“I’m with Roosevelt and Jack: Benefits of Mandatory Disclosure” Prepared Remarks before Columbia Law School Conference in Honor of John C. Coffee, Jr.

Washington D.C. March 22, 2024

Good afternoon. Thank you, Merritt. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.

Today, Columbia is honoring Jack Coffee, a leader of securities law scholarship and policy. I hope Columbia one day might invite me back to celebrate your career, Professor Fox. Caveat inviter, though, at the SEC, we are Merritt neutral.

I’m going to focus on one of Jack’s earlier works from 1984 when the SEC was just 50 years old. Now, I know this likely is before all the students in the room were born. Maybe even some of the professors, too! I was working on Wall Street at the time. Jack’s paper was called “Market Failure and the Economic Case for a Mandatory Disclosure System.”[1]

We’ve all taken tough positions: Beatles vs. Stones; Yankees vs. Mets; Coke vs. Pepsi. Jack was focused on mandatory vs. voluntary disclosure. He was on the side of the founding principles of the federal securities laws. The basic bargain that President Franklin Roosevelt and Congress laid out 90 years ago was that investors get to decide which risks to take so long as those companies raising money from the public make what Roosevelt called, “complete and truthful disclosure.” In 1933, the year the Securities Act was enacted, Roosevelt said, “It changes the ancient doctrine of caveat emptor to ‘let the seller beware,’ and puts the burden on the seller rather than on the buyer.”[2]

Jack had three main points in that seminal 1984 paper about the benefits of mandatory disclosure, the first of which may have been the most important.

First, information about securities is a public good. In essence, companies bear the cost of providing the information while they do not necessarily receive all of the benefits. Jack detailed a number of reasons for this, but fundamentally, anyone can use the information and benefit from it once it is produced.[3] Relying solely on market-based incentives would lead to under-production of the public good of information about securities. Thus, there is a role for the official sector, as Congress embedded in our securities laws 90 years ago.[4]

Second, given the imperfect alignment between the interests of management and shareholders, management may not be fully incentivized to give correct signals to shareholders about their companies.[5] 

Third, Roosevelt’s “complete and truthful disclosure,” achieved in the securities laws, enables more efficient valuation and price discovery of issuers’ securities.[6]

When Jack wrote his paper four decades ago, there were others who suggested voluntary disclosure would work just as well because if something is valuable to disclose, companies would do so. These scholars contended if companies were value-maximizing, then mandatory disclosure wouldn’t be necessary. Companies with good news would be incentivized to put that information out to distinguish themselves. On the other hand, companies that don’t have good news wouldn’t disclose, and everyone would know the company didn’t have a good story. This line of reasoning often now is called the “unraveling argument.”

The unraveling argument, though, unravels for the reasons Jack noted. Public company disclosure is a public good. Further, the interests of companies, run by managers, and shareholders aren’t always aligned. In essence, companies won’t always provide investors important information, even if it is worth it to investors.

I’m with Roosevelt and Jack on this.

The benefits from investors having access to disclosure required by laws and rules are numerous.

First, disclosure promotes more efficient markets. It promotes better price discovery. Providing more information results in prices that more accurately reflect a company’s prospects.

Second, such prices provide valuable signals, helping capital flow to its most productive use, and thus promoting capital formation.

Third, disclosure promotes trust in markets and the companies that are raising money from the public. Investors are more likely to entrust their capital to a stranger if they are in receipt of consistent, comparable, and reliable disclosure. As U.S. Supreme Court Justice Louis Brandeis said in 1913, “Sunlight is said to be the best of disinfectants.”[7]

A mandatory disclosure-based regime helps protect investors. It reduces information asymmetries and helps them make more informed investment decisions. It also helps issuers access the markets. In fact, decades of economic literature support the value of securities disclosure.[8]

Materiality represents a fundamental building block of the disclosure requirements under the federal securities laws. The Supreme Court articulated the meaning of materiality in cases in the 1970s and 1980s.[9] It is this standard of materiality that is reflected in Commission rules.[10]This materiality standard is reflected when materiality appears in numerous disclosure rules governing registration statements and public company periodic and current reports.[11]

In the 90 years since Roosevelt described the intent of the federal securities laws and the 40 years since Jack’s paper, the core benefits of a mandatory disclosure-based regime haven’t changed. Technology, business models, and risks, however, do change. Thus, what investors find important to their investment decisions can change over time.

