Reflections on Dual Regulation of Securities: A Case Against Preemption

Abstract

Congress, urged by the states to fill the “gap” left by their existing regulatory schemes for local securities markets, passed the Securities Act of 1933 and the Securities Exchange Act of 1934. Since the enactment of federal legislation, investors in securities have been protected by a dual regulatory system. In recent years, federal and state administrators have commenced efforts to coordinate their respective regulatory schemes in order to reduce any unnecessary obstacles to capital formation without a corresponding reduction in investor protection. Despite the success of the dual regulatory system, it has been subjected to extensive criticism by investment bankers. The primary focus of this criticism is two fold: the absence of uniformity among the federal and state schemes makes compliance difficult and expensive, and the federal and state schemes are needlessly duplicative. Investment bankers have complained that the dual regulatory system’s negative impact on the securities industry far outweighs the benefits to investors. Consequently, it has called for the Securities and Exchange Commission to seek legislation to preempt states from concurrent regulation. Currently, the preemption issue is being used to encourage, if not frighten, the states to adopt uniform regulatory schemes. This article first addresses the judicial, congressional, and executive recognition that has been extended to the states in the field of securities regulation. After reviewing these sources of support for state regulation, a response is made to the claim that duplication and the absence of uniformity have undermined the advantages, if any, of the dual regulatory system. In addressing this criticism, the different regulatory philosophies of the state and federal regulatory schemes and the resulting benefits to investors are explored. This article concludes that the complementary policies inherent in the present system establish a persuasive case against preemption of state securities laws.