Berkeley Law

This Essay examines the role of private institutions in promoting strong securities markets. Recent scandals in the United States highlight both the importance and the fallibility of the securities market intermediary institutions to which investors typically turn for protection, such as auditors, analysts, and proxy advisory firms. From the perspective of investor welfare, this Essay discusses the various forms of institution failure and the efficacy of recently promulgated reforms. First, the paper provides a taxonomy of the various forms of securities market intermediary institution failure. Second, the essay compares the failings of the market against the fallibility of regulators. Not all regulations are the same - a series of possible interventions into the securities market exists ranging from merit regulation at one extreme to the provision of optional investor education materials at the other. Some forms of market failures require less intervention (with a corresponding reduced cost of regulatory error and capture). Lawmakers often regulate first and ask questions later, ignoring both the potential downsides of regulation as well as the possibility of market-based alternative solutions to market failures. The presence of market-based solutions allows regulators to intervene less stringently into markets, leaving the market with some degree of choice in how to address particular intermediary defects.