The Use and Misuse of Disclosure as a Regulatory System

Over the past several decades, legislators and regulators have increasingly turned to disclosure schemes, rather than substantive regulation, to accomplish regulatory goals. Most of these schemes are either expressly or impliedly based on the disclosure-based regulatory system established by the securities acts, which is primarily intended to provide information to traders in an established market and thereby to enhance the operation of the market. A secondary purpose of the securities acts is to alter the behavior of firms and individuals through the operation of the market. Other disclosure schemes usually have similar purposes, but they rarely operate in a market akin to the financial markets. As a result, the mechanism by which the disclosure scheme is expected to accomplish its purpose is often obscure. Where there is a specified mechanism for the operation of the disclosure system, it often fails to take account of the way individuals and firms process and react to information. This Article examines the purposes and operation of both securities disclosure and other disclosure schemes and the limitations on the usefulness of disclosure as a regulatory method. The Article then describes criteria for the use and design of disclosure systems as regulatory tools that take into consideration realistic benefits and costs of the disclosure regime