Commissioner Robert J. Jackson Jr.
March 26, 2019
I want to begin by conveying my thanks to the Staff in the Division of Corporation Finance for their hard work in developing today’s adopting release. I am especially grateful to Charles Kwon and Dan Greenspan, as well as Director Bill Hinman, for the time you spent with me and my Office throughout this process.
Following up on a detailed report our Staff sent to Congress under the Fixing America’s Surface Transportation (FAST) Act,[1] the Commission today adopts a final rule on information investors receive about the increasingly complex companies in our markets.[2] The rule reverses our Staff’s recommendation that firms disclose a clear identifier of their corporate entities. The rule also removes our Staff’s role as gatekeepers when companies redact information from disclosures—despite evidence that redactions already deprive investors of important information. For these two reasons, I respectfully dissent.
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First, the financial crisis taught regulators that firms’ complex structures made it impossible to identify the corporate entities responsible for risktaking. For more than a generation the market tried—and failed—to come up with a single identifier on its own.[3] The reason, of course, is the standard collective-action problem that our securities laws were written to solve. The few firms who tried to create a marketwide standard bore all of the costs of those efforts, giving individual firms no incentive to make the investments necessary to create a single, standard identifier across the marketplace.
That’s why investors, market participants and regulators around the world support a single legal entity identifier (LEI), a twenty-character code that identifies entities engaged in financial transactions. To encourage the use of LEIs, the Commission, the Staff, and our own Investor Advisory Committee have long supported rules requiring firms who adopt LEIs to disclose them.[4] Today’s majority abandons those requirements, with little evidence or reasoning to support the change.
The majority seems to share industry’s intuition[5] that disclosing LEIs will be costly. Of course, the costs of disclosing a twenty-character code are unlikely to be meaningful. The market might impose a penalty upon companies that do not obtain an LEI and then disclose that fact. But giving investors information they need to price decisions like that is a benefit, not a cost, of our securities laws.[6] Instead, the majority leaves investors wondering what the absence of an LEI disclosure means.
Second, the rule’s treatment of redactions from confidential filings is even more troubling. Historically, we’ve required firms to work with our Staff when sensitive information is redacted from exhibits to registration statements. There are often good reasons for our Staff to permit redactions. But recent research shows that redactions already include information that insiders or the market deem material—showing how important careful review of these requests can be for investors.[7]
Today’s rule removes both the requirement that firms seek Staff review before redacting their filings and the requirement that companies give our Staff the materials they intend to redact. The release doesn’t grapple with the effects of that decision for the marketplace. But one thing is clear: in a world where redactions already rob the market of information investors need, firms will now feel more free to redact as they wish. And investors, without the assurance that redactions have been reviewed by our Staff, will face more uncertainty.
Both of these decisions reflect a troubling trend in our rulemaking: ignoring facts in favor of belief that the SEC can deliver a free lunch in finance. Students of markets know there’s no such thing. If more firms choose not to obtain LEIs, knowing that this choice will not be disclosed to investors, LEIs will become less useful, and the resulting risks will raise the costs of capital for all companies. If more firms redact their disclosures, knowing that our Staff cannot intervene, investors will demand compensation for additional money they’ll spend to understand the risks they’re taking. Evidence from the market tells us that these redactions often include important information. And markets, not Commissioners, are in the best position to say what information is important to investors.[8]
I am grateful to the Staff for the hard work and long hours that this release reflects. But because the final rule prizes faith over facts, I respectfully dissent.
[1]See Staff of the U.S. Securities and Exchange Commission, Report on Modernization and Simplification of Regulation S-K (Nov. 23, 2016); see also Fixing America’s Surface Transportation (FAST) Act, Pub. L. No. 114-94, §§ 72001-03, 129 Stat. 1311, 1784-85 (2015).
[2] It is well-documented that the structure of our equity and credit markets, and the law governing both, give firms strong incentives to adopt increasingly complex organizational structures. For a classic and compelling debate about the implications of those incentives for social welfare, compare Richard Squire, Strategic Liability in the Corporate Group, 78 U. Chi. L. Rev. 605 (2011) with Richard A. Posner, The Rights of Creditors of Affiliated Corporations, 43 U. Chi. L. Rev. 499 (1976).
[3] Of course, some have managed, through decades of effort and investment, to create crucial reference points for market participants. Most famously, to address the slow settlement of securities transactions in the 1960s, at regulators’ urging Wall Street formed the Committee on Uniform Securities Identification Procedures (CUSIP), which today still provides the single securities identifier the market needs to function smoothly. CUSIP Global Services, About CGS (describing the 1964 genesis of that standard). Dun & Bradstreet’s Data Universal Numbering System is today “used to maintain up-to-date and timely information on more than 300 million global businesses,” Dun & Bradstreet, What is a D-U-N-S Number?, and the Markit Red Code helps the market avoid the need for “manual[] confirm[ation of] CDS reference data,” IHS Markit, RED for CDS. But each of these systems comes with its own costs—in particular, proprietary systems require subscription fees and that users limit the distribution of the data—which is why the market failed for decades to come up with a single, uniform identifier.
[4] Staff of U.S. Securities and Exchange Commission, supra note 1; see also U.S. Securities and Exchange Commission Investor Advisory Committee, Letter to Chair Mary Jo White (June 15, 2016); U.S. Securities and Exchange Commission, SEC Adopts Rules to Increase Transparency in Security-Based Swap Market (Jan. 14, 2015).
[5] The final rule offers no actual empirical evidence that disclosing LEIs imposes meaningful costs. At the proposal stage, our Staff pointed out that “[m]any commenters supported requiring disclosure of LEIs, with most of them recommending that we require both the registrant and its subsidiaries to obtain and disclose LEIs.” Securities Act Rel. No. 10425 at fn. 216 (Oct. 11, 2017). Today, on the basis of a few evidence-free industry letters, the majority concludes that the file is now “mixed.” See Securities Act Rel. No. 10618 at Section II.C.2 (Mar. 20, 2019).
[6] To the degree that the market might react negatively to the news that a firm did not obtain an LEI, rules requiring disclosure of that fact would simply induce firms to internalize investors’ preferences regarding LEIs when deciding whether or not to obtain one. Negative market reactions to a company’s decisions aren’t costs of disclosure rules; they convey the benefit of giving the company and its management reason to pursue investor preferences.
[7] See Anne Thompson, Oktay Urcan & Hayoung Yoon, What Information Do Firms Hide in Confidential SEC Filings? (working paper 2018) (also pointing out the troubling fact that redacted positive information is associated with insider purchases of stock).
[8] It might be argued that market forces will give registrants economic incentives not to redact excessively. That, of course, is a case against mandatory disclosure more generally; for a famous economic analysis of the flaws of that premise, see Merritt Fox, Retaining Mandatory Securities Disclosure: Why Issuer Choice is Not Investor Empowerment, 85 Va. L. Rev. 1335 (1999) (explaining why a voluntary disclosure regime cannot be expected to yield socially optimal information production). Consistent with that analysis, the evidence makes clear that firms often redact important information, see Thompson et al., supra note 6.