Research on Public Regulation of Securities

Author: Sheng Xuejun
Publisher:
Publishing Date: 2004-07-01
Features: Securities disclosure regulation is a specific way in which modern governments intervene in the securities market. As a form of regulation, it has sparked extensive academic debate and policy. By the end of the 20th century, with the exposure of a series of regulatory failures, it faced significant challenges in both developed securities markets and transition economies. The arguments for deregulation or what is termed "strengthened" regulation, though differing in stance, share a common point of denying disclosure regulation at various levels. Before making corresponding legislative and policy choices, we should ask: What are the institutional ideals behind securities disclosure regulation and other regulatory legislation? What are the underlying institutional conditions? What is the rationale for choosing disclosure regulation, and how should it be implemented? What are the reasons for its failure, and what is the relationship or conflict between our institutional environment and the ideals of disclosure regulation? To address these issues, this paper employs an integrated analytical approach combining economics, sociology, and law to systematically explore them. The full text, excluding the introduction, consists of five chapters.
Chapter 1 analyzes the institutional ideals and implementation mechanisms of securities disclosure regulation. The fundamental meaning of disclosure regulation is to confirm the freedom and equality of individuals in seeking and obtaining information. In securities law, it is embodied as a regulatory system that grants specific parties in securities issuance and trading with disclosure obligations to assist investors in making judgments. Unlike other regulatory systems, securities disclosure regulation reflects a unique fusion of state interventionism and economic liberalism, i.e., institutional economic liberalism and policy-level state interventionism. The implementation mechanism of this ideal is to enforce the disclosure of information to maintain the choice freedom of market participants, thereby ensuring free competition. This perfectly reveals the different levels of the disclosure regulation ideal: as a tool-based ideal of state intervention and as an objective ideal of market freedom.
Chapter 2 traces the origin and development of securities disclosure regulation and its inherent ideals, revealing the basic clues and development conditions of its historical origins. The article first outlines the early commercial norms with intrinsic connections to disclosure regulation, such as the duty of disclosure, commercial registration, and fiduciary management obligations. It then describes the three major stages of securities disclosure regulation: First, the establishment of disclosure regulation in the UK, marked by the passage of the 1844 Joint Stock Companies Act, with a basic structure including issuance registration, disclosure of annual reports, and anti-fraud provisions. Second, the comprehensive development of disclosure regulation in the U.S., symbolized by the passage of the 1933 Securities Act and the 1934 Securities Exchange Act, with typical characteristics being: "establishing disclosure regulation as the basic regulatory approach for securities legislation," "constructing a complete system from issuance disclosure to ongoing disclosure, from the disclosure of issuers to the disclosure of information advantages in trading," and "establishing highly authoritative and specialized government agencies to oversee regulation." Third, the widespread adoption of disclosure regulation in various countries and coordinated development internationally. In addition to the universal establishment of disclosure regulation in securities legislation, another sign is that international documents such as the Objectives and Principles of Securities Regulation regard transparency and information disclosure as the minimum standards for member states' securities regulation. Thus, the historical process of the emergence and development of securities disclosure regulation can be summarized as: from the "duty of disclosure" in individual contractual relationships—whether in insurance contracts or in the fiduciary management of property—to the "duty of disclosure of companies to shareholders," then transformed into the "disclosure of companies and relevant entities to all investors," and further developed into a complete system of disclosure regulation promoted and implemented by specialized government agencies, and finally evolved into an indispensable basic system of securities regulation in various countries. By reviewing and summarizing this historical process, the article proposes the following viewpoints: (1) A certain restriction on contractual freedom by law is the primary basis for establishing disclosure obligations, but at this stage, disclosure is only individual and limited in scope. (2) Legislation starting from a social perspective rather than an individual one is an important condition for information disclosure to be directed at the public and fully disclosed. At this point, the recipients of disclosed information are no longer limited to existing company shareholders or bondholders, and the content of disclosure is not limited to company operations and financial information but also includes specific transaction information. (3) The strong yet limited intervention of state regulation is the ultimate condition for the formation of disclosure regulation. It ensures that disclosure regulation becomes a feasible social game rule rather than just a decorative piece. At the same time, excessive government intervention not only conflicts with the institutional design of disclosure regulation but also inevitably becomes a hidden and major institutional factor hindering market development and triggering financial crises.
