From Incongruity to Cooperative Federalism

Abstract

The conventional wisdom has been that state law governs internal affairs, and federal law governs disclosure. This reassuring construct, however, has little basis in today's reality. Left alone, states have not provided adequate shareholder protections: state securities laws were historically anemic, and the regulatory reach of state corporate law shrank under a prevailing contractarian ethos. As consequence, beginning in 1933, federal securities laws emerged to regulate many internal affairs. Curiously, however, as federal regulation has grown and become increasingly preemptive over the past decade, it has often decreased shareholder protections. As a consequence, some states have recently reversed course, using newly energized state securities laws to pursue fraud.

The responsibility for regulating the relationship between corporations and their shareholders has thus descended into a welter of confusion. Neither dual federalism nor preemptive federalism has been satisfactory.

In order to begin overcoming this morass, the article draws on new research in the theory of economic regulation. In particular, it proposes that the relationship between corporations and their shareholders operate within the framework of cooperative federalism using a reverse-Erie framework. The federal government would set minimal shareholder protections, but leave implementation and the creation of enhanced standards largely to the states. The article concludes by addressing a number of constitutional issues cooperative federalism might raise, including the creation of federal common law by state instrumentalities, as well as possible non-delegation and anti-commandeering concerns.

Keywords: securities law, corporate law, federalism, regulatory theory

JEL Classification: K22, K23, L51