Disclosure in the Digital Age: Time for a New Revolution

Commissioner Kara M Stein

Denver, Colorado

May 6, 2016

Thank you, Julie [Lutz], for that kind introduction, and thanks to all the conference organizers who have worked hard to put together a really great agenda for today.  What a pleasure to be here in the Mile-high City and to join you for the 48th Annual Rocky Mountain Securities Conference.  You have almost a half-century of bringing together a diverse group of people who care deeply about our capital markets. 
Before I go further, I must state that the views I express today are my own, and not necessarily those of my fellow Commissioners or the SEC staff.
I want to thank you for the opportunity to speak with you today, and I'm going to return the favor by providing you with an invitation as well.  I want your input on perhaps one of the most significant undertakings the Commission has faced in decades.    
I'm talking about how we can breathe new life into the critical matchmaking process between companies and investors; I'm talking about a new way of communicating; I'm talking about Disclosure in the Digital Age.    
For over 80 years, disclosure has also served as the lynchpin for U.S. regulation and oversight of the capital markets.   As Louis Brandeis stated over a century ago, "[s]unlight is said to be the best of disinfectants; electric light the most efficient policeman."[1]  With that guiding principle, after the Great Depression, we revolutionized our nation's capital markets, by putting into place a new paradigm for the vitally important relationship between companies and their investors. 
And the relationship between companies and investors has thrived - mainly as a result of our disclosure system.  Disclosure is what spurs the formation, and the continuing reassessment, of these matches or relationships – it is how companies present themselves to investors, and how investors, who need to grow their capital, find just the right match for them.  It is how workers saving for retirement find the right mutual fund or investment adviser, how institutional investors identify long term investments, and how analysts begin their research.
The result of this disclosure system has been the creation of the healthiest, most vibrant capital markets in the world.  And today, in order to sustain and improve upon that achievement, it's time to usher in a new disclosure paradigm for the future – one that will benefit both investors and companies for the decades to come. 
So, with that as our backdrop, how can we enhance this important relationship?  How can we provide the right balance - the give-and-take that helps match the right companies with the right investors?   Let me tell you about two important, ongoing initiatives at the Commission.  The first is the redesign of our electronic filing system known as EDGAR.  The EDGAR redesign is a "multi-year initiative to develop the next generation electronic disclosure system." [2]   
As most of you know, the Commission launched EDGAR over two decades ago.[3]  EDGAR brought monumental change to the way investors obtained information about companies.  Paper documents were replaced with electronic documents that could be immediately accessed from anywhere in the world.   
EDGAR now serves as the Commission's central data repository.  It receives over 700,000 disclosure documents every year from companies, investment companies, and individuals.  When EDGAR rolled out in 1995, we were accessing the Internet on large desktop computers using a dial-up connection.  Back then less than 1% of the world population had Internet connectivity.[4] 
Today, most of us are carrying around in our pockets vastly more advanced computers with nearly instantaneous access to a variety of digital information.  Today, nearly 40 percent of the world's population is connected to the Internet.[5]  And, most of us in the United States have access to the Internet on our smartphones, tablets, and laptops.  While technology has been evolving, EDGAR has not changed much.   EDGAR needs a redesign to catch up to the new digital world.  However, even the redesign needs to be part of a larger, more holistic effort.  
As I mentioned, there is a second ongoing initiative to improve communications between companies and investors.  It is known as the "Disclosure Effectiveness" project.   As part of that effort, the Commission recently issued a concept release on Business and Financial Disclosures.[6]  The Commission is seeking input on dozens of issues, asking hundreds of questions, relating to both the form and substance of various disclosures.  And yet, it falls short.  As I said when the release was issued, there are important questions that were not asked.  Questions relating to corporate governance disclosures were left out.  Also missing were questions about how to best measure corporate performance.  For example, are non-GAAP measures presenting a true and fair view of a company's performance?
My point regarding both of these initiatives is this:  We need to broaden our vision and reach for a higher goal.  Let us re-imagine disclosure and how information can be exchanged between companies and investors.   It's an ambitious goal, and we should be ambitious. 
Why now?  Put simply, companies and investors are demanding a new way of communicating.  Investors want better information.  Companies want fewer burdens.  We can do both because the technology to do both has arrived. 
