Skip to main content
SpringerLink
Log in
SpringerLink
Log in

Towards Principles-Based Regulation

  • Chapter
  • First Online:
Promoting Information in the Marketplace for Financial Services

  • 687 Accesses

Abstract

In this book we have examined reasons for the failures of financial services/securities regulation to ensure and to promote the disclosure of information in the marketplace for financial services. We have concluded that financial markets remain uninformed, as evidenced by the new disclosure laws continually being passed to cure the problem of non-disclosure which is always revealed by securities commissions (government) investigations and inquiries after every ‘boom’ and ‘bust’. We have identified the costs of collection, dissemination and compliance with myriad and overlapping disclosure laws as the first reason for the failure to produce information. We also argue that the second reason for the failure to produce information is management’s conflict of interest in what information to disclose and how to disclose it. The result is that stakeholders in financial markets remain uninformed. The third reason for non-disclosure is how to actually ensure disclosure. We argue that financial markets remain uninformed despite the best of intentions of governments and securities commissions with their continual passing of new disclosure laws. Hence we recommend a return to effective coregulation by the securities commission with stock exchanges and the financial markets, underpinned by a simple principles based standard like ‘you must keep the financial market fully informed’.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 39.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 54.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 54.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    Brandeis (1914), chapter 5 (What publicity can do), p. 92.

  2. 2.

    Oladele and Ogunleye (2006), pp. 45 and 50.

  3. 3.

    Colliton (1995), pp. 265 and 328 (pointing out how US federal tax legislation has grown from the original 16 pages in 1913).

  4. 4.

    Ford (2007), pp. 1 and 6.

  5. 5.

    Ayres and Braithwaite (1992). There is a vast body of literature on the rule/principle dichotomy, see, e.g., Schauer (2005), p. 803; Schlag (1985), p. 379; Ford (2007); Colliton (1995); Korobkin (2000), p. 23.

  6. 6.

    Schauer (2003), p. 303.

  7. 7.

    See, e.g., Bratton (2003), p. 1023.

  8. 8.

    Ford (2007), p. 10.

  9. 9.

    See Chap. 5.

  10. 10.

    Ford (2010), pp. 257 and 284.

  11. 11.

    Black (2004), p. 30.

  12. 12.

    This supports the recommendation of the Task Force to Modernize Securities Legislation in Canada (2006), p. 50.

  13. 13.

    Kaplow (1992), pp. 557 and 559.

  14. 14.

    See Maume and Walker (2011), pp. 239 and 243.

  15. 15.

    Neyers (2000), pp. 173 and 177–178.

  16. 16.

    See, e.g., Benjamin (2007), para 27.32; Walla (2013), p. 43.

  17. 17.

    Ford (2007), p. 60.

  18. 18.

    Black et al. (2007), pp. 191, 196 and 197.

  19. 19.

    Walla (2013), p. 42.

  20. 20.

    Black et al. (2007), p. 194.

  21. 21.

    Other countries were far more reluctant to introduce a principles-based approach to financial markets regulation. For Europe, see Walla (2013), p. 42.

  22. 22.

    Financial Conduct Authority (UK) (2014). These carry forward the fundamental obligations of all firms under the regulatory system from the earlier SIB Proposed Principles for Investment Business (1990), made by the SIB under the authority of the former Financial Services Act 1986 (UK) s 48.

  23. 23.

    Discussed in Chap. 4.

  24. 24.

    See, e.g., Medddick and Meddick v Cutten and Harvey (1984) 36 SASR 542, 556; Department of Trade and Industry (1985), p. 20.

  25. 25.

    Walla (2013), p. 41.

  26. 26.

    See Ford (2007), pp. 1 and 2.

  27. 27.

    Financial Services Authority (UK) (2006); see, e.g., Briault (2007).

  28. 28.

    This approach was being looked at in Canada in British Columbia’s Bill 38-2004 Securities Act, which had a principles-based and outcome-oriented regulation. It was passed in 2004, but shelved while the current province and territory national ‘passport system’ was developed: Ford (2007).

  29. 29.

    Reg FD also targets when insider trading liability arises in connection with a trader’s ‘use’ or ‘knowing possession’ of material nonpublic information, and when the breach of a family or other non-business relationship may give rise to liability under the misappropriation theory of insider trading: Securities and Exchange Commission (US); Release Nos. 33-7881, 34-43154, IC-24599; File No. S7-31-99, RIN 3235-AH82.

  30. 30.

    Heflin et al. (2003), p. 1.

  31. 31.

    Agrawal et al. (2006), p. 2811.

  32. 32.

    Mohanram and Sunder (2006), p. 491.

  33. 33.

    These relate to product disclosure statements issued by financial service licensees as required by Pt 7.9 of the Corporations Act 2001 (Cth). Australian Securities and Investments Commission (2001) RG168.10.

  34. 34.

