Institute for Financial Transparency

Shining a light on the opaque corners of finance


Clayton led SEC Highlighting Importance of Transparency Label Initiative

To no one’s surprise, the latest member of the Opacity Protection Team to be appointed chairman of the SEC is looking to reduce mandatory disclosure by companies.

Under his leadership,

the agency released a proposal that, if adopted, would give companies more leeway in deciding what information they share with investors. Lynn Turner, former chief accountant at the agency, said that the SEC has suggested that companies might be allowed to make some decisions about what is included in their disclosures based on what is important — or “material” — from management’s point of view, as opposed to what is material to the investor. Should that be allowed, investors might as well use the required quarterly and annual filings “to light the Yuletide log,” Turner said.

SEC Commissioner Kara Stein, a Democrat, raised additional concerns in an October 11 statement. The proposed rule would potentially eliminate “critical information” about financial performance and prospects by cutting back on management’s analysis of its businesses. [emphasis added]

In addition,

the SEC announced that it would expand disclosure exemptions created by the 2012 JOBS Act that eased the path for emerging companies to go public. That law waived many public disclosures for firms with revenues under $1 billion a year; now any company going public, however large, can withhold certain details of its finances and strategies when selling shares through an IPO.

Of course, there are some who see this as a step in the wrong direction.

This idea of less disclosure is an “unfortunate trend,” says David S. Fink, a Michigan-based lawyer…. “We either do or don’t believe in the benefits of free markets,” Fink said. “People who pretend to be advocates for free and open markets and then promote measures that allow less transparency are not supporting capitalism; they are simply supporting large economic institutions at the expense of small investors.”

The Transparency Label Initiative is the antidote to this unfortunate trend towards less disclosure.  Through the use of its label, the Initiative differentiates between investments that provide sufficient disclosure so an investor could know what they own and investments that don’t.

Investors will demand investments in the “Opacity as an asset-class” category provide a much higher potential return to compensate for the investors’ inability to be able to properly assess their true risk.  A recent study showed this dynamic was already in play when firms that provided little disclosure while going through the IPO process were forced to lower their offering price by 7.1% compared to firms that offered greater disclosure.