Legal Commentary

In the context of possible new regulation in the financial markets, it's worth asking an old and fundamental question: who are the investors?   The type of regulation we choose turns in part on the answer.  Our current financial woes put pressure on this question, but so does the longer-term trend of institutionalization or "deretailization" of the US markets.  In other words, while our system is rooted in protection of retail investors and much of the political rhetoric reflects this ("mom-and-pop" investors), institutions such as mutual funds, pension funds, etc. increasingly play a role.   

My modest aim here is to point you to some "food for thought."  First, identifying the investors comes up even in the most mundane of contexts.  Take the SEC website.  Featured at the top of the page these days is the headline "SEC Protecting Investors, Markets During Credit Crisis" and a link to the "SEC Actions During Credit Crisis."  What audience does this target?  Sophisticated investors don't need to read it.  I suspect Congress has heard it in other forms.  The press?  Do retail investors really read it or care?

Second, Donald Langevoort has a paper called The SEC, Retail Investors, and the Institutionalization of the Securities Market recently posted to SSRN.  In a passage that is almost an aside, he complicates the debate over how institutionalization should influence regulatory choices:

I am convinced that part of the motivation for the substantive and procedural disclosure requirements of US securities regulation increasingly is disconnected from shareholder or investor welfare per se, and instead relates to the desire to impose norms that we associate with public governmental responsibility - accountability, transparency, openness and deliberation - to institutions that have comparable power and impact on society.  It is a familiar point that many large corporations have more economic power than many counties and cities, perhaps even a handful of states.