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From Securities Regulation Daily, November 21, 2016

SEC’s Investor Advocate: disclosure effectiveness hinges on investor outreach

By Anne Sherry, J.D.

Addressing the NASAA Corporation Finance Training event, the SEC’s Investor Advocate, Rick A. Fleming, suggested that the agency may be out of touch with the needs of retail investors. For the SEC’s Disclosure Effectiveness Initiative to succeed, the Commission must bring up to date not only the disclosure rules, but also the methods for determining investors’ needs.

Rulemaking and investor outreach. Fleming opined that the SEC’s formal rulemaking process gives an edge to sophisticated stakeholders who are experienced in talking to the Commission in rulemaking and other contexts. Investors, and especially individual retail investors, tend not to participate. The input the SEC does receive "often seems to be at least one or two steps removed from the perspective of people who pore over 10-Ks and other disclosure documents." The proposals under the Disclosure Effectiveness Initiative comprise six rulemaking releases totaling more than 1,000 pages and nearly 600 questions, he observed, likely overwhelming retail investors if they are even aware of them. And the benefit to any one investor or entity is too small to outweigh the trouble of engaging in the rulemaking process.

"Web 2.0" strategies could lower barriers to participation, Fleming posited. He cited the CFPB’s use of a discussion forum to invite discussion of an advance notice of proposed rulemaking on debt collection in 2013. Over 8,000 people visited "RegulationRoom" while commenting was open, and 224 people posted comments. The "10-K Muse Project" envisioned by The Center for Audit Quality and George Washington University’s Institute for Corporate Responsibility would challenge teams to rewrite sections of already published Forms 10-K to make the content more informative or useful to investors.

Disclosure scaling. Fleming also talked about the scaling of disclosure as one of his biggest fears about the Disclosure Effectiveness Initiative. Simply scaling down the disclosure requirements so that smaller issuers are required to disclose less information "is a dangerous path for both issuers and investors," he said. Investors will gravitate toward the companies that offer full disclosure. Fleming acknowledged that the JOBS Act and FAST Act scale back disclosure requirements, but said the SEC’s proposal expanding the definition of a smaller reporting company is not faithful to the dual mandates of the FAST Act. The Act did mandate that the Commission further scale disclosures and eliminate duplicative requirements, but also required the agency to do this "while still providing all material information to investors." At a minimum, Fleming said, the SEC should take advantage of the FAST Act’s authorization to conduct further study on the effectiveness of contemplated S-K revisions.

The Millennial generation. The official closed his remarks with observations about the Millennial generation. Millennials are expected to be the most important financial generation in the country by 2038, Fleming said. They are also the most educated generation and are the most demanding when it comes to technology and innovation. In light of this new generation of investors, the SEC should continue modernizing how data is structured and delivered and should consider how the informational needs of investors may change over time. What is material to investors today is likely different than it was in 1933; for example, today’s investor may place greater importance on environmental, social, and governance issues. The SEC should be prepared to respond to those changes, Fleming concluded.

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