So, what do I mean by Disclosure in the Digital Age?   I mean disclosure that can evolve to provide the right information at the right time by utilizing the right technology. 
What Do Investors Want to Know?
What do investors care about in 2016 and what will they care about in the years ahead?  First, it's important to note that studies indicate investors are looking for better, not less, disclosure.[7]  This is not a question of "overload," it is a question of quality.  If companies want investors' money, they need to be nimble and responsive.  Companies must be prepared to offer investors the fair, neutral, and decision-useful information they want in order to part with their hard-earned capital.  What investors want changes.  Materiality evolves.  It changes as society changes, and it also changes with the availability of new and better data.  To achieve effective disclosure, we must understand what is important to today's investors.   
This effort needs to involve more outreach.  Asking investors for written comments is necessary and important, but not sufficient.  To truly understand what investors and our markets need, we should conduct investor testing.  This is not a radical concept.  Private industry has employed consumer testing consistently and successfully for years.  And regulators have come to understand its value as well.[8]
Are there new areas of interest for investors?  Today, investors make their decisions based on an array of information, which goes beyond mere profit and loss.  Many believe that the era of sustainability or impact investing has arrived.  Sustainability disclosure differentiates companies and may foster investor confidence, trust, and employee loyalty.  Studies indicate that today's investors are considering strategies that take into account environmental, social and corporate governance criteria.  For example, at the start of 2014, more than one out of every six dollars in assets under management -- $6.57 trillion -- was invested using such strategies.  This is an increase of 76% since the start of 2012, and a startling 929% increase since 1995.[9]  This phenomenon is here to stay.  Why?  It's not just about socially conscious millennials, although that is certainly a factor.[10]  There is also data indicating that companies adopting certain sustainability measures may perform better than those that do not.[11]  What changes to our disclosure regime may be implicated by this trend? 
Other relatively new areas of concern to investors are cyber security and climate risk.  How are firms managing these ubiquitous risks?  The past few years have seen massive and unprecedented cyberattacks against some of our largest companies.   Investors want and need information relating to how companies are addressing this very real threat.[12]  How might climate risk affect the performance of a company or industry in the future?  Where do these types of disclosures fit into the Digital Age?  
How Should Companies Deliver the Information?
But this is only half of the equation.  An equally important question is how should information be provided in the Digital Age?  In a paper world, the way I write down information matches the way you are going to see it.  In effect, the reporting format has to match the viewing format, and everyone has to look at the same thing. 
Disclosure, and our concept release, are both still stuck in the paper world.  Sure, you can view the reporting forms on the Internet, and you can pull up the individual filings on EDGAR.  But, fundamentally, the reporting requirements are still focused on making the reporting format match the viewing format.  How it is reported and how it is viewed is exactly that same. 
In the digital world, this need to match formats no longer applies.  Newspapers figured this out years ago.  You can still read their stories on paper – they still print newspapers.  But they can also push that story out to you in an email, or serve it up on a smartphone.  In an electronic setting, it doesn't matter if the story was front page, above the fold, or buried in a later section.  That same story can be presented differently in other formats.  That concept can be imported into our disclosure regime, freeing content to be used dynamically.     
This is the promise of structured or machine-readable data.  It allows data to be pulled out of filings and presented according to the needs of the consumer.  Structured data can provide big advantages for companies.  For example, some have suggested the use of a "company profile" approach to disclosure, whereby certain basic information about a company and its operations could reside in a centralized database that can be updated when changes occur. [13]  Companies could provide this information once, and then not have to repeat it over and over again across numerous filings.  The beauty of this approach is that it completely separates how the company submits the data – the reporting format – from how investors access the data – the viewing and processing format.
The potential power of this approach is especially relevant to smaller companies.  Using structured data could increase access to capital for smaller companies by making data about the company more accessible and comparable.  This could reduce the cost to analysts of researching smaller companies, making it easier for these companies to connect with investors.  And, proper data structuring requirements may also save money for companies who currently have to reformat and repackage their data multiple times for multiple uses. Moreover, more timely, relevant, and reliable information will also allow for more efficient price discovery.        
So, can we envision a future where users query SEC data from their smartphones?  Or, perhaps even through social media?[14]  Can we give investors a quick way to comparison shop – check the box on three companies and see a dynamically generated side-by-side comparison?  Why not?
