Fighting Fraud on Faith: Federal Securities Regulation and the Limits of Disclosure


In the past ten years, Congress passed three major reform acts to address two diametrically opposed concerns: It first restrained what it believed was an excess of securities fraud litigation, then responded to an explosion of securities fraud. This Article contends that despite the competing provocations and ambitions of the reforms, they share an unwarranted adherence to the principle of disclosure as the best means to attack market malfeasance: The Article examines the basis for and consequences of that undeserved legislative fidelity. Applying behavioral economics and cultural theory to the recent legislation and its underpinnings, the Article concludes that a resilient faith in the integrity and possibilities of markets has displaced critical examination of market practices. Because Congress resists the more complex and irregular descriptions of markets that behavioral economists provide and instead relies ever more heavily on disclosure, legal models remain far too simple to capture much real world behavior – including the many possible permutations of fraud. This misplaced faith in the preventive power of disclosure impedes efforts to deter, detect and punish securities malfeasance. This Article suggests an alternative. Drawing on skeptical philosophy, it proposes a conceptual framework and practical reforms that avoid extremes and accommodate change. The skeptical approach advocated here acknowledges the benefits of disclosure, but contends that securities regulations also must recognize its limitations. The Article suggests that by questioning its assumptions, broadening its approach, and redirecting its resources toward a more diverse range of regulatory mechanisms, Congress could craft securities regulations that recognize the market’s imperfections and better protect its participants from fraud.


Jurisdiction | Law | Law and Economics | Law and Society | Legislation | Securities Law

Date of this Version

September 2005