In Transparency Games, I discuss in detail how SEC Chairwoman Mary Jo White’s highest priority upon taking office was and still is reducing disclosure by the issuers of securities.  In her testimony to the Senate, she cited both the JOBS Act and a court ruling by Thurgood Marshall as the drivers behind project “Information Overload”.  As she explained, project “Information Overload” is the SEC’s effort to balance the competing interests of investors who want more information and issuers who want to disclose less information.

Before I debunk this explanation, let me make a critically important point:  the SEC sets a minimum level of disclosure.  It does not set a ceiling on how much more information a company can choose to voluntarily disclose.

This is important because the primary lesson we learned from the 2007 financial crisis and the opaque, toxic subprime mortgaged-backed securities is the minimum level of disclosure set by the SEC does not necessarily equate to disclosure of enough information so investors can know what they own.

Let me repeat that: the SEC’s disclosure requirements are not a guarantee a security provides transparency.

This is why the Transparency Label Initiative was created.  It is a buy-side funded effort that uses a label to distinguish between securities that are transparent and an investor can know what they own and securities that are opaque and buying these securities is simply blindly betting.  The existence of the label puts significant pressure on issuers to voluntarily disclose the information needed for transparency even when this disclosure is not required by the SEC regulations.  The pressure comes in the form of a much higher cost to fund an opaque security as the pool of money willing to blindly bet is orders of magnitude smaller than the amount of money available to invest in transparent securities.

Now let me briefly debunk Mary Jo White’s argument.

First, the SEC was never given the charge to balance the competing interests of investors and issuers.  The SEC was suppose to be the investors’ advocate.  The fact she advocates balancing the competing interests is simply confirmation the SEC has been captured by Wall Street and the issuers.

Second, the Marshall court decision occurred before the beginning of what we call the “information age” and the growth of the asset management business.  The information age is important because it made it easy for any investor to solicit the opinion of experts who are capable of analyzing all the disclosures made by a security.  The growth of the asset management business is important because much more than 50% of all investment dollars are now managed by firms that either have the experts on staff or use these experts to assess a security’s risk/return profile.  In short, if they chose, all investors have access to experts who are capable of assessing far more information than is currently disclosed today.