Chapter 3 addresses the doubts and confusion surrounding securities disclosure regulation by employing economic, legal, and social analysis methods, using information theory, fiduciary theory, and social trust theory to comprehensively analyze the theoretical basis of disclosure regulation and its ideals, thereby revealing its efficiency value, fairness value, and order value, and thereby justifying the legitimacy of securities disclosure regulation. First, by analyzing the market defects of incomplete information and the specific characteristics of securities market information issues, the article points out that information failure, as an endogenous problem of the market, cannot be fully overcome by the market itself, making government intervention an irreplaceable choice. The basic attribute of disclosure regulation is precisely to overcome the information failure in the securities market. Information theory is a correction rather than a complete denial of the market mechanism in classical liberalism, and therefore it embodies respect and adherence to market-based free choice, thereby laying the theoretical foundation for the coexistence of state intervention and market freedom as tool-based and objective ideals in disclosure regulation. Therefore, securities disclosure regulation based on information theory embodies efficiency value in that government intervention through information disclosure regulation into the market not only remedies the market defects of incomplete information but also maximizes the choice freedom and competitive order of the market. Thus, it achieves the goal of overcoming market failures while avoiding government failures. In other words, the choice freedom (rights) related to issuance and trading in the securities market still belongs to market participants. In addition to implementing disclosure regulation, the government does not hold the "life-and-death power" over securities issuance and listing transactions. Correspondingly, government judgment errors and "rent-seeking" issues related to regulatory resources can be largely avoided. The rationality of the institutional ideal of "institutional liberalism and policy-level interventionism" lies herein. Second, based on the analysis of fiduciary theory, investment contracts in the securities market (securities issuance and certain conditions of securities trading) exhibit a serious imbalance in rights, belonging to the nature of a "fiduciary relationship." Disclosure regulation is established as the primary means to correct the imbalance of rights in the "fiduciary relationship." The fairness value of disclosure regulation is thus reflected in granting information advantage parties in trading relationships with disclosure obligations higher than those required by ordinary law to ensure a balance between the efficiency of "professional financial management" and the security of the "principle's" assets. Third, based on the analysis of social trust theory, the trust order that connects financiers and investors is extremely fragile due to the "virtuality" of securities assets. Securities transactions are shrouded in a "mysterious veil," and investors are like wandering in the endless night, almost unable to protect themselves, ultimately leading the public to avoid market investment and securities transactions. The primary way to reverse this situation and restore public trust is through information disclosure. The order value of disclosure regulation is reflected in its contribution to building a sound social order. Specifically, it enhances market transparency, eliminates public fear, controls financing enterprises, suppresses fraudulent behavior, and promotes investors' equal awareness and enthusiasm for participation, thereby maintaining social trust relationships.
