Legitimacy in the Securities Industry: The Role of Merit Regulation

State regulators utilize merit review to protect investors, issuers, and the marketplace by focusing on the substantive quality of securities offerings. In this article, the author addresses the evolution of the dual regulatory system and the resulting roles of the state and federal securities laws. The author responds to criticism that the state and federal schemes are duplicative, not complementary, by explaining the differing scopes and philosophies of state and federal securities laws. Expanding on the role of state regulators, the author elaborates on the importance of their accommodation of local interests at the state level in preserving cooperative federalism. Further, he recognizes the need for overlap in a dual regulatory system, due to shifts in regulatory intensity at both levels and to the evolving regulatory atmosphere. Because of a trend in federal deregulation and a corresponding intensified reliance on state regulators, the author dispels the duplicative coverage argument. The author also questions the argument that capital formation is impeded by merit regulation, providing evidence that states with reputations for strict merit regulation have not experienced adverse effects on capital formation. Although he recognizes the utility of the merit regulation debate, the author concludes by acknowledging the positive effects of state merit review: protective regulation and the promotion of capital formation.