Regulation Policy

Choose Your Regulator

In a forthcoming article, a Yale Law School specialist will propose creation of a market for securities regulation. Roberta Romano argues that there would be significant benefits if securities firms were able to op out of oversight by the Securities and Exchange Commission in favor of another regulatory jurisdiction -- a U.S. state, for example, or a foreign country.

  • Rather than allowing the SEC to retain a monopoly on securities regulation, competition would arise between various jurisdictions to sell their own brand of regulation in order to realize fees from the regulated parties.

  • American firms can now incorporate in any state -- and that state's company law governs the firm throughout America.

  • More American firms are incorporated in Delaware than in any other state -- and incorporation fees provide one-fifth of the state's tax revenues.

  • Romano argues that competition would mean better regulation as each jurisdiction tries different regulatory approaches -- allowing an eventual comparison of what policies lead to the most smoothly functioning securities markets.

Companies would not necessarily choose the most lax regulator, since they want raise capital cheaply -- and it is cheaper when investors believe regulation is sound.

Firm would not be able to switch easily to a less exacting regulator, since shareholders would have to approve the move.

Romano says competition is likelier to raise regulatory standards -- so as to offer greater reassurance to investors -- than it is to lower them.

The article is to appear in the June 1998 edition of the Yale Law Journal.

Source: "The Market for Regulation," Economist, March 7, 1998.

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