Merit Regulation via the Suitability Rules
Please cite the paper as:
“Ronald J. Colombo, (2012), Merit Regulation via the Suitability Rules, World Economics Association (WEA) Conferences, No. 3 2012, Rethinking Financial Markets, 1st November to 31st December, 2012”
Abstract
In the wake of the financial crisis, many in the U.S. are revisiting the concept of “merit regulation” – the road not taken with regard to the federal regulation of securities. However, the drawbacks of such an approach remain as compelling today as when the approach was rejected by policymakers eighy years ago. That said the benefits of merit regulation can be largely obtained, while avoiding these perennial drawbacks, via the federalization of the suitability rules. The suitability rules are administered by SROs and based on standards set by the private market. They attempt to manage investment risk by requiring that brokers offer to their clients only those securities that are suitable for them. The SEC could effectively commandeer this process, establishing guidelines and definitions for brokers to apply in their suitability determinations – thereby mandating that securities trading takes into account the best information available regarding risk, and that such trading comports with public policy.