Chapter 4 examines and argues for the institutional framework and specific norms of securities disclosure regulation from the perspective of the feasibility of the institutional ideal. The author believes that the system of securities disclosure regulation consists of three components: disclosure obligations, systems to guarantee the disclosure of information, and the status and responsibilities of the government. Considering the overlapping institutional norms among the three components, to emphasize key points and avoid repetition, this paper takes the basic norms of disclosure obligations as the thread, analyzing three issues: "Who should bear the disclosure obligation," "What information should be disclosed and how," and "legal liability." First, regarding the subjects of the disclosure obligation, the article argues that it should be based on distinguishing between disclosure subjects and enforcement subjects, granting securities issuing companies, directors and controllers, shareholders and acquirers with independent disclosure obligations. Among them, securities issuing companies, as the basic subject of the obligation, bear disclosure obligations throughout the issuance and circulation activities of securities, which are further divided into issuance disclosure and ongoing disclosure, with the former being a prerequisite for registration and management; the independent disclosure obligation of directors or controlling shareholders is an effective countermeasure to address the challenges of "separation of ownership and control" and balancing conflicting interests. Second, regarding the content and methods of information disclosure, the article argues that the following five principles should be followed: "completeness," "truthfulness," "accuracy," "timeliness," and "convenience." Influenced by differences in cognition and judgment, the activities of information disclosure and acceptance both involve significant subjective components. The experience of mature legal countries is to grant regulators the authority to formulate regulatory rules and judges appropriate discretion. Third, regarding the legal liability of disclosure regulation, this paper focuses on analyzing the civil liability of false statements in light of the practical requirements of the system. The current liability attribute of false statements is attributed to tort liability, but based on legislative purposes and normative characteristics, it is more appropriate to be classified as independent liability. The subjects of false statement liability are divided into four categories: securities issuers and sponsors, directors and managers, dealers and their directors, and professional intermediaries and their professionals. The subjects of the right of claim for false statements are limited to investors who "bought" or "sold" specific securities during the period from the occurrence of false statements to their correction, without knowledge at the time and suffering losses. The constitutive elements of false statements also include four aspects, but further clarification is needed. The remedial procedures for false statements, in addition to following the requirements of ordinary litigation, should leverage the information, technology, and decision-making advantages of regulators through the channel of "public interest litigation" to enhance the institutional effectiveness of disclosure regulation.
Chapter 5 examines the performance of China's securities disclosure regulation practices and analyzes the causes of institutional failure and the underlying institutional conflicts and obstacles. First, at least on the surface, China's securities legislation "already has all the conditions required for a typical disclosure system," but the practical performance is far from the system design. Information disclosure has become one of the weakest links in the construction of China's securities market system, particularly manifested in: the widespread occurrence of violations of disclosure obligations, the lack of credibility in disclosed information, the extreme methods of "fabrication," the frequent exposure of major cases of false statements, and the difficulty of investors harmed by false statements to obtain effective relief through valid channels. Second, the article analyzes the severe "insider control" problem of listed companies in China from the perspective of the normative behavior of market entities, which undermines the function of disclosure regulation. At the same time, the ineffective implementation of the law and "punishments that do not match the crime" have also indulged violations. On this basis, the article further explores the institutional obstacles faced by securities regulation in the context of China's social institutional changes. In the model of forced institutional change, contemporary Chinese society is undergoing a dual institutional change from a planned economy to a socialist market economy and from a traditional society to a modern society. Forced institutional change entails conflicts between the irrational value preferences of the government and the goals of institutional change, as well as intense clashes among various interest groups that have not reached "consensus agreements" internally and with the government. One manifestation is that the institutions forcibly pushed forward by legislation deviate from their intended goals. Disclosure regulation is no exception. Especially, the government-led model of the securities market formed by this, with its element of "violating the principle of consensus agreement," inherently denies the free will of market entities, making it inevitable to conflict with the objective ideal of disclosure regulation. This further leads to the suppression of disclosure regulation by the government-led securities system, weakening the market foundation for information disclosure regulation and thus causing institutional failure. On the other hand, the typical norms of traditional society (such as concepts, behavioral patterns, etc.) also undermine the effectiveness of the disclosure principle to a certain extent. The basic conclusion of the paper is that the institutional foundation of China's securities disclosure regulation not only encourages "fabrication" but also incites enterprises to "fabricate," making the failure of disclosure regulation inevitable. The essence of the current institutional shortcomings in China is that they distort the fundamental positioning of the relationship between the government and the market, directly conflicting with the institutional ideals of disclosure regulation. Therefore, the institutional construction of the securities market, as well as the process of social change, is not a simple matter of transplanting advanced legal norms and enforcing the law; regarding disclosure regulation, the realization of legal norms and their presupposed goals requires not only the self-improvement of legislation and law enforcement but also the creation of a legal application environment based on the values and ideals inherent in the system, particularly including the transformation of government behavior patterns and public social concepts.