On Sept. 15, SEC Chairman Mary Schapiro testified before Congress and noted that, over the past two decades, “the markets, products, and participants… have undergone a truly sweeping transformation” and that the SEC must carefully examine how it operates to ensure its “effectiveness.”
Nowhere is there a greater need to examine effectiveness than with mandatory disclosure. SEC Commissioner Troy Paredes wrote in 2003 (then as an Associate Professor of Law) about mandatory disclosure and whether market participants are subject to information overload. Saying mandatory disclosure may be “the most hotly contested debate in the history of securities regulation,” Paredes concluded that to the extent market participants are “subject to information overload, the model of mandatory disclosure that says more is better than less may be counterproductive.”
Paredes reasoned, in part, that psychological literature suggests consumers overloaded with information make worse decisions when provided more information. He also underscores that a premise of a “regulatory regime based on disclosure”: the users of the information “need to use the disclosed information effectively.”
Yale Management Professor Daylian Cain recently offered a sobering view of what academic research reveals regarding conflicts and disclosure. “Conflicts of interest are a cancer on objectivity. Even well-meaning advisors often cannot overcome a conflict and give objective advice. More worrisome, perhaps, investors usually do not sufficiently heed even the briefest, bluntest and clearest disclosure warnings of conflicts of interest.”
Professor Cain’s remarks came during a panel discussion “Crafting Effective Disclosure – is it Possible?” at the Fiduciary Forum 2011 on Sept. 9. The event, co-sponsored by The Institute for the Fiduciary Standard, The Heartland Institute and TD Ameritrade Institutional was held just as the SEC, in accordance with Dodd-Frank, and the Department of Labor engage in rule-making on the fiduciary standard.
Cain was joined on the panel by Arthur Laby, Professor of Law Rutgers-Camden School of Law; Ira Hammerman, general counsel at SIFMA; and David Bellaire, general counsel for the Financial Services Institute.
The Institute for the Fiduciary Standard also released a paper by University of Texas Professor Robert Prentice, “Moral Equilibrium: Stock Brokers and the Limits of Disclosure,” to be published early next year. Prentice reviews the existing research on disclosure, behavioral psychology, and “new developments in the field of behavioral ethics” and concludes disclosure is inadequate.