Re-Engineering Corporate Disclosure: The Coming Debate Over Company Registration

I. IntroductionStatutory obsolescence is the fate of all legislation.(1) At some point in the natural "life cycle" of any statute,(2) courts tend to move from purposive statutory construction, focused on the actual legislative intent, to greater deference towards administrative expertise as they implicitly recognize that the original legislative intent no longer fits the contemporary institutional landscape. Given that the federal securities laws were passed during the 1930s, they have now entered the geriatric zone where their possible obsolescence must be considered. Some academics have already called for the SEC's elimination on precisely this basis.(3) Practitioners complain about the "metaphysical" and "hypertechnical" distinctions that the SEC's doctrinally absorbed staff has developed, which arguably have little relationship to public policy concerns or the needs of investors.(4) Meanwhile, the SEC, itself, appears to be administratively repealing some of the Securities Act of 1933's clearest prohibitions.(5) Independently, Congress seems intent on "deregulating" the Securities Act of 1933, in part by making prospectus delivery optional with the investor.(6)Although the idea that the federal securities laws need rejuvenation is timely, it is not new. A well-known and widely respected model for updating the federal securities laws has existed for the past thirty years. In 1966, Milton Cohen published what probably has become the most influential article ever written on the federal securities laws, Truth in Securities Revisited.(7) Cohen argued that the combined disclosure requirements of the Securities Act of 1933 (the '33 Act) and the Securities Exchange Act of 1934 (the '34 Act) produced pointless duplication. Had the statutes instead been passed in the reverse order or as part of a single integrated statute, he suggested that our disclosure system would have been structured very differently. Because the '34 Act creates a system of continuous, periodic disclosure, the existence of this system profoundly reduces the need for transaction-specific disclosure at the time when an issuer later seeks to sell its securities. Logically, a corporate issuer seeking to sell securities under a continuous disclosure system would only be required to disclose any additional material information that it had not previously disclosed pursuant to the continuous disclosure system.In modern terms, Milton Cohen's point was that the development of securities regulation in the United States was "path dependent." Because the '33 Act came first, it understandably keyed the timing of disclosure to the issuer's sale of its securities. Later, the '34 Act overlaid a system of company-specific disclosure on top of the '33 Act's system of transaction-specific disclosure. Had events occurred in the reverse order, no one would have sought to overlay transaction-specific disclosure on top of company-specific disclosure.Although Milton Cohen's fundamental point -- that our two principal statutes governing securities regulation are not well integrated -- has received nearly universal acceptance, progress toward implementing his vision has been slow and halting, at least until recently. Thirty years after his article, serious administrative efforts have been made to integrate the '33 and '34 Acts, but their statutory structure has not been significantly altered. Most notably, the American Law Institute (ALI) labored for over a decade on its Federal Securities Code,(8), ambitious attempt to recodify all six federal securities statutes into one seamless code. Almost everyone in the field applauded this effort, accomplished under the magisterial direction of Harvard Professor Louis Loss. Eventually, even the SEC endorsed this approach, but when the ALI's Federal Securities Code was presented to Congress in 1980, Congress essentially yawned and declined to act. Unfortunately, "good government" reform does not excite powerful constituencies nor generate the level of emotion necessary to stir a lethargic Congress into action. …