In 2013, a new system for mandatory public disclosure came into effect, the first since the creation of the Securities and Exchange Commission (SEC) in 1934. Today, major banks and certain other entities must make disclosures mandated not only by the SEC, but also by a new system developed by the Federal Reserve Board and other U.S. bank regulators acting in the shadow of the Basel Committee on Banking Supervision and the Dodd-Frank Act. Already, this parallel system, which stemmed in large part from a belief that disclosures as to the complex risks flowing from modern financial innovation were manifestly inadequate, dwarfs the SEC system in sophistication as to the quantitative aspects of market risk and the impact of economic stress.
The overall morphology of mandatory public information has changed in elemental ways, spanning two parallel regulatory universes with divergent ends and means. The SEC system is directed at the interests of investors and market efficiency, while the bank regulator system is directed at the well-being of the entities themselves and the stability of the financial system. The regulatory means diverge as well, not only as to specific risk-related disclosures, but even as to overarching concepts like “materiality” and the availability of private enforcement.
This Article is the first academic work to consider the new morphology of public information. Refining the conceptual framework for “information” introduced in a prior (2012) work (“Too Complex to Depict?”), I set out three approaches to information. First, the longstanding approach to information is termed the “descriptive mode,” one that relies on “intermediary depictions” of objective reality. An intermediary–such as a corporation issuing shares– stands between objective reality and the investor. The corporation observes and analyzes the objective reality, crafts a depiction of the pertinent aspects, and transmits its depiction to investors. With revolutionary advances in computer- and web-related technologies, investors need no longer rely exclusively on the descriptive mode and its intermediary depictions. The “transfer mode” allows “pure information” about the objective reality to be transmitted directly to investors. The “hybrid mode” draws on elements of both of the other modes, and investors rely on “moderately pure information.”
This Article also offers pathways for reform. In terms of modes, the most incremental step would be to improve the implementation of the descriptive mode, especially at the SEC. The key SEC disclosure requirements have been substantially frozen even as banking and financial innovation have undergone epochal changes. More fundamentally, regulators have invested almost entirely in the descriptive mode. Giving full consideration to all three modes–modal “informational neutrality”–would lead to a more diversified portfolio of informational strategies, one better suited to the informational challenges of financial innovation. The Article outlines examples of transfer and hybrid mode strategies and the need to address longstanding issues associated with confidential treatment requests and the Freedom of Information Act.
Reforms are also necessary at the level of the morphology. In the long run, the existence of parallel universes with divergent regulatory quests is unsustainable. The regulatory objectives of the two systems not only diverge, but sometimes conflict. A disclosure the SEC system deems essential for investor protection and market efficiency can be contrary to the bank well-being and financial system stability goals of the bank regulator system (and of the new Financial Stability Oversight Council). In the short run, boundary-setting and a modest form of “informational neutrality” across regulatory systems (including as to judicial review of rule-making) can promote coordination.