Risk & Compliance

SEC Begins Study of Disclosure Overhaul

Commission, under fire and threatened with having a smaller enforcement role, aims for major change in reporting approach.
Stephen TaubJune 24, 2008

The Securities and Exchange Commission — seemingly in danger of having its mandate severely diluted — made public its initiative to consider overhauling how public companies, mutual funds, brokers, and other regulated entities disclose information.

The goal of the “21st Century Disclosure Initiative,” as it was called, will be to alter a disclosure system that better incorporates technology, new ways in which investors get their information, and recent developments in corporate compilation and reporting of information in their SEC-mandated disclosures.

The first phase of the study will be completed by the end of this year, after which a follow-on advisory committee will be appointed to consider questions in more detail through a public and consultative process, according to the SEC.

Cox said that the SEC’s internal study will be led by Dr. William D. Lutz of Rutgers University.

“On the 75th anniversary of the SEC, with so much new technology available to improve the quality of information for investors as well as the way investors acquire it, we’re initiating a broad, introspective look at our business model,” said SEC Chairman Christopher Cox. “What hasn’t changed in 75 years is the importance of full disclosure — sunlight remains the best disinfectant for problems in our capital markets. We’ll be examining how to improve the way disclosure works, including tapping the full potential of today’s technology and integrating it seamlessly into our regulatory approach. That could mean fewer confusing forms, and more useful information at investors’ fingertips in a form they can really use.”

The announcement comes amid renewed criticism of how the SEC operated through the credit crisis, especially during Bear, Stearns’ collapse.

According to the Wall Street Journal’s Monday edition, a new cooperation agreement between the SEC and Federal Reserve Board could result in the Fed assuming more oversight of the investment banking system. Under the agreement, the Fed would be able to see an investment bank’s trading positions, its leverage and its capital requirements, among other things, according to the report.

The information-sharing accord, negotiated among the two agencies and the Treasury Department, “is designed to facilitate our joint efforts to fulfill our respective regulatory functions in a post-Bear environment,” said Cox, according to the Journal. Meanwhile, a separate story in the paper said that Cox had been criticized for playing too small a role in the landmark Bear Stearns bailout plan.

Dr. Lutz’s background includes expertise as both a securities lawyer and a plain-English expert focused on transparency. The SEC asserts that he has significant experience in working with the SEC on disclosure issues, has participated in several SEC roundtables, and has frequently provided advice on SEC rulemaking.

From 1995 to 1999, he played an important role in advancing the SEC’s Plain English initiative by preparing the SEC’s Plain English Handbook, a manual to help mutual funds and public companies write clear and understandable SEC filings. He is Emeritus Professor of English at Rutgers University, and the author of numerous books and articles on the importance of plain-language disclosure.

The internal study will produce a blueprint for future Commission action “to improve the usefulness and timeliness of disclosure for investors, and to streamline and modernize the collection of disclosure from companies and regulated entities,” according to the SEC’s announcement.

The study will seek to rethink financial disclosure, beginning with the basic purposes of disclosure from the perspective of investors and markets. The inquiry will be aimed at identifying the objectives of the ideal disclosure system at the architectural level, according to the Commission.

The study will include a review of all existing SEC forms and reporting requirements, as well as the manner in which information is provided to the Commission, with a special focus on needless redundancy. It will also include consideration of various alternative strategic approaches to acquiring and publishing disclosure information.

In addition, the initiative will consider ways that regulatory requirements for the collection of information might be tailored to get the best real-time distribution of financial and narrative disclosure to investors.

Finally, the study will examine how best to integrate public disclosure with the SEC’s proposed new post-EDGAR architecture for investor search, assembly, and comparison of data.