Rules, Principles, and the Competition to Enforce the Securities Laws

Though the Securities and Exchange Commission (SEC) is the primary securities enforcer, multiple enforcers are active in enforcing the securities laws. Some scholars argue that enforcement should be centralized to eliminate or control enforcers with incentives to overenforce, while others contend that competition checks the SEC from a tendency to underenforce. The debate is characterized by a focus on whether the system produces an optimal quantity of enforcement. This Article assesses the centralization debate through a different lens, emphasizing differences in the quality of enforcement, particularly the values that influence and are expressed by enforcement. To frame the discussion, it draws a distinction between two categories of enforcement: rule-enforcement and principle-enforcement. Rule-enforcement is less costly and controversial than principle-enforcement because specific rules tend to reflect the technical requirements of an administrative regime while general principles can reflect a wider range of values. Enforcers differ in their approach in taking on the cost and controversy of principle-enforcement. Industry enforcers are likely to interpret principles narrowly based on industry values. Regulatory enforcers such as the SEC may find it difficult to adequately enforce principles because of the pressure of implementing consistent regulatory policy. Public-values enforcers such as federal prosecutors and state attorneys general are willing to enforce principles in light of social values but may overreach because of political ambition. Entrepreneurial enforcers such as class action attorneys are most willing to invest in principle-enforcement but also have a tendency to bring questionable cases for profit. The choice between a centralized and decentralized enforcement system is fundamentally a choice between a one-dimensional and multidimensional conception of the values relevant to securities enforcement. Proposals to centralize securities enforcement are motivated by a desire to eliminate the conflicts that can arise between enforcement approaches that reflect different values. The cost of such centralization is that the advantages diverse enforcers bring to the table will be eliminated. This Article concludes that a decentralized system is best justified by recognizing the particular strengths of different enforcers rather than focusing on whether an optimal amount of enforcement is produced