We currently have over 500 active forms in EDGAR.  Shouldn't we instead allow retail investors and others in the market to ask for the information they want.  This information could be about a single company or a group of companies in the same industry, and it could come from a variety of digital records.  Let's say you want to know where a company has its physical plants and properties.  Why shouldn't a natural language query produce an interactive map that shows the locations, along with material information on the facilities?   Investors should be able to effortlessly and electronically get exactly what they need, when they need it, nothing more and nothing less.   
In addition, with the advent of structured data comes the promise of faster access to that data.  Machine readable data can facilitate more real-time or on-demand data availability for investors.  Are there certain types of information that could be provided as soon as that information is available? Of course, it is important that structured data quality be carefully vetted and monitored.  But, that said, can or should we get certain types of information to investors faster?  All of these questions should be carefully weighed as we consider a new vision for Disclosure.   
Finally, what should disclosure look like?  Technology opens up new possibilities for innovative visual display.[15]  But it's not just about technology.  It's also about learning styles and investor literacy.[16]  Can a company tell its story best with a graph or a video?  Can graphic design help investors navigate layered information?  Maybe the first thing I see is a company dashboard.  Then, with a click, I look behind the dashboard and see the financial statements.  Investors increasingly access the Internet through their phones.[17]  What does a shareholder report look like on a four-inch screen?  Let's look at what the science has to say about the visual display of information.  Let's not limit ourselves to just to text and two dimensions.
We need to be thoughtful in our vision, and analytical in our implementation.  Let's make sure that the resources companies invest in providing disclosure is money well spent – money that leads to greater information access for investors, which in turn leads to greater capital formation for the companies.  The perfect match between investor and issuer.   
That is why today I am making an important call to action:  We need to create a Digital Disclosure Task Force.  The Digital Disclosure Task Force should include investors, analysts,  academics, companies, and technology experts.   Together, we can envision what disclosure should look like in the Digital Age so that we can continue to have the premier capital markets in the world.
We must do more than ask questions in concept releases, we must lead.  It's time to revolutionize our disclosure paradigm.   Help us in that endeavor and everyone wins.  Thank you for your time, and for inviting me to your conference today.
[1] Louis Brandeis, What Publicity Can Do, Harper's Weekly, December 20, 1913.
[2]  See description of EDGAR design available at https://www.sec.gov/osi; see also, Rel. No. 33-10064, Business and Financial Disclosure Required by Regulation SK, (April 13, 2016) available at https://www.sec.gov/rules/concept/2016/33-10064.pdf
[3] The SEC began building an "electronic library" in 1984, under then-SEC Chairman John Schad. The SEC awarded the first contract to build EDGAR, as a source of information for investors, in 1989, under then-Chairman David Ruder. In 1995, the Commission launched www.sec.gov, which provided investors with access to electronic filings by corporate issuers.
[4] See Internet Live Stats, available at http://www.internetlivestats.com/internet-users/.
[5] Id.
[6] See Rel. No. 33-10064, Business and Financial Disclosure Required by Regulation SK, (April 13, 2016) available at https://www.sec.gov/rules/concept/2016/33-10064.pdf.  In addition, in September 2015, the Commission issued a Request for Comment on the Effectiveness of Financial Disclosures About Entities Other Than the Registrant.  See Rel. No. 33-9929, (Sept. 25, 2015) available at https://www.sec.gov/rules/other/2015/33-9929.pdf
[7] Financial Reporting Disclosures: Investor Perspectives on Transparency, Trust and Volume, CFA Institute, July 2013, available at   http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2013.n12.1 ("Investors neither seek a reduction in disclosures nor believe they can be overloaded with useful information.  Additional useful information provides investors greater transparency into their holdings, which has been found to ultimately reduce the cost of capital …"); Matthew Heller, Investors Want More Disclosure on Director Qualifications, CFO.com, March 18, 2015, available at http://ww2.cfo.com/governance/2015/03/investors-want-disclosure-director-qualifications/; Shreenivas Kunte, Earnings Confessions:  What Disclosures Do Investors Prefer?, Enterprising Investor, November 19, 2015, available at  https://www.sec.gov/servlet/Satellite/goodbye/Speech/1370548048954?externalLink=https%3A%2F%2Fblogs.cfainstitute.org%2Finvestor%2F2015%2F11%2F19%2Fearnings-confessions-what-disclosures-do-investors-prefer%2F ("… the overall preference [among CFA survey respondents] for more disclosures stood at an overwhelming 98%.")
