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Disclosure can be too much of a good thing

From SEC Commissioner Daniel M. Gallagher’s remarks at the 67th National Conference of the Society of Corporate Secretaries & Governance Professionals, Seattle, Washington on July 11, 2013:

The vital importance and proven value of our disclosure regime as a whole does not and should not lead to the conclusion that more government-mandated disclosure is always better.

In a speech earlier this year, Commissioner Paredes expressed a concern that I share, noting that the expansion of mandatory disclosure requirements may lead to “information overload,” not just in volume but also in the complexity of presentation. When the Commission-mandated public disclosure documents of public companies run well into the hundreds of pages, we have to question whether such documents are at all understandable, and of any utility, to investors.

When disclosure documents start to resemble treatises, the wheat gets lost in the chaff.  With too much information, it often becomes difficult for investors to focus and determine what is useful and what is not. As Justice Thurgood Marshall warned almost 40 years ago, disclosure requirements with “unnecessarily low” materiality standards risk “simply bur[ying] the shareholders in an avalanche of trivial information – a result that is hardly conducive to informed decision making.”

When investors are inundated with immaterial information, it increases the likelihood that they will miss key disclosures. Even more likely is the possibility that investors, despairing about the voluminous compilations of corporate minutiae contained in company filings, will never even look at disclosure documents. In either case, the result is that investors are left less informed when making investing decisions than they would be if presented with a document that didn’t require a magnifying glass to read and a PhD to understand. The irony that the vast expansion of the Commission’s mandatory disclosure regime may help incentivize investors to throw their hands up and simply ignore company filings is not lost on me or, I’m sure, all of you.

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Commissioner Gallagher’s full remarks are here.

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