Institute for Financial Transparency

The financial crisis that began on August 9, 2007 revealed a fundamental flaw in the design of the global financial system. The global financial system was designed in the 1930s recognizing market participants need the transparency of a clear plastic bag rather than the opacity of a brown paper bag if the invisible hand of the market is to operate properly.

The fundamental flaw was the design created the illusion investors could depend on the global financial regulators to maintain disclosure regulations so investors would always have the transparency of a clear plastic bag. As revealed by the recent financial crisis, this did not happen across large areas of the global financial system. This regulatory failure resulted in investors losing hundreds of billions on investments in opaque securities that met the disclosure requirements established by the financial regulators.

Why did the financial regulators fail to require disclosure so investors could have the transparency of a clear plastic bag in every corner of the global financial system? While we will never know exactly why, one fact sticks out. Wall Street dominates the financial regulators’ process for setting disclosure requirements. Wall Street dominates the process for setting disclosure requirements because it is willing to spend much more time and money lobbying for opacity than investors are willing to spend lobbying for transparency. Wall Street is willing to spend the time and money because the benefits from opacity are concentrated in a few firms while the harm from opacity is spread across many investors.

Frequently, Wall Street’s dominance of this process has resulted in disclosure requirements that are inadequate for the purpose of investors being able to know what they own or are thinking of buying. A classic example of this failure to create adequate disclosure requirements is the SEC’s Regulation AB. This disclosure regulation was first adopted prior to the financial crisis and covers structured finance securities including the infamous opaque, toxic subprime mortgage-backed deals at the heart of the financial crisis. On August 27, 2014, after years of heavy lobbying from Wall Street, the SEC finalized its post-financial crisis update to these disclosure requirements. The updated disclosure requirements provide all the transparency of a brown paper bag as the SEC rejected providing the transparency of a clear plastic bag on the grounds it could not justify the cost to the issuers. As a result, under the updated disclosure requirements investors still won’t know what they own or are thinking of buying for either publicly traded or privately placed structured finance securities.

The Transparency Label Initiative^TM is the investors’ response to prevent future losses from the ongoing failure of the global financial regulators to require transparency that achieves the clear plastic bag standard not just for structured finance securities but in all the opaque corners of the global financial system. It ends the investors’ reliance on the financial regulators for ensuring transparency as investors recognize there is a better alternative to ensure this level of transparency than the status quo with its dependence on the regulators.

The Transparency Label Initiative^TM makes the investors’ view, rather than the financial regulators’ disclosure requirements, the global standard for adequate disclosure. It gives investors the final say on disclosure. This is appropriate as it is only the investors who can say either there is or there is not adequate disclosure so they can know what they own or are thinking of buying. In exchange for having this final say, investors recognize their responsibility for absorbing all losses on their investment exposures rather than being bailed out. This responsibility for losses gives the investors a strong incentive to both independently assess the information disclosed and use the result of this assessment to practice self-discipline by restricting the size of their investments to what they can afford to lose.

Equally importantly, under the Transparency Label Initiative^TM, investors take full responsibility for ensuring the transparency of a clear plastic bag across the global financial system. The TLI Label is only awarded where publicly traded securities, private placements and global financial benchmarks and commodity prices meet the following criteria:

All the useful, relevant information is made available in an appropriate, timely manner so market participants can independently assess this information and make a fully informed decision.

Where there is a label, investors know there is adequate disclosure. Where there is a label, investors can independently assess the disclosed information and know what they own or are thinking of buying.

Regardless of what the existing disclosure requirements might be, what financial regulators might claim or what a security’s rating might be, where there is no label investors know there is inadequate disclosure. Where there is no label, investors know there is inadequate information for them to truly know what they own or are thinking of buying. Investors recognize in the absence of a label they are not investing, but rather are blindly gambling.

The TLI label is not a credit rating. The TLI label is not a guarantee that an investor will not lose money buying a TLI labeled security. The TLI label is not a recommendation to buy, hold or sell any security or invest in a private placement. The TLI label is not a recommendation to enter into any arrangement based on global financial benchmarks or commodity prices. Rather, the TLI label is solely to help investors and other market participants distinguish between safe and unsafe financial products, rigged and unrigged markets and where there is adequate disclosure so they can make a fully informed decision and where they are blindly gambling.