Online Financial Information: Law and Technological Change*

• DOI: http://doi.org/10.1111/j.1467-9930.2004.00184.x
• Author: Caroline Bradley
• Date: 01 October 2004
• Published date: 01 October 2004

LAW & POLICY, Vol. 26, Nos. 3 & 4, July & October 2004 ISSN 0265–8240

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Original ArticleLAW & POLICY July 2004BradleyONLINE FINANCIAL INFORMATION

Online Financial Information: Law and

Technological Change

*

CAROLINE BRADLEY

Two contrasting narratives about the impact of the Internet on investors point to

different responses by regulators: a narrative of empowerment suggests that regula-

tors should encourage investors to make investment decisions for themselves. But

a narrative of vulnerability suggests that these investors may not be able to use

the information that is available, and may be at increased risk of loss. Regulators

should aim to promote investor empowerment while taking due account of investor

vulnerabilities.

Three characteristics (immediacy, interactivity, and interjurisdictionality) dis-

tinguish online investment information from off‌line investment information and

have implications for the regulation of online information.

In 1991, Louis Lowenstein wrote that money and f‌inance had moved from

being “arcane topics” to being “front page news” (Lowenstein 1991: 17).

More recently commentators have noted a trend to “investment autonomy”

(e.g. Bailey, Nofsinger & O’Neill 2003: 149) which means that people are

increasingly taking responsibility for management of their own f‌inancial

welfare. In making choices about their investments investors consult f‌inan-

cial advisors, or they learn about investing from newspapers’ f‌inancial

pages, specialized magazines, and the Internet. The Internet reduces the

costs of publication of information and provides investors with access to

software programs that can analyze their investment objectives or train

them to become day traders. Financial services regulators need to rethink

the regulation of f‌inancial information in the light of these changes in investor

behavior.

* Earlier versions of this paper were presented at a symposium to inaugurate the Centre for

Law in the Digital Economy at Monash University, Melbourne, Australia in August 2001 and

at the Law and Society Association annual meeting in Vancouver in 2002. I would like to thank

participants in these conference sessions, the contributors to this issue, Michael Froomkin, and

two anonymous reviewers for comments on earlier versions of this paper. All errors are mine.

Address correspondence to Caroline Bradley, Professor of Law, University of Miami School

of Law, PO Box 248087, Coral Gables, FL, 33124. Telephone: (305) 284 2082; fax: (305) 284

6506; e-mail: cbradley@law.miami.edu.

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LAW & POLICY July & October 2004

© 2004 Baldy Center for Law and Social Policy and Blackwell Publishing Ltd.

There are two contrasting narratives about what technological change

means for the regulation of investment information. The f‌irst is a narrative

of empowerment: investors are now in a position to make investment deci-

sions for themselves, using information resources that hitherto were only

available to professional market participants (e.g. Levitt 1999; Stefanadis

2001: 21). The second is a narrative of vulnerability: investors in general

may not be able to use the information that is available, and may be at

increased risk from fraud, or from losses incurred through their own lack of

relevant skills (e.g., Levitt 1999).

Both of these narratives have some truth in them, and regulators should

try to promote investor empowerment while taking due account of investor

vulnerabilities (see Australian Securities & Investment Commission (ASIC)

2003: 1). This balancing task is complicated by the fact that those who push

either narrative as the appropriate story may have hidden reasons for doing

so. The rhetoric of empowerment can be used by those who want to limit

the role of regulation, perhaps in ways that would harm the interests of

investors. The rhetoric of vulnerable investors can be used by those who

wish to protect and consolidate the privileges that the existing regulatory

setup gives them.

Part I of the article discusses the relationship between law and technolo-

gical change generally, then Part II focuses on the ways in which technology

has changed investors’ access to information. Part III suggests three charac-

teristics (immediacy, interactivity, and interjurisdictionality), which distin-

guish online investment information from off‌line investment information,

and suggest some ways of thinking about how online investment information

should be regulated. Part IV examines the ways in which the developing

regulation of investment information in the United States, United Kingdom,

and Australia ref‌lects concerns about vulnerability of investors and investor

empowerment, and takes account of the distinguishing characteristics of

new information providers. Part IV argues that regulators should focus

on two strategies: (1) educating investors about how to identify which

sources of information are reliable and (2) (where possible) giving investors

cooling-off periods during which they can cancel investment arrangements.

By combining these two strategies, regulators will reduce investor vulner-

ability and increase investor empowerment, while addressing the harmful

effects of the immediacy and interactivity of new means of providing online

investment information. These two strategies can also apply at the global

level, thus responding to issues of interjurisdictionality, through unilateral or

multilateral actions of regulators.

I. LAW AND TECHNOLOGICAL CHANGE

Technological change challenges institutional structures, including legal

rules, by facilitating changes in social practices. Two factors intensify this

Bradley ONLINE FINANCIAL INFORMATION

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© 2004 Baldy Center for Law and Social Policy and Blackwell Publishing Ltd.

challenge. First, technological development occurs at an increasingly rapid

rate over time (e.g., Moore 1997), as does the rate of development of applica-

tions of new technology (Basel Committee 2001: 5). Second, the modern tend-

ency to promulgate very specif‌ic legal rules means that existing rules may

be particularly vulnerable to technological change (Merges 2000: 2190).

The combination of these factors does not make it easier to predict the

changes in social practice that technology will enable in the future. Existing

legal rules may interfere with desirable changes, and may be incapable

of controlling undesirable changes. Financial regulation is no exception to

this trend.

What we call “new technology” today is by no means the f‌irst example of

the interaction of technological development with law, but merely a recent

instantiation of a recurrent phenomenon. The development of the printing

press facilitated the reproduction of texts, and led to disputes over rights to

reproduce texts, and the development of copyright law (cf. Stallman 1996:

293) The introduction of the railways and motor vehicles created issues of

safety (Winf‌ield & Goodhart 1933: 372), and property rights (Keasbey 1890:

245), which prompted the development of new legal rules (Kahn-Freund 1939:

136–7). Photography, and the idea that it could be used by newspapers,

raised issues of what rights to privacy people should have (Warren &

Brandeis 1890: 195).

In common law countries, the f‌irst stage in the adaptation of law to the

new technology in these examples was the adaptation of rules of common

law to the new situation (e.g. Holdsworth 1934: 190). One of the advant-

ages commentators claim for the common law is its adaptability to new

circumstances: “Political, social and economic changes entail the recogni-

tion of new rights, and the common law, in its eternal youth, grows to meet

the demands of society” (Warren & Brandeis 1890: 193).

Common law copyright doctrine antedated copyright statutes. The rules

that applied to common carriers were applied to the railways (e.g.

Louisville

& S. I. Traction Co. v Worrell

1908 at 489). Statutes regulating the railroads

followed later (Siegel 1984), because legislators perceived that statutes were

necessary to deal with some of the issues raised by the new technologies.

The common law may be able to control how the provider of a service

should provide that service, but it is less apt to control the price charged for

the service (cf. Bender 1994: 735– 6). The common law (and equitable rules)

may be able to regulate the conduct of a f‌inancial services provider, but it

cannot regulate access to the status of a f‌inancial services provider.

During the twentieth century, regulatory regimes took over much of the

territory that had been regulated by the common law in earlier centuries,

leading commentators to refer to the rise of the regulatory state (e.g., Glaeser

& Shleifer 2001). In this regulatory state, licensing regimes controlled who

could become a banker, or a broker-dealer, or an insurance broker, and

how those people who were allowed access to such a status should perform

their functions. The growth of regulatory regimes raises the question of