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From Incongruity to Cooperative Federalism

35 Pages Posted: 2 Mar 2006 Last revised: 28 Sep 2010

Reza Dibadj

University of San Francisco - School of Law

Date Written: 2006


The conventional wisdom has been that state law governs internal affairs, and federal law governs disclosure. This reassuring construct, however, has little basis in today's reality. Left alone, states have not provided adequate shareholder protections: state securities laws were historically anemic, and the regulatory reach of state corporate law shrank under a prevailing contractarian ethos. As consequence, beginning in 1933, federal securities laws emerged to regulate many internal affairs. Curiously, however, as federal regulation has grown and become increasingly preemptive over the past decade, it has often decreased shareholder protections. As a consequence, some states have recently reversed course, using newly energized state securities laws to pursue fraud.

The responsibility for regulating the relationship between corporations and their shareholders has thus descended into a welter of confusion. Neither dual federalism nor preemptive federalism has been satisfactory.

In order to begin overcoming this morass, the article draws on new research in the theory of economic regulation. In particular, it proposes that the relationship between corporations and their shareholders operate within the framework of cooperative federalism using a reverse-Erie framework. The federal government would set minimal shareholder protections, but leave implementation and the creation of enhanced standards largely to the states. The article concludes by addressing a number of constitutional issues cooperative federalism might raise, including the creation of federal common law by state instrumentalities, as well as possible non-delegation and anti-commandeering concerns.

Keywords: securities law, corporate law, federalism, regulatory theory

JEL Classification: K22, K23, L51

Suggested Citation

Dibadj, Reza, From Incongruity to Cooperative Federalism (2006). University of San Francisco Law Review (Symposium Issue), Vol. 40, p. 845, 2006; Univ. of San Francisco Law Research Paper No. 2010-18. Available at SSRN:

Reza Dibadj (Contact Author)

University of San Francisco - School of Law ( email )

2130 Fulton Street
San Francisco, CA 94117
United States
415-422-5253 (Phone)

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