[8] See, e.g., Consumer Financial Protection Bureau Strategic Plan FY 2013-2017, (referring to its strategy to "Build a behavioral research and user testing practice in order to ensure maximally usable product design.") available at: http://www.consumerfinance.gov/strategic-plan/.
[9] Report on US Sustainable, Responsible and Impact Investing Trends 2014, Executive Summary, pp. 12-13; available at http://www.ussif.org/Files/Publications/SIF_Trends_14.F.ES.pdf; see also, Environmental, Social and Governance (ESG) Survey, CFA Institute, June 2015 available at https://www.sec.gov/servlet/Satellite/goodbye/Speech/1370548048954?externalLink=https%3A%2F%2Fwww.cfainstitute.org%2Fethics%2FDocuments%2Fesg_survey_report.pdf ("73% of survey respondents take ESG issues into account in their investment analysis and decisions, with governance being the most common.")
[10] See, e.g., Thomas Hoops, Why It's Time to Believe the Hype Behind ESG Investing, Investment News, April 8, 2015 available at http://www.investmentnews.com/article/20150408/blog09/150409926/why-its-time-to-believe-the-hype-behind-esg-investing  (noting that millennials stand to inherit $59 trillion by 2060, and that surveys indicate "they want to invest the way they live" i.e., in an environmentally conscious manner).
[11] See e.g. Mozaffar Khan, George Serafeim and Aaron Yoon, Corporate Sustainability:  First Evidence on Materiality, forthcoming in The Accounting Review (March 9, 2015) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575912, (study showing that a focus on certain "material" sustainability metrics impacted investment returns positively); Letter From Jean Rogers, Sustainability Accounting Standards Board, available at http://www.sasb.org/letter-jean-rogers-sasbs-ceo/ (describing the development of standards that observe patterns of material risk and ESG exposure across equity portfolios); David Katz and Laura McIntosh, Corporate Governance Update: Gender Diversity on Boards: The Future is Almost Here, New York Law Journal (March 24, 2016)(noting studies that show companies with strong female leadership and participation had higher return on investments than those without). See also, Nicole Friedman and Bradley Olson, Calpers Pushes Exxon to Outline Potential Effects of Climate Change Initiatives, Wall Street Journal (April 12, 2016) available at http://www.wsj.com/articles/calpers-pushes-exxon-to-outline-potential-effects-of-climate-change-initiatives-1460475184
[12] See, e.g., Morgan Stanley Research, Beyond Firewalls: A New World of Cyber Security, November 20, 2015, available at http://www.morganstanley.com/ideas/Cyber-security-risks-and-opportunities; ("In addition to understanding exposure, investors will want to assess whether companies are taking proactive steps to safeguard against cyber crime.")
[13] See, e.g.  Letter from Society of Corporate Secretaries & Governance Professionals, September 10, 2014, available at  http://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness-17.pdf
[14] See, e.g., Social Networking Fact Sheet, Pew Research Center, Internet, Science and Tech, December 27, 2013, as updated ("As of January 2014, 74% of online adults use social networking sites.") available at http://www.pewinternet.org/fact-sheets/social-networking-fact-sheet/; Institutional Investing in the 21st Century: The Growing Influence of Digital and Social Media around the World, publication by LinkedIn of Greenwich Associates 2014 survey, ("79% of institutional Investors use social media for investing") available at https://www.sec.gov/servlet/Satellite/goodbye/Speech/1370548048954?externalLink=https%3A%2F%2Fbusiness.linkedin.com%2Fcontent%2Fdam%2Fbusiness%2Fmarketing-solutions%2Fglobal%2Fen_US%2Fcampaigns%2Fpdfs%2Fiam-ebook-global.pdf
[15] See e.g., Edward Teach, Rethinking Disclosure, CFO Magazine, available at http://ww2.cfo.com/disclosure/2016/04/rethinking-disclosure
[16] See, e.g., Study Regarding Financial Literacy Among Investors, U.S. Securities and Exchange Commission, Aug. 2012, available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf.
[17] Can the Internet Transform Disclosures for the Better? CFA, http://www.consumerfed.org/pdfs/can-the-internet-transform-disclosures-for-the-better.pdf