SEC Commissioner Talks Disclosure in the Digital Age

Commissioner Kara M. Stein called on the SEC to create a “Digital Disclosure Task Force” – which would include investors, companies and technology experts – to “envision what disclosure should look like in the Digital Age.”

At the 48th Annual Rocky Mountain Securities Conference, the Commissioner asserted that the electronic data gathering and reporting (“EDGAR”) system, serving as the SEC’s central data repository, “has not changed much” since it was rolled out in 1995, and needs a redesign to “catch up to the new digital world.”

Commissioner Stein noted that as part of a second ongoing SEC initiative, the “Disclosure Effectiveness” project, a recent SEC Concept Release on Business and Financial Disclosures failed to ask important questions relating to: (i) corporate governance disclosures; and (ii) how to best measure corporate performance (i.e., whether non-GAAP measures present a true and fair view of company performance).

To achieve effective disclosure, Commissioner Stein recommended that regulators not only solicit written comments, but also conduct investor testing to “truly understand what investors and our markets need.” She also commented on sustainability disclosure to differentiate companies and to foster investor confidence, trust and employee loyalty.

Commissioner Stein argued that in providing information, disclosure must be digitalized for investors to “effortlessly and electronically get what they need, when they need it, nothing more and nothing less.” With the advent of structured data, machine readable data can facilitate more real-time or on-demand data availability for investors.

Lofchie Comment: Commissioner Stein’s suggestion that the SEC should attempt to find out what disclosures investors really want makes sense. Both the SEC and Congress should embrace it. Recent “social” disclosure requirements (e.g., conflict minerals, compensation ratios, and diversity and contributions to come) are political rather than financial in nature.

Commissioner Stein is correct that the best way to find out what investors want is to ask them. Accordingly, it would make sense to require issuers to ask their investors (in their proxy statements, perhaps) whether they actually desire such disclosure and at what cost. Perhaps investors in some companies/industries will want “social” disclosures of the sustainability type noted by Commissioner Stein. Others may not. The Commissioner’s suggestion that what investors want may change over time is also noteworthy. Today, investors may want (or not want) conflict mineral/compensation/diversity/contribution disclosures. Next year, investors may decide that they do not (or do) want them. Let the market decide.