SEC Studies Overhaul of Disclosure

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Last week in a speech before the Stanford Directors’ College, an annual symposium on corporate governance hosted by the Stanford University Law School, SEC Chairman Christopher Cox publically announced an initiative to overhaul how public companies, mutual funds, brokers, and other regulated entities disclose information to investors and the markets.  This new project has been dubbed  the “21st Century Disclosure Initiative.”

The goal of this disclosure initiative is to come up with a blueprint “for overhauling the SEC’s current form-based structure with one that truly meets users’ needs.” The study will look at how information is collected, how the data is stored, and more generally how to maximize the usefulness of information collected by the commission for investors.

“On the 75th anniversary of the SEC, with so much new technology available to improve the quality of information for investors as well as the way investors acquire it, we’re initiating a broad, introspective look at our business model,” said SEC Chairman Christopher Cox. “What hasn’t changed in 75 years is the importance of full disclosure – sunlight remains the best disinfectant for problems in our capital markets. We’ll be examining how to improve the way disclosure works, including tapping the full potential of today’s technology and integrating it seamlessly into our regulatory approach. That could mean fewer confusing forms, and more useful information at investors’ fingertips in a form they can really use.”

According to the Commission, this study will include a review of all existing SEC forms and reporting requirements, as well as the manner in which information is provided to the Commission, with a special focus on needless redundancy. It will also include consideration of various alternative strategic approaches to acquiring and publishing disclosure information. In addition, the study will consider ways that regulatory requirements for the collection of information might be tailored to get the best real-time distribution of financial and narrative disclosure to investors. Finally, the study will examine how best to integrate public disclosure with the SEC’s proposed new post-EDGAR architecture for investor search, assembly, and comparison of data.

Chairman Cox noted that the first phase of this study is expected to be delivered to the commission by the end of this year, after which a follow-on advisory committee will be appointed in 2009 to consider questions in more detail through a public and consultative process.  The initial study will be led by Dr. William D. Lutz of Rutgers University.

Dr. Lutz’s background includes expertise as both a securities lawyer and a plain-English expert focused on transparency. Dr. Lutz has significant experience in working with the SEC on disclosure issues, having participated in several SEC roundtables, and having frequently provided advice on SEC rulemaking.

From 1995 to 1999, Dr. Lutz played an important role in advancing the SEC’s Plain English initiative by preparing the SEC’s Plain English Handbook, a manual to help mutual funds and public companies write clear and understandable SEC filings. He is Emeritus Professor of English at Rutgers University, and the author of numerous books and articles on the importance of plain-language disclosure.

The Consequences of this Study

While we are supportive of the SEC’s interest in overhauling its rather outdated approach to information collection and disclosure, we fear that the announcement of the “21st Century Disclosure Initiative” is likely to further delay (if not outright derail) any move by the SEC on commission disclosure.  This means that many asset managers will continue to spend investors’ assets (commissions) on research provided by broker-dealers and investment banks, without telling them what they are paying for this research, and what they are getting for the money they are spending. 

We suspect this continued delay is not in the best interests of investors.  Lack of disclosure means that U.S. asset managers will continue spending in excess of $5 billion per year of investors’ assets on sell-side research without having to justify these expenditures to the people whose money is being spent.  And while we are confident that most investment managers are making good faith efforts to spend investors’ commissions wisely, we are also wary of any system where lack of transparency is the norm.  Like SEC Chairman Cox, we also believe that sunlight is the best disinfectant for the problems in our capital markets.

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