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SEC Official Discusses Future Disclosure Plans

Limited access to information may have been a contributing factor to the recent market turmoil, according to Willliam Lutz, the director of the Securities and Exchange Commission's 21st Century Disclosure Initiative. During a January 15 speech in New York, Lutz added that in many cases, sophisticated investors took positions in financial instruments without understanding the structure of the risks associated with the underlying assets. In addition, investors who purchased shares in institutions holding some of these assets may have had no idea about the risks embedded in these transactions, he believes. While Lutz does not believe that improved transparency would have averted the crisis, he believes that "improved transparency would have surely blunted some of the pain we are suffering."

According to Lutz, the amount of data and information supplied by issuers can get lost "because there's simply too much of it, and investors can't make sense of what they see." He gives as an example a 15,000 or even 750,000 page description of an asset-backed security, and then asks who has the time, the patience, or the expertise to read and understand such documents. He continued by noting that the markets move at the speed of light, and that decisions are made in a nanosecond.

Last spring, the SEC's Office of Investor Education and Assistance completed a study of the usefulness of SEC-mandated company and fund disclosures for investors. The survey asked 1,000 investors about their use of disclosures made in proxy statements, fund prospectuses and the annual reports of operating and investment companies. Lutz believes that the results were "quite revealing."

According to Lutz, the survey indicated that a majority of people were at least somewhat satisfied with all the disclosure documents. He added that the respondents recognized that the date is important and helpful. Furthermore, many of these respondents never actually read the various reports, but gathered information from other sources, according to Lutz.

Lutz believes that one reason the reports go unread is that they are filled with legal, accounting and technical jargon, and that they are long and wordy. As a result, the time and expertise needed to extract the relevant information from company reports can make it too burdensome for all but the professional investor, according to Lutz.

Lutz is in the process of developing what he calls a "high-level plan," which will be available on the Commission's Web site. His basic recommendation is for the SEC to move away from lengthy disclosure to an interactive filing system that calls for specific disclosure of data in response to universal reporting obligations. The filings would be made in a universal language and would reside on an accessible database. Companies would file basic information once and would then add to that. For example, according to Lutz, operating company's annual report would not need to re-enter unchanged information like the description of the business, its headquarters or the number of shares outstanding. New information like the financials or the management discussion and analysis would be included, and all would be tagged with extensible business reporting language or another common language.

Lutz envisions a system where, in an example he gave, it would be easy to learn how exposed a mutual fund is to investment risk in Asia, or how much a financial institution deals in structured financial products tied to sub-prime loans. He also hopes that better information will enhance the independent analysis of companies, particularly smaller issuers.