To that end, the SEC has updated, from time to time, the disclosure requirements underlying the basic bargain and, when necessary, provided guidance with respect to our disclosure requirements. We did it in the 1960s when we first offered guidance on disclosure related to risk factors.[12] We did so in the 1970s regarding disclosure related to environmental risks.[13] We did so in 1980 when the agency adopted Management’s Discussion and Analysis sections in Form 10-K.[14] We did it again in the 1990s when we required disclosure about executive stock compensation[15] and in 1997 regarding market risk.[16]

Of course, there was lively debate about each of these disclosure requirements. Today, though, they have become integral to our disclosure regime, and it’s hard to imagine investors not having access to them.

Disclosure-Related Rulemaking

Just as we’ve done in the past, these last two years we’ve adopted rules providing investors with disclosures on emerging risks like climate and cybersecurity; capital raising technologies, like special purpose acquisition companies (SPACs); and an age-old topic—executive compensation.

In each of these rulemakings, the Commission has sought to enhance information disclosed to investors so that they can make informed investment and voting decisions. Each of these rulemakings is grounded in materiality. In each rulemaking, the Commission seeks to ensure investors have consistent, comparable, and reliable information.

Climate

Already today, 90 percent of the Russell 1000 issuers are publicly providing climate-related information, though that’s generally in sustainability reports outside of their SEC filings.[17] Further, nearly 60 percent of those top 1,000 companies are publicly providing information about their greenhouse gas emissions.[18] Investors ranging from individual investors to large asset managers have indicated that they are making decisions in reliance on that information.[19]

It’s in this context that we have a role to play with regard to climate-related disclosures. Our agency, though, was set up to be merit neutral. Thus, the SEC has no role as to climate risk itself.

Earlier this month, the Commission adopted rules, not just guidance, and ones that require disclosures be filed in annual reports and registration statements, not just posted online.[20] These rules enhance the consistency, comparability, and reliability of disclosures.

The final rules provide specificity on what must be disclosed, which will produce more useful information than what investors see today.

Cyber Risk Disclosure

Increasingly, cybersecurity risks and incidents are a fact of modern life. When material incidents occur, they can have a range of consequences—including financial, operational, legal, or reputational.

Thus, last year, we finalized rules that enhance and standardize disclosures to investors with regard to public companies’ cybersecurity practices as well as material cybersecurity incidents.[21] The rules require periodic disclosures regarding companies’ risk management, strategy, and governance with respect to cybersecurity risks. This will help investors more effectively assess these risks and make informed investment decisions. The rules also require disclosure of material cybersecurity incidents, which will help with price discovery.

Whether a company loses a factory in a fire—or millions of files in a cybersecurity incident—it may be material to investors. These rules started to become effective in December 2023.

SPACs

In January 2024, we finalized rules that will better align the protections investors receive when investing in SPACs with those provided to them when investing in traditional initial public offerings (IPOs).[22] The federal securities laws provide a range of protections for investors in traditional IPOs—through disclosure, marketing standards, as well as gatekeeper and issuer obligations.

The SPAC rules ensure that similar protections apply to investors in these non-traditional IPOs of private companies as much as they do for investors in traditional IPOs. Just because a company uses an alternative method to go public does not mean that its investors are any less deserving of time-tested investor protections. IPOs are IPOs, and as Aristotle once said, “treat like cases alike.”

Whether you are doing a traditional IPO or a SPAC target IPO, SPAC investors are no less deserving of our time-tested investor protections.

These rules become effective in July of this year.

Executive Compensation

We adopted a number of rules in 2022 taking on unfilled Dodd-Frank mandates related to executive compensation.

For instance, we adopted rules requiring companies to make clear disclosure to investors on the relationship between a company’s executive compensation actually paid and the company’s financial performance.[23] It helps investors understand which factors may influence the compensation of its executives.

