This essay, prepared for a University of Cambridge conference on ‘Principles Versus Rules in Financial Regulation’, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: unless protected by a regime enabling one in good faith to exercise judgment without fear of liability, such a person will effectively act as if subject to a rule and, even worse, an unintended rule.
Steven L. Schwarcz, The ‘Principles’ Paradox, 10 European Business Organization Law Review 175-184 (2009)
Library of Congress Subject Headings
Trust indentures, Mortgage-backed securities, Liability (Law), Bond market, Public finance