The Advantage of Competitive Federalism for Securities Regulation

This work argues that the production of US securities law should be subject to the same market forces that produce US corporate law. It questions fundamental beliefs regarding the efficacy of present-day securities regulation and calls for opening US securities regulation up to competition.

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Romano argues that the production of U.S. securities law should be subject to the same market forces that produce U.S. corporate law. She questions fundamental beliefs regarding the efficacy of present-day securities regulation and calls for opening U.S. securities regulation up to competition. Romano charges that the current legislative approach to securities regulation is profoundly mistaken and that preemption is not the solution to frivolous lawsuits or the cost of compliance with multiple registration regimes. She advocates instead a market-oriented approach to competitive federalism that would expand, not reduce the role of the states in securities regulation. Under this approach, which is based on corporate law, corporations would be able to select their securities regime from among those offered by the states, the Securities and Exchange Commission, and even other nations, with the result that there would be competition among securities regulators for firms' registrations. The market approach would thereby fundamentally reconceptualize the regulatory approach to securities regulation.
Romano's proposal is at odds with both sides of the current debate over the 1995 Reform Act, the plaintiff's bar and issuers, especially high technology firms, each of which has sought to use national laws as a weapon to beat down its opponent's position by monopolizing the regulatory field. The aim of Romano's competitive federalism approach is to replicate for the securities setting the benefits produced by the state competition for corporate charters - a responsive legal regime that has tended to maximize share value - and thereby eliminate the frustration experienced at efforts to reform the national regime. As a competitive legal market supplants a monopolist federal agency in the fashioning of regulation, it would produce rules more aligned with the preferences of investors, whose decisions drive the capital market.