Experts on the Future of the SEC, Part 2

Recommendation 1 - Keep disclosure-based regulation! It is a good system, and the alternatives are worse.

Disclosure-based regulation of securities transactions has been with us since the enactment, 75 years ago, of the Securities Act of 1933. The ’33 Act and the Securities Exchange Act of 1934, which regulates securities exchanges and provides for periodic disclosure to investors, form an interlocking regulatory structure built on,

“[…] a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security.” (SEC website)

“No and no,” says Jesse M. Fried, Professor of Law at UC Berkeley, echoing all the respondents: disclosure-based regulation will not disappear, nor should it. In fact, adds Broc Romanek, editor of theCorporateCounsel.net, “I believe the only alternative to disclosure-based regulation for deals is merit-based regulation […] To do that, you would have to grow the SEC (or whatever agency would be in charge of transactions) tenfold or more.”

Merit review is part of the blue-sky law of many states. It consists of an analysis of whether an offering is a good investment. It is also, adds Broc Romanek, “nearly un-American because it would likely result in the government turning down companies that want to raise capital.” An ABA committee on merit regulation summarized the process this way,

“A disclosure review by a merit administrator […] may differ significantly from an SEC review in that it might focus primarily on disclosure of the facts that generate merit problems. […] The key point, however, is that merit review and disclosure review are interrelated, since the examiner may require extensive disclosure of merit issues, such as conflicts of interest and promoter compensation.”

Ad Hoc Committee on Merit Regulation of the State Regulation of Securities Committee of the American Bar Association, Report on State Merit Regulation of Securities Offerings, 41 Bus. L. 785 (1986)- [41 BUSLAW 785].

NEXT: Don’t ditch the SEC!