Article

From the Regulatory Abyss: The Weakened Gatekeeping Incentives Under the Uniform Securities Act

From the Regulatory Abyss: The Weakened Gatekeeping Incentives Under the Uniform Securities Act

Marc I. Steinberg & James Ames

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In the last two decades, massive financial scandals have impaired the integrity of the financial markets and cost investors billions of dollars.  Even more financial devastation was wrought as the Great Recession struck.  These calamities have brought the importance of proper regulatory control in the securities markets into sharp focus.  With this backdrop, this Article tackles the task of examining regulation of one of the most integral components of an effective regulatory system for securities:  gatekeepers.  Gatekeepers, such as accountants, attorneys, bankers, and other professionals involved in the securities disclosure process are uniquely positioned to provide much needed oversight with respect to the effectuation of law compliance.

This Article explores the regulatory incentives provided in the securities laws to gatekeepers and focuses on a critical flaw in the framework:  namely, pursuant to the Uniform Securities Act (USA) and as adopted by a majority of states, the private civil liability regimen allows gatekeepers who fail to properly fulfill their role to avoid private civil liability under the securities laws.

As the Supreme Court and Congress largely have eliminated private liability for collateral actors under the federal securities laws, state securities statutes have become increasingly important in holding collateral actors accountable.  While the majority of states have adopted the Uniform Securities Act (USA), that Act contains a significant flaw, which until now, has not been addressed.  The wording of the USA effectively allows outside lawyers, accountants, bankers, and other outside collateral actors to avoid private civil liability under the Act, while inside collateral actors engaging in the same improper activity are subject to significant liability exposure.  Apart from the inherent unfairness presented by this state of affairs, allowing outside actors to escape private liability under this Act generates fundamental concerns regarding the oversight of the securities markets and appropriate gatekeeper incentives.

This Article begins by discussing the gatekeeping function as it has been envisioned and understood over time.  Gatekeepers, properly fulfilling their role, can use their reputational capital to prevent and deter securities violations.  How gatekeepers function to deter illegal or improper conduct, gatekeeper incentives, and the possible results when gatekeepers abdicate their responsibility are analyzed.  The reasons that federal law and common law causes of action fail to adequately fill the regulatory gap left by the wording in the USA is explored.  Specifically, the elimination of private secondary civil liability for aiding and abetting under the federal law, along with onerous requirements and challenges present with common law remedies, means that a liability gap ensues absent private civil liability for collateral actors under the USA. Given this understanding, the disparity under the USA between inside professionals and outside professionals is explored in depth.  Additionally, as a point of reference, the approaches to state securities liability for collateral actors adopted by other states that have not enacted the USA are examined.  After this, an analysis of the classifications under which collateral actors are held accountable under the USA, such as an agent or employee, and how the courts have construed these classifications under the Act, is undertaken.  Finally, the Article recommends a substantive and specific amendment to the USA’s language, thereby remedying the current inequity in collateral actor liability.

In view of the financial scandals that this country has witnessed over the last two decades, gatekeeper functionality is paramount.  The gap in gatekeeper liability, as is the current situation with respect to the USA’s framework, is detrimental to the integrity of the securities markets.  This Article provides a solution to this current disparity in private securities liability between outside and inside gatekeepers that is achievable, fair, and effective in the current regulatory environment.

 

Marc I. Steinberg: Rupert and Lillian Radford Professor of Law, SMU Dedman School of Law; Director, Corporate Externship Program, SMU Dedman School of Law.

James Ames: Partner, Samples Ames PLLC.

Cite this article:

Marc I. Steinberg & James Ames

,

From the Regulatory Abyss: The Weakened Gatekeeping Incentives Under the Uniform Securities Act

, 35 Yale L. & Pol'y Rev. 1 (2016).