    As required by Corporations Act 2001 (Cth) s 1013C(3).

  35. 35.

    Financial Services Reform disclosure to be clear, concise and effective (Australian Securities and Investment Commission 2004).

  36. 36.

    For a detailed discussion, see Ford (2010).

  37. 37.

    See Chap. 3, Sect. 3.2.3.1.

  38. 38.

    Ford (2010), p. 280.

  39. 39.

    Financial Services Authority (UK) (2009).

  40. 40.

    The Department of the Treasury (US) (2008).

  41. 41.

    See, e.g., Coffee and Sale (2009), pp. 707 and 757 (recommending not less power for the SEC but more power).

  42. 42.

    This compares with British Columbia’s proposed Bill 38:

    A person must not engage in or participate in conduct relating to securities if the person knows, or ?>reasonably should know, that the conduct

    1. (a)

      results in or contributes to a misleading appearance of trading activity in, or an ?>artificial price for, a security, or

    2. (b)

      perpetuates a fraud on any person

  43. 43.

    [Employment of Manipulative and Deceptive Practices] Rule 10b-5: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

    1. a.

      To employ any device, scheme, or artifice to defraud,

    2. b.

      To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

    3. c.

      To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

    in connection with the purchase or sale of any security.

  44. 44.

    A ship launched missile: Pengilley (1987), p. 247. Section 18 was originally passed as s 52 of the former Trade Practices Act 1974 (Cth); later reenacted as ACL s 18.

  45. 45.

    See, e.g., Baldwin (2004); Baldwin et al. (2012), especially Chap. 3 (Explaining regulation).

  46. 46.

    Baldwin and Black (2008), p. 59. For discussion of responsive regulation, see Chap. 6.

  47. 47.

    See, e.g., Fischel and Grossman (1984), p. 273.

  48. 48.

    Douglas (1940), p. 82.

  49. 49.

    See, e.g., Ben-Shahar and Schneider (2010), pp. 62–66.

References

  • Agrawal, Anup, Chen, Mark and Chadha, Sahiba, Who is Afraid of Reg FD? The Behavior and Performance of Sell-Side Analysts Following the SEC’s Fair Disclosure Rules (2006) 79 Journal of Business 2811

    Google Scholar 

  • Australian Securities and Investment Commission, Disclosure: Product Disclosure Statements (and other disclosure obligations) (ASIC Regulatory Guide 168, Sydney, 2001). www.asic.gov.au. Accessed 10 June 2014

  • Australian Securities and Investment Commission, Media Release 04-062 (Sydney, 10 March 2004). www.asiv.gov.au. Accessed 10 June 2014

  • Ayres, Ian and Braithwaite, John, Responsive Regulation: Transcending the Regulation Debate (Oxford University Press, New York, 1992)

    Google Scholar 

  • Baldwin, Robert, Better Regulation … Is it Better for Business (Federation of Small Business, London, 2004). http://www.fsb.org.uk/policy/assets/0952BetterRegulation.pdf. Accessed 10 June 2014

  • Baldwin, Robert and Black, Julia, Really Responsive Regulation (2008) 71 Modern Law Review 59

    Google Scholar 

  • Baldwin, Robert, Cave, Martin and Lodge, Martin, Understanding Regulation – Theory, Strategy, and Practice (Oxford University Press, New York, 2nd ed, 2012)

    Google Scholar 

  • Benjamin, Joanna, Financial Law (Oxford University Press, Oxford, 2007)

    Google Scholar 

  • Ben-Shahar, Omri and Schneider, Carl, The Failure of Mandated Disclosure (John M Olin Law and Economics Working Paper No 516, Chicago, 2010)

    Google Scholar 

  • Black, Julia, The Development of Risk Based Regulation in Financial Services: Canada, the UK and Australia – A Research Report (ESRC Centre for the Analysis of Risk and Regulation, London School of Economics, London, 2004)

    Google Scholar 

  • Black, Julia, Hopper, Martyn and Band, Christa, Making a Success of Principles-Based Regulation (2007) Law and Financial Markets Review 191

    Google Scholar 

  • Brandeis, Louis D., Other People’s Money, and How the Bankers Use It (Stokes, New York, 1914, reprinted 1986)

    Google Scholar 

  • Bratton, William, Enron, Sarbanes-Oxley and Accounting: Rules Versus Principles Versus Rents (2003) 48 Villanova Law Review 1023

    Google Scholar 

  • Briault, Clive, More Principles-based Regulation and Treating Customers Fairly (Speech at the ASIC Summer School 2007, Sydney, 7 March 2007). http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2007/0307_cb.shtml. Accessed 10 June 2014

  • Coffee, John and Sale, Hillary, Redesigning the SEC: Does the Treasury Have A Better Idea? (2009) 95 Virginia Law Review 707

    Google Scholar 

  • Colliton, James, Standards, Rules and the Decline of Courts in the Law of Taxation (1995) 99 Dickinson Law Review 265

