Monday, June 2, 2014

Pondering Disclosure "Creep"

Thanks for the warm welcome to the Business Law Prof Blog, Stefan et al.  Having avoided a regular blogging gig for many years now (little known fact: I was the first guest blogger on The Conglomerate – or at least the first one formally listed as a guest – back in 2005), I recently determined that I should sign on to work with this band of thieves scholars on a regular basis.  I appreciate the invitation to do so.

I already feel right at home, given that my post for today, like Steve Bradford's, is on mandatory disclosure.  Unlike Steve, however, my focus is on the creep of mandatory disclosure rules in U.S. securities regulation into policy areas outside the scope of securities regulation.  I think we all know what "creep" means in this context.  But just to clarify, my definition of "creep" for these purposes is: "to move slowly and quietly especially in order to not be noticed."  I participated in a discussion roundtable in which I raised this subject at the Law and Society Association annual meeting and conference last week.

My concerns about this issue were well expressed by Securities and Exchange Commission Chair Mary Jo White back in early October 2013 in her remarks at the 14th Annual A.A. Sommer, Jr. Corporate Securities and Financial Law Lecture at Fordham Law School:

When disclosure gets to be too much or strays from its core purposes, it can lead to “information overload” – a phenomenon in which ever-increasing amounts of disclosure make it difficult for investors to focus on the information that is material and most relevant to their decision-making as investors in our financial markets.

To safeguard the benefits of this “signature mandate,” the SEC needs to maintain the ability to exercise its own independent judgment and expertise when deciding whether and how best to impose new disclosure requirements.

For, it is the SEC that is best able to shape disclosure rules consistent with the federal securities laws and its core mission.  But from time to time, the SEC is directed by Congress or asked by interest groups to issue rules requiring disclosure that does not fit within our core mission.

She goes on to note that some recent disclosure rules mandated by Congress:

. . . seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.

That is not to say that the goals of such mandates are not laudable.  Indeed, most are.  Seeking to improve safety in mines for workers or to end horrible human rights atrocities in the Democratic Republic of the Congo are compelling objectives, which, as a citizen, I wholeheartedly share.

But, as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.  

Parts of these remarks—those on information overload—were echoed in a speech that Chair White gave to the National Association of Corporate Directors Leadership Conference.  

Chair White's words ring true to me.  I derive from them two main contestable points for thought and commentary.

First, the SEC, alone or in concert with Congress (if you can imagine that happening right now . . .), not Congress alone, should fashion mandatory disclosure rules.  An inexpert, representative, deliberative legislative body is not the right place for tinkering with specialized disclosure requirements.  Regulation at this level of detail belongs with a well-resourced, expert, relatively apolitical regulatory body.  The SEC has the best prospect for success here, but it needs to have a better resource base, including more funding.  Yet, the political dynamics between Congress and the SEC since the Bernie Madoff affair and the financial crisis have not been conducive to allocating needed resources to the SEC . . . .

Second, mandatory disclosure rules should be adopted to serve the policies underlying the federal securities laws: capital formation, investor protection, and market integrity maintenance.  But the devil's in the details.  Serving these sometimes-overlapping, sometimes-competing policy objectives is no mean feat.  And at a certain level of interpretive value, nearly every matter that may be disclosable is in the "public interest" (which, together with the protection of investors, is the typical standard for SEC rule making).

Does any of this resonate with you?  Let me know.  As I ponder these issues, I am finding it useful to read and think about Cynthia Williams's nifty 1999 article entitled The Securities and Exchange Commission and Corporate Social Transparency and Michael Guttentag's wonderful work on investor protection and disclosure, including his recently released article:  A New Light on Public Company Political Spending Disclosure.  I offer them up in the same spirit that Steve offered up his book suggestion: possible fruitful and enjoyable summer reading . . . .

Joan Heminway, Securities Regulation | Permalink


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