Vanderbilt Law Review

First Page



This Article corrects widespread misconception about whether complex regulatory systems can be described fairly as either "rules-based" or "principles-based" (also called "standards-based'). Promiscuous use of these labels has proliferated in the years since the implosion of Enron Corp. Users show an increasing habit of celebrating systems dubbed principles-based and scorning those called rules-based. While the concepts of rules and principles (or standards) are useful to classify individual provisions, they are not scalable to the level of complex regulatory systems. The Article uses examples from corporate law, securities regulation, and accounting to illustrate this problematic phenomenon. To describe or design systems as principles-based or rules-based, analysis must account for the application and interaction of all provisions. Once these features are accounted for, the labels become facile. The Article thus concludes that it is neither possible nor desirable to fashion such systems to be "principles-based" or "rules-based" and that such misleading labels should be retired.

The Article then explores why the rhetoric extolling "principles-based systems" is flourishing. It considers three hypotheses: (1) a regulatory emphasis on discretionary enforcement to induce cautious compliance, (2) a quest to rejuvenate ethical principles in the practice of corporate law, securities regulation, and accounting, and (3) a deflective political strategy in jurisdictional competition to signal product differentiation. The first and second hypotheses are credible but suffer from both descriptive and normative weaknesses, including how they can backfire by leading to overzealous enforcement. The third is the strongest descriptively but the most troubling normatively.