Comment, Regulation and Investors' Trust in the Securities Markets

Throughout history, the relationship between government regulation, investors' trust in the securities markets, and market prices has been a puzzle. Regulation is costly to issuers. Yet, in a bull market, when raising capital is easy, regulation relaxes and in a bear market, when raising capital is difficult, regulation tightens, often at the request of issuers. This paper suggests that investors view prices as surrogates of a fair and trusted market system. When they lose, they seek greater proof that the system is not ‘rigged.’ Regulation points to such assurances, as well as protection against cutthroat competition by securities distributors. This paper also suggests that after the recent market crash, even though investors seemed to stay in the markets, they did not actually do so. Those who invested in tax deferred plans could not escape the markets without paying a high tax penalty, so they moved within the mutual fund system to money market funds and bonds. Finally, this paper suggests that more than regulation may be needed to resurrect investors' trust today.