Dynamic Federalism: Competition, Cooperation and Securities Enforcement

Abstract

The concept of competition between the federal government and the states was central to the framers’ vision of our constitutional structure. In the framers’ view, federal-state regulatory competition ensured an alternative regime to citizens dissatisfied with the dominant regulator’s performance. Recently, the dynamics of federalism have shifted power in the securities enforcement field from the SEC to certain state securities regulators. The states, rather than the SEC, have led enforcement efforts in the Wall Street analyst conflicts and the mutual fund trading investigations. This shift in authority has prompted renewed debate over whether a uniform national system of securities regulation is preferable to the current dual system. The rising profile of state officials, and calls from certain quarters to curtail states’ enforcement powers, presents a paradigm through which to assess how a dynamic federalist system helps to ensure optimal regulatory policies and practices. This Essay explores the complex dynamics of federal-state regulatory competition in securities enforcement and concludes that efforts to curtail the states’ enforcement power are misguided. Contrary to the claims of state regulators’ critics, the recent move by states to exert influence in securities enforcement demonstrates the vibrancy and health of our political and constitutional structure.