The Securities and Exchange Commission and the Ownership Narrative

Note from the Digital Editor: In order to highlight the high-level of research and scholarship from the authors who have published in the William & Mary Policy Review’s peer-reviewed print journal, we have reproduced the abstracts from Volume 3, Issue 2 along with a link to an electronic copy of the full form of the piece. 

In 2010, the Securities and Exchange Commission introduced Rule 14a-11, which was intended to facilitate the rights of shareholders to nominate directors on corporate boards as part of the Commission’s response to the 2008 financial crisis. Recently, the District of Columbia Circuit of the U.S. Federal Court of Appeals vacated the rule, in Business Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission, citing that “the Commission acted arbitrarily and capriciously for having failed once again . . . adequately to assess the economic effects of the new rule.” I argue that the rule, which placed a downward negative pressure on the Commission’s reputation and legitimacy as both a regulator and an enforcer of securities legislation in the U.S., is the result of factors that can be summed by the (potentially bold) argument that the Commission does not appear to have a clear grasp of the nature of public corporate ownership in the U.S. The concept of ownership is a principal consideration guiding the Commission’s approach to the regulation of the federal proxy process, the regulation of which is one of the Commission’s original responsibilities delegated to it by Congress; hence, the identification of any policy-based errors vis-à-vis the concept also rests on the Commission’s shoulders. Descriptively, relying on historical accounts and socio-legal and investment theory explanations, I trace the Commission’s failure to come to terms with the nature of public firm ownership to views and cognitive constructs of the concept held by the architects of the Securities Exchange Act of 1934. The views introducing distortions into the regulatory framework governing the securities markets in the U.S. were embedded into the fabric of the framework and carried forward to the present day. The normative implications of the ownership distortion are analyzed using institutional, organizational, and risk regulation approaches. From an institutional perspective, I show that the failure to recognize the ownership distortion by the Commission resulted in the failure to introduce efficiency into the U.S. capital markets. From an organizational perspective, I show that the Commission’s failure to recognize the ownership distortion resulted in the failure to display organizational learning and to protect the Commission’s reputation. From a risk regulation perspective, I show that the Commission, rather than display an ability to deal with matters of risk, has become a source of an endogenous type of risk affecting the regulatory framework, the integrity of which it is supposed to guard.

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Aviv Pichhadze is a Fellow at Critical Research Laboratory in Law & Society, Osgoode Hall School of Law, York University, Toronto, Canada