Document Type

Article

Publication Date

2009

Abstract

The American retail investor is dying. In 1950, retail investors owned over 90% of the stock of U.S. corporations. Today, retail investors own less than 30% and represent a very small percentage of U.S. trading volume. Data on the overall level of retail trading in U.S. equity markets are not available. But recent New York Stock Exchange ("NYSE") data reveal that trades by individual investors represent, on average, less than 2% of NYSE trading volume for NYSE-listed firms. There is no question that U.S. securities markets are now dominated by institutional investors. In his article, "The SEC, Retail Investors, and the Institutionalization of the Securities Markets,"' Professor Donald Langevoort offers a compelling, original account of the challenges facing the Securities and Exchange Commission as it turns seventy-five years old in the face of securities markets characterized by increasing institutionalization. Professor Langevoort's article offers several interesting insights and serves as an important commentary on the appropriate regulatory model for a marketplace strikingly different from the one existing at the time of the SEC's founding. Despite the enormous contribution of the work, however, I find some of Professor Langevoort's assertions regarding the SEC's focus and capabilities, and his assumptions regarding the contours of an institutionalized marketplace, unconvincing. In this commentary, I address three concerns. First, Professor Langevoort is skeptical that the SEC, with a history of what he terms retail-driven regulation, is equipped to regulate a highly institutionalized marketplace. I question the claim that regulation of the markets for issuer securities is, in any meaningful sense, retail investor driven and argue that there is no reason to think that the SEC is incapable of regulating a marketplace with limited direct individual investor participation. Second, Professor Langevoort conducts a thought experiment regarding the likely emergence of an institutions-only trading market that could substitute for public capital markets and be regulated as antifraud-only. He argues that this is unlikely to ever occur in the current political climate, but nonetheless holds up such a market as clearly preferable to the status quo. I agree that the emergence of such a market is unlikely, but I am skeptical of his idealized notion of an institutions-only marketplace. Finally, Professor Langevoort, in addressing mutual recognition proposals, argues that foreign issuers seeking to sell securities in the United States should be subject only to the laws of their home countries, as long as those laws are "reasonably responsive to institutional investor interests." This would be in lieu of subjecting such issuers to the purportedly retail-driven regulation that is the hallmark of U.S. securities markets. I question exactly what it means for the laws in a foreign issuer's home country to be "responsive to institutional investor interests" and argue that this proposed standard for substantial comparability is insufficiently definite to guide policy decisions in this area.

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