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The Securities Act of 1933 is tied to transactions in securities, rather than the risk of those securities, an approach that reflects the risk management of the times. Managing risk through diversification did not occur until twenty years later, and a further twenty years passed before new instruments were created to facilitate the transfer of discrete portions of financial risk. For much of the capital markets, this shift resulted in a separation between the risk associated with individual securities and the securities themselves. The idiosyncratic risk of individual securities now matters less than its impact on a portfolio’s total risk.
In response, SEC disclosure requirements increasingly have facilitated cross-company comparisons and portfolio-level investment decisions. Nevertheless, the growing separation between risk and the instruments evidencing that risk, and the ability today to manage and transfer risk by itself, prompts a question: Should we begin reconsidering the Securities Act’s approach to regulation, moving from requirements tied to transactions in securities towards requirements that reflect the management and transfer of risk?
There is certainly merit to doing so, but we may be limited by the practical difficulty of tracing risk in today’s capital markets. For now, regulation’s practical reach may fall short of contemporary investment and risk management strategies. While regulatory responses are possible, there is likely to continue to be a tension between the requirements of the Securities Act and the risk-based approach to investing taken by institutions whose investments comprise most of the transactions subject to the Securities Act.
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