Securities Regulation.

• Author: Van Doren, Peter
• Position: Working Papers - A New Market-Based Approach to Securities Law - Book review

"A New Market-Based Approach to Securities Law," by Kevin S. Haeberle and M. Todd Henderson. August 2018. SSRN #3233122.

Three claims are used to justify modern securities regulation:

* Firms fail to disclose enough information.

* Firms disclose untruthful information.

* Insiders trade on information, reducing their incentive to release information and the incentive of outsiders to invest in information production.

Modern securities regulation attempts to solve all three of these problems through mandates and restrictions.

Government-mandated production of information results in the overproduction of information irrelevant to firms' soundness (e.g., blood diamond disclosure, CEO pay ratios) and underproduction of relevant information. For instance, disclosure law has become a focal point and securities fraud litigation reinforces this legally defensible but mindless focal point. "Additional statements mean additional exposure to lawsuits based on the allegation that those statements are false or misleading," note the authors of this paper. Class action investor fraud lawsuits result in overcompensation (the authors point out in a footnote that, since 1996, these suits have named 35,000 defendants and produced $95 billion in settlements) and are just a wealth transfer from one set of shareholders to another, with a healthy cut for the lawyers. (See "The End of Securities Fraud Class Action?" Summer 2006.) The marginal deterrence benefits from securities fraud are low because the payments are orders of magnitude greater than the actual level of fraud.

For the authors, the central economic problem with current securities regulation is that it mandates that firms provide information for free. The authors' solution is to legalize payments for early access to public information. This money would generate incentives for firms to provide the information...