    Google Scholar 

  • Department of the Treasury (US), Blueprint for a Modernized Financial Regulatory Structure (Department of the Treasury, Washington DC, March 2008). http://www.treasury.gov/press-center/press-releases/Documents/Blueprint.pdf. Accessed 10 June 2014

  • Department of Trade and Industry (UK), Financial Services in the United Kingdom - A New Framework for Investor Protection (Stationary Office Books, London, 1985)

    Google Scholar 

  • Douglas, William O., Democracy and Finance (Yale University Press, New Haven, 1940)

    Google Scholar 

  • Financial Conduct Authority (UK), FCA Handbook (London, 2014). http://www.fca.org.uk/about/what/regulating/principles-for-businesses. Accessed 10 June 2014

  • Financial Services Authority (UK), Treating Customers Fairly – Towards Fair Outcomes for Consumers (London, 2006). http://www.fsa.gov.uk/pubs/other/tcf_towards.pdf. Accessed 10 June 2014

  • Financial Services Authority (UK), The Turner Review: A Regulatory Response to the Global Banking Crisis (London, 2009). http://www.fsa.gov.uk/pubs/other/turner_review.pdf. Accessed 10 June 2014

  • Fischel, Daniel and Grossman, Sanford, Customer Protection in Futures and Securities Markets (1984) 4 Journal of Futures Markets 273

    Google Scholar 

  • Ford, Christie, New Governance, Compliance and Principles-based Securities Regulation (2007) 45 American Business Law Journal 1

    Google Scholar 

  • Ford, Christie, Principles-Based Regulation in the Wake of the Global Financial Crisis (2010) 55 McGill Law Journal 257

    Google Scholar 

  • Heflin, Frank, Subramanyam, K.R. and Zhang, Yang, Regulation FD and the Financial Information Environment (2003) 78 Accounting Review 1

    Google Scholar 

  • Kaplow, Louis, Rules versus Standards: An Economic Analysis (1992) 42 Duke Law Journal 557

    Google Scholar 

  • Korobkin, Russell, Behavioral Analysis and Legal Form: Rules vs. Standards Revisited (2000) 79 Oregon Law Review 23

    Google Scholar 

  • Maume, Philipp and Walker, Gordon, Goodbye to All That: A New Financial Markets Authority for New Zealand (2011) 29 Company and Securities Law Journal 239

    Google Scholar 

  • Mohanram, Partha and Sunder, Shyam, How Has Regulation Fair Disclosure Affected the Operations of Financial Analysts? (2006) 23 Contemporary Accounting Research 491

    Google Scholar 

  • Neyers, Jason, Canadian Corporate Law, Veil-Piercing and the Private Law Model Corporation (2000) 50 University of Toronto Law Journal 173

    Google Scholar 

  • Oladele, O.O. and Ogunleye, T.A., The Conceptual Basis and Limit of Self-regulation by Securities Markets in Nigeria and the United States (2006) 3 University of Botswana Law Journal 45.

    Google Scholar 

  • Pengilley, Warren, Section 52 of the Trade Practices Act: a Plaintiff’s New Exocet? (1987) 15 Australian Business Law Review 24

    Google Scholar 

  • Schauer, Frederick, The Convergence of Rules and Standards (2003) New Zealand Law Review 303

    Google Scholar 

  • Schauer, Frederick, The Tyranny of Choice and the Rulification of Standards (2005) 14 Journal of Contemporary Legal Issues 803

    Google Scholar 

  • Schlag, Pierre, Rules and Standards (1985) 33 UCLA Raw Review 379

    Google Scholar 

  • Securities and Exchange Commission (US), Final Rule, Selective Disclosure and Insider Trading, 17 CFR Parts 240, 243, and 249; http://www.sec.gov/rules/final/33-7881.htm. Accessed 10 June 2014

  • Task Force to Modernize Securities Legislation in Canada, Canada Steps Up, Final Report (Government of Ontario, Toronto, 2006)

    Google Scholar 

  • Walla, Fabian, Process and Strategies of Capital Markets Regulation in Europe, in: Rüdiger Veil (ed), European Capital Markets Law (Hart Publishing, Oxford, 2013) 25

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Business Law and Taxation, Monash University, Melbourne, Australia

    Paul Latimer

  2. TUM School of Management Technische Universität München, Munich, Germany

    Philipp Maume

Authors
  1. Paul Latimer
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Philipp Maume
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

Copyright information

© 2015 Springer International Publishing Switzerland

About this chapter

Cite this chapter

Latimer, P., Maume, P. (2015). Towards Principles-Based Regulation. In: Promoting Information in the Marketplace for Financial Services. Springer, Cham. https://doi.org/10.1007/978-3-319-09459-5_8

Download citation

Publish with us

Policies and ethics

Search

Navigation