A New Market-Based Approach to Securities Law

Modern securities regulation has three main areas, each of which is plagued by a core problem. Mandatory disclosure law leaves society with suboptimal disclosure, as the government calls for too little of some information (for example, management analysis of company prospects) and too much of other information (for example, data about trivial executive perks). Securities fraud law (specifically, its central fraud-on-the-market theory of reliance) yields damages at odds with any reasonable theory of compensation and deterrence. And insider trading law fails to achieve its ends because incentives to police illegal trading and tipping by executives are currently weak. In this Article, we propose fixing these fundamental flaws of securities law by shifting much of the regulatory focus from firms to information. In particular, we introduce the idea of building the law around a well-regulated market for the public-company information that sits at the center of each of the three main areas of securities law. Deploying this market, we argue, would trigger incentives for firms to disclose more information of value while also motivating them to more rigorously police illegal trading and tipping by their agents. Additionally, it would help regulators identify when the law requires disclosure that is not socially valuable, and assist in the identification of a class of securities fraud plaintiffs that is more in line with the goals of the anti-fraud regime.