Indirect Investor Protection: The Investment Ecosystem and Its Legal Underpinnings

Indirect Investor Protection: The Investment Ecosystem and Its Legal Underpinnings

Holger Spamann

Series number :

Serial Number: 
594/2021

Date posted :

July 01 2021

Last revised :

July 13 2021
SSRN Share

Keywords

  • investor protection • 
  • index funds • 
  • Market efficiency • 
  • Activism • 
  • Activist Hedge Fund • 
  • private equity • 
  • Plaintiff Lawyers • 
  • Contractarian Model of Corporate Law • 
  • mandatory law

This paper argues that the key mechanisms protecting retail investors’ financial stake in their portfolio investments are indirect. They do not rely on actions by the investors or by any private actor directly charged with looking after investors’ interests.

Rather, they are provided by the ecosystem that investors (are legally forced to) inhabit, as a byproduct of the mostly self-interested, mutually and legally constrained behavior of third parties without a mandate to help the investors (e.g., speculators, activists). This elucidates key rules, resolves the mandatory vs. enabling tension in corporate/securities law, and exposes passive investing’s fragile reliance on others’ trading.

Authors