In addition, we adopted rules related to clawbacks of executive compensation.[24] In essence, if a company makes a material error in preparing a financial statement, an executive may receive compensation for reaching a milestone that was never actually hit. It’s common sense to require issuers to “claw back” that erroneously awarded pay. We also required certain disclosures around companies’ clawback policies as well as actions taken pursuant to those policies. Under the new rules, the stock exchanges adopted new listing standards related to clawbacks that became effective in December 2023. 

On the Other Side of Roosevelt and Jack

A few months shy of the SEC’s 90th birthday and 40 years since Jack’s paper, there still are those who would like to whittle away at the SEC’s disclosure regime.

To those who seek to reduce information available to investors, I stand with Roosevelt and Jack. The 1920s didn’t have federal disclosure requirements. The markets were rife with fraud, manipulation, and abuse. What happened? Investors got hurt. They lost confidence in the integrity of the capital markets. And the market imploded.

Some voices today are calling for further expanding the exemptions to our core 1933 and 1934 Act rules requiring registration of public offerings and ongoing disclosures.

There are participants in crypto securities markets that seek to avoid these registration requirements. No registration means no mandatory disclosure. Many would agree that the crypto markets could use a little disinfectant.

Conclusion

Roosevelt’s views have stood the test of time. Jack Coffee’s views have stood the test of time.

Full, fair, and truthful disclosure helps protect investors, lowers cost of capital for issuers, and promotes efficiency in the markets.

Watch the full recording of the speech here.

[1] See John C. Coffee Jr., Columbia Law School Scholarship Archive, “Market Failure and the Economic Case for a Mandatory Disclosure Regime” (1984), available at https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=1567&context=faculty_scholarship.

[2] See The American Presidency Project, “Franklin D. Roosevelt: White House Statement On Securities Legislation” (March 29, 1933), available at https://www.presidency.ucsb.edu/documents/white-house-statement-securities-legislation.

[3] In his introduction, Coffee identified four arguments in favor of a mandatory disclosure regime. The first two points pertain to the public-good nature of information, which I merge together here. Coffee’s second point specifies that having companies disclose information reduces the need for multiple entities to produce the same information, which would lead to waste. See John C. Coffee Jr., Columbia Law School Scholarship Archive, “Market Failure and the Economic Case for a Mandatory Disclosure Regime” (1984), available at https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=1567&context=faculty_scholarship.

[4] See John C. Coffee Jr., Columbia Law School Scholarship Archive, “Market Failure and the Economic Case for a Mandatory Disclosure Regime” (1984), pages 723-737 available at https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=1567&context=faculty_scholarship.

[5] Ibid. See pages 738-747.

[6] Ibid. See pages 747-751.

[7] See Louis D. Brandeis School of Law Library, “Other People’s Money – Chapter V” (1913) available at https://louisville.edu/law/library/special-collections/the-louis-d.-brandeis-collection/other-peoples-money-chapter-v.  

[8] See Craig Doidge, G. Andrew Karolyi, et al., “Why Are Foreign Firms Listed in the U.S. Worth More?” (2004), available at https://tspace.library.utoronto.ca/bitstream/1807/96821/1/Why%20Are%20Foreign.pdf. See also Luzi Hail and Christian Leuz, Journal of Accounting Research, “International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?” (June 2006), available at https://www.jstor.org/stable/3542332.

[9] See Basic Inc. v. Levinson, 485 U.S. 224, 231, 232, and 240 (1988) (holding that information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision; and quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1977) to further explain that an omitted fact is material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”)

[10] See 17 CFR 230.405 (defining the term “material”); 17 CFR 240.12b-2 (same).

