Iterative Regulation of Securities Markets after Business Roundtable: A Principles-Based Approach

Abstract

Financial regulation poses special challenges because markets a constructed in the sense that they reflect a web of existing regulations. Moreover, financial regulation frequently comes as a package, such as the Sarbanes-Oxley Act of 2002 or the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 where multiple provisions are together injected into a regulatory setting. In this context, compliance costs with a particular requirement can be isolated, measurement of the benefits are more problematic. After Business Roundtable this calculus has become more perilous for regulators, particularly the SEC. This article suggests that a non-exclusive strategy to address the challenges posed by Business Roundtable is for the SEC to return to an earlier time of proceeding on an iterative basis. The process is principle based at its heart, but through enforcement and prudential actions that over time emerge from the principle a highly textured body of practices evolves that ultimately informs rule making. The article examines classic illustrations of such iterative regulation and makes the case that that such an iterative process is consistent with the most recent D.C. Circuit decision, Investment Company Institute v. CFTC.