Trust and the Reform of Securities Regulation

Ronald J. Colombo, Maurice A. Deane School of Law at Hofstra University

Abstract

Trust is a critically important ingredient in the recipes for a successful economy and a well-functioning securities market. Due to scandals, ranging in nature from massive incompetence to massive irresponsibility to massive fraud, investor trust is in shorter supply today than in years past. This is troubling, and commentators, policy makers, and industry leaders have all recognized the need for trust's restoration.

As in times of similar crises, many have turned to law and regulation for the answers to our problems. The imposition of additional regulatory oversight, safeguards, and remedies, some advocate, can help resuscitate investor trust. These advocates have it half right.

For trust is complicated, and exists in a variety of forms. Some forms, predicated primarily upon reasoned calculation, respond well to law and regulation. But other forms, predicated primarily upon relationship and emotion, respond poorly to law and regulation. In fact, these latter forms of trust can be seriously harmed by legal intervention. Wise policymakers would carefully assess the nature of whatever particular trust relationship they wish to strengthen before taking action to ostensibly strengthen the trust in that relationship.

Unfortunately, such an assessment has not been part of the significant securities law reforms recently proposed. As such, some of these reforms threaten to undermine, rather than enhance, the remaining supply of trust.