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Holger Spamann, Indirect Investor Protection: The Investment Ecosystem and Its Legal Underpinnings (Harv. John M. Olin Ctr. for L. Econ. & Bus. Discussion Paper No. 1046, Oct. 7, 2020).

Abstract: This paper argues that the key mechanisms protecting retail investors’ financial stake in their portfolio investments are indirect: they do not rely on actions of the investors themselves, or of their agents including fund managers, or of any other private actor directly charged with looking after the investors’ interests. Rather, investors’ main protections are provided by the ecosystem that they (are legally forced to) inhabit. These protections arise as a byproduct of the self-interested, legally constrained behavior of sophisticated third parties that are in competition with one another, particularly hedge funds, traders generally, and plaintiff lawyers. While existing law consciously supports some of these indirect mechanisms, others remain hidden from view and are at risk from contractual innovations and their own success. The analysis provides a more convincing rationale for mandatory corporate and securities law, cautions against the SEC’s recent push to open private markets to smaller investors, and identifies a new challenge from the rise of large index funds.