Regulating Investors Not Issuers: A Market Based Proposal

Stephen J. Choi

Berkeley Program in Law and Economics, Working Paper Series from Berkeley Program in Law and Economics

Abstract: The present securities regulatory regime in the United States focuses on the protection investors. Investor protection, in turn, leads to a robust capital market. The federal government accomplishes its goal of investor protection through the registration and direct regulatory control of issuers, intermediaries, and self-regulatory organizations in the securities markets. The Article contends that this regulatory approach is ill advised. Rather, the Article argues that regulators should instead regulate investors. Al-though against current wisdom, a securities regime that regulated investors would allow regulators to take a more market-driven approach toward in-vestor protection, resulting in a less paternalistic regime. For those inves-tors with good information on issuers in the market, for example, no mandatory regulations are necessary. Rather investors will contract for desired protections; those market participants failing to provide valued protections will receive less for their securities or services. As a result, market participants will voluntarily provide desired protections. The pa-per, therefore, proposes to classify investors based on their informational resources. Such classification frees those investors able to protect them-selves to engage in a wide variety of investments while allowing regulators to focus their resources on investors less well equipped.

Date: 2000-03-01
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