[11] See, e.g., 17 CFR 229.101 (Description of business); 17 CFR 229.103 (Legal proceedings); 17 CFR 229.105 (Risk factors); 17 CFR 229.303 (MD&A); Form 8-K, Items 1.01 (Entry into a Material Definitive Agreement), 1.02 (Termination of a Material Definitive Agreement), and 2.06 (Material Impairments). See also, e.g., 17 CFR 229.101(c)(2)(i) (requiring discussion of “[t]he material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries”); 17 CFR 229.101(h)(4)(x) (“Briefly describe the business and include, to the extent material to an understanding of the smaller reporting company . . . [c]osts and effects of compliance with environmental laws (federal, state and local) . . . .”); 17 CFR 229.103(c)() (requiring disclosure of “[a]dministrative or judicial proceedings (including proceedings which present in large degree the same issues) arising under any Federal, State, or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment” if, among other things, “[s]uch proceeding is material to the business or financial condition of the registrant”); Form 8-K, Item 1.01 (“If the registrant has entered into a material definitive agreement not made in the ordinary course of business of the registrant, or into any amendment of such agreement that is material to the registrant, disclose [among other things] . . . a brief description of any material relationship . . . [and] a brief description of the terms and conditions of the agreement or amendment that are material to the registrant.”).

[12] Guides for the Preparation and Filing of Registration Statements, Release No. 33-4936 (Dec. 9, 1968) [33 FR 18617 (Dec. 17, 1968)].

[13] Disclosure Pertaining to Matters Involving the Environment and Civil Rights, Release No. 33-5170 (July 19, 1971) [36 FR 13989 (July 29, 1971)].

[14] Amendments to Annual Report Form, Related Forms, Rules, Regulations and Guides; Integration of Securities Acts Disclosure Systems, Release No. 33-6231 (Sept. 2, 1980) [45 FR 63630 (Sept. 25, 1980)].

[15] Executive Compensation Disclosure, Release No. 33-6962 (Oct. 16, 1992) [57 FR 48126 (Oct. 21, 1992)].

[16] Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information About Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments, Release No. 33-7386 (Jan. 31, 1997) [62 FR 6044 (Feb. 10, 1997)].

[17] See G&A, 2023 Sustainability Reporting in Focus, available at https://www.ga-institute.com/research/ga-research-directory/sustainability-reporting-trends/2023-sustainability-reporting-in-focus.html; See also past reports, available at https://www.ga-institute.com/research/ga-research-directory/sustainability-reporting-trends.html.

[18] See Just Capital, “The Current State of Environment Disclosure in Corporate America: Assessing What Data Russell 1000 Companies Publicly Share,” available at https://justcapital.com/wp-content/uploads/2022/04/JUST-Capital_Environment-State-of-Disclosure-Report_2022.pdf.

[19] See, e.g., E. Ilhan, et al., Climate Risk Disclosure and Institutional Investors, 36 Rev. Fin. Stud. 2617 (2023) (“Through a survey and analyses of observational data, we provide systematic evidence that institutional investors value and demand climate risk disclosures”); Morrow Sodali, Institutional Investor Survey (2021), available at https://morrowsodali.com/uploads/INSTITUTIONAL-INVESTOR-SURVEY-2021.pdf (surveying 42 global institutional investors managing over $29 trillion in assets and finding that 85 percent of those investors cited climate change as the leading issue driving their engagements with companies, and 61 percent indicated that they would benefit from disclosures that more clearly link climate-related risks to financial risks and opportunities).

[20] See Securities and Exchange Commission “SEC Adopts Rule to Enhance and Standardize Climate-Related Disclosures for Investors” (March 6, 2024), available at https://www.sec.gov/news/press-release/2024-31.  

[21] See Securities and Exchange Commission, “SEC Adopts Rules on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies” (July 26, 2023), available at https://www.sec.gov/news/press-release/2023-139.  

[22] See Securities and Exchange Commission “SEC Adopts Rules to Enhance Investor Protections Relating to SPACs, Shell Companies, and Projections” (Jan. 24, 2024), available at https://www.sec.gov/news/press-release/2024-8.  

[23] See Securities and Exchange Commission, “SEC Adopts Pay Versus Performance Disclosure Rules” (Aug. 25, 2022), available at https://www.sec.gov/news/press-release/2022-149.

[24] See Securities and Exchange Commission, “SEC Adopts Compensation Recovery Listing Standards and Disclosure Rules” (Oct. 26, 2022), available at https://www.sec.gov/news/press-release/2022-192.