Abstract
Conflicts of interest exist in both professional and private settings, and everyone experiences them from time to time. If a person harboring a conflict acts on it—meaning the person acts against interests she ought to uphold—innocent parties may be harmed. Accordingly, the key to addressing a conflict in most settings is to eliminate it, such as by prohibiting conflicted behavior or recusing oneself from a deliberative process. However, conflicts of interest have a special character in the securities realm, both because they are ubiquitous given financial firms’ myriad competing interests and because the goal of the agency charged with addressing conflicts in the securities context, the U.S. Securities and Exchange Commission (SEC), is not to eliminate them but, rather, merely to mitigate them, tempering them for the benefit of securities regulation’s dual objectives: investor protection and capital formation. This approach reflects the recognition that, while eliminating conflicts of interests helps protect investors, it can impede the cause of capital investment and growth. Accordingly, the SEC’s challenge in regulating financial firms is to strike a balance between these two objectives, allowing firms to act on conflicts of interest in the name of capital formation but simultaneously restricting those conflicted actions in the name of protecting investors. Yet, as this Article argues, the agency has not always gotten the balance correct, at times erring on the side of permitting too much conflicted activity and at times erring on the side of permitting too little. Providing examples in each category, the Article suggests that the SEC could consistently produce better rulemaking outcomes by heeding prior episodes of failed rulemaking, drawing more from its own experience, and training its regulatory focus at the appropriate level of analysis.