At the 2nd Annual Institute for Corporate Counsel, SEC Commissioner Daniel M. Gallagher delivered a speech in which he discussed corporate disclosure reform. Commissioner Gallagher stated that, without an effective disclosure policy, the SEC cannot foster capital formation in fair and efficient markets. He also stated that, from an investor’s perspective, “excessive illumination by too much disclosure can have the same effect as obfuscation – it becomes difficult or impossible to discern what really matters.”
According to Commissioner Gallagher, the SEC must engage in a self-examination of its disclosure requirements, beginning with addressing the more “discrete” issues rather than incurring the “risk spending years preparing an offensive so massive that it may never be launched.” He stated that congressional mandates dominate the SEC agenda, and that many of those mandates, such as Dodd-Frank, do not appear to view corporate disclosure reform as a priority. According to Gallagher, the SEC must set a more rational agenda that includes improving SEC regulatory programs which predate Dodd-Frank.
Commissioner Gallagher went on to list a number of issues which he believes should be the primary points of focus, including:
- “layering disclosure,” or distinguishing between information that is inherently material and should be the focus of a disclosure document, such as a company’s financial statement, and information that is not inherently material and should be reported elsewhere, such as the pay-ratio calculation required pursuant to Dodd-Frank Section 953(b);
- streamlining Form 8-K disclosure, and considering whether investors really need all of the information updated immediately in order to know what is material about a company’s current condition;
- an effort to reduce redundancy in filings;
- streamlining proxy statements to make their contents as clear and concise as possible, and implementing a more standardized, online disclosure system;
- streamlining registration statements by permitting forward incorporation by reference in Form S-1 registration statements;
- increasing the reliability of SEC guidance by enhancing its authority and issuing significant guidance with SEC endorsement rather than by the staff alone;
- renewing the focus on the potential of technology to improve corporate disclosure; and
- treating “special, meaning politically-motivated, disclosures as the anomalies they are.” According to Gallagher, there is no reason to expect that Congress will give up issuing specific disclosure requirements, and stated that he expects Congress to continue to further policy objectives unrelated to providing investors with information that is material to their investment decisions.
Commissioner Gallagher also mentioned that the SEC should resist successive rounds of concept releases and roundtables, and instead seek more practical solutions to specific problems.
Lofchie Comment: This speech is interesting for its specific content as to securities disclosure, but even more so for its discussion of the interaction between the Congress and the regulators. In short, Commissioner Gallagher asks: What should a responsible regulator do when Congress directs the regulator to adopt rules that are, at best, irrelevant to the overall work of the regulatory agency and, at worst, affirmatively destructive to the economic system? The answer that Commissioner Gallagher gives is that the regulator should prioritize; where there are limited resources, the responsible regulator should focus first on those ongoing regulatory requirements that are central to the mission of the agency, and only then turn to other requirements that are either irrelevant or affirmatively destructive. As a specific example of this, Commissioner Gallagher says he would prioritize the SEC’s ongoing mission of improving corporate disclosure for the benefit of investors and set a lower priority on Congressional mandates that are not intended to provide any investor benefit, such as the Congressional mandate on disclosures in regard to conflict minerals.
For anyone who cares about the quality of U.S. financial regulation, it is difficult to disagree with Commissioner Gallagher’s views as to the function of the regulators. Congressional overreach as a response to crisis, however, jeopardizes a functioning economy. Regulators, as the adults in the room, are the only ones positioned to blunt the damage. Imagine if regulators had adopted Dodd-Frank in full and done it on the time scale mandated by Congress. The financial system would have come to a complete stop. Query, would that have been better than an ongoing deterioration of a “policy” that provides the framework for our financial regulatory system.
See: Commissioner Gallagher’s Speech.
Related news: SEC Chair White Delivers Speech on Disclosure Requirements (October 16, 2013).