Disclosure is Today’s Biggest Challenge
Since the process the SEC uses to set disclosure requirements was captured by Wall Street in the 1990s, issuers have not been sharing the information investors need to know what they own.
Not only did this lack of disclosure directly contribute to the Great Financial Crisis, but this lack of disclosure has gotten so bad, it has finally become a topic of conversation at the Council of Institutional Investors conference.
As Chicago Treasurer Kurt Summers put it:
Disclosure is the biggest challenge today. I think where we are in this country and around the world, we are in the early innings, not just on the quantity of disclosure … but also the quality and the depth of disclosure.
Regular readers know this is where the Transparency Label Initiative comes in. Unlike the SEC, the process by which the Initiative determines if an issuer is disclosing the information an investor needs to know what they own is not and cannot be captured by Wall Street.
The reason the process for awarding a label cannot be captured by Wall Street is quite simple. The starting point for determining what information is needed so an investor can know what they own for any investment is the investors and the third party experts they hire to help them assess the risk and reward of an investment.
As SEC Commissioner Kara Stein said:
We hear the claim that public companies are overloading investors with information. But I have not heard this complaint from a single investor.
Next, the information the investors and their experts want is compared to what the issuer discloses (note: there is nothing that prevents an issuer from disclosing more than the SEC requires and some do). Where the issuer’s disclosure exceeds or matches the information the investors and their experts want disclosed, the issuer is awarded a label. This label indicates an investor can know what they own if they buy this investment.
Where the issuer’s disclosure is less than what the investors and their experts want disclosed, the issuer is not awarded a label. The lack of a label indicates an investor is blindly betting if they buy this issuer’s securities. Naturally, if an investor is going to blindly bet, they should expect to be compensated for the risk involved in blindly betting.
Of course, there are certain investors who shouldn’t be permitted to blindly bet. This would include pension funds, endowments and life insurance companies.
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