The SEC has been looking for a private market solution like the Transparency Label Initiative to take over its public role of requiring disclosure.

This interesting fact was included in a report from the Center for American Progress on how existing disclosure regulations fail.  The report’s authors focus on the regulations failure to require consistent, comparable and reliable disclosure of environmental, social and governance information.  What caught my attention wasn’t just the call for a private market solution or the failure of the disclosure regulations, but the authors identify all the reasons working with the SEC is unlikely to cure this disclosure failure.  The report reads like a marketing piece for the Transparency Label Initiative.

Why?

Because the Transparency Label Initiative is a private market solution for requiring the information investors need to know what they own.  The Initiative includes environmental, social and governance disclosure in its assessment of whether or not a company qualifies for a label indicating investors can know what they own.

The authors start by explaining why we have disclosure regulations by looking at

the question of whether investors, markets, and key corporate stakeholders are sufficiently informed—and from that information, empowered—to do the basic work of the capital markets: drive smart capital decisions for the long term. This report asserts that the answer to that question is “no.” Shareholders and stakeholders of all types and sizes do not have access to the long-term-oriented information they need….

How are investors suppose to get this information?

Public oversight of the nation’s stock markets is premised on the need for government to mandate corporate transparency.

Why?

Corporations are understandably unwilling to voluntarily share information that might not be flattering but that investors and the public need to distinguish between good and bad investments. Moreover, information must be shared in a consistent, comparable, and reliable manner for it to be useful to investors and the public—and hence to enable efficient markets.

In the early 1930s, the Pecora Commission established investors were unable to force firms to disclose the necessary information so they could know what they owned.  The reason why investors couldn’t do this is no investment requires every investor.  They only need a subset of investors.  Wall Street understood how to find the subset of investors who were willing to blindly bet on any specific investment.

Since the investors hadn’t found a way to organize themselves, the FDR Administration did if for them.

The Securities and Exchange Commission (SEC) was created during the Great Depression to address market failures and ensure this very transparency.

However,

Over the years, as investors, the economy, and the public interest have evolved, the SEC has had to update its requirements. When it has failed to do so, the consequences to investors of all types and to the public interest have been severe.

Regular readers know the consequences of its failure to ensure transparency was the Great Financial Crisis.  The crisis took place along the multi-trillion dollar opacity fault line in the global financial system.

As a result of the financial crisis, has the SEC restored transparency?

Today, the SEC is behind the curve on mandating the disclosure of sufficient long-term-oriented information, especially ESG information.

The SEC is also behind the curve on restoring transparency.  For example, the banks are still black boxes.

Why is the SEC behind the curve?  Wall Street captured the process by which disclosure regulations are set.  For example, the SEC issued new disclosure regulations for subprime mortgage-backed deals that leave these deals every bit as opaque as they were before the updated regulations were issued.

So what is the alternative to the SEC?

Its reliance to date on the private market to execute this public regulatory function has not worked.

Not surprising given the SEC has done nothing to boost the single private market solution in existence:  the Transparency Label Initiative.

Regular readers know the Initiative is the private market solution for taking over the SEC’s disclosure function.  The Initiative recognizes the SEC sets minimum disclosure requirements.  The Initiative uses its label to identify which firms provide investors with the information they need to know what they own.  Sometimes, the information needed to be awarded a label is the same as the SEC requires.  In most cases, the information required to be awarded a label is substantially more.  Examples of this additional required information is the environmental, social and governance information.