Remarks at SEC Historical Society 2014 Annual Meeting: On the 80th Anniversary of the SEC

Commissioner Daniel M. Gallagher

Washington, D.C.

June 5, 2014

Thank you, Carla [Rosati].  The SEC Historical Society plays an important role in helping maintain a collective memory of the SEC’s triumphs and failures so that current and future generations of Commissioners and Staff can learn from their predecessors, and I’m pleased to have the opportunity to share a few brief thoughts with you today at the Historical Society’s annual meeting.

Today’s event commemorates the 80th anniversary of the creation of the SEC in the Securities Exchange Act of 1934.  As I’m sure you all are aware, only a few days ago it was the 81st anniversary of the Securities Act of 1933—an event also worthy of celebration.  One of the nice things about speaking to a historical society event is that you don’t have to provide a history lesson as background.

With that in mind, I’d like to share a few thoughts related to the ’33 Act, which embodies the idea that requiring the disclosure of material information to investors promotes confidence in the markets.  At the time of its passage, of course, investors’ confidence was still badly shaken by the 1929 stock market crash and ensuing Great Depression.

Initially, in the dark days before the creation of the SEC, the authority to administer the new disclosure regime was given to the Federal Trade Commission.  According to the Historical Society’s website, the FTC’s initial approach to implementing the ’33 Act “may have let principles get in the way of practicality,” raising the interesting question:  “[E]ven if sunlight could clean up the markets, could too much sunlight—by making it difficult for corporations to issue securities—impede recovery?”[1]

The Historical Society website further indicates that businesses at the time believed that too much sunlight was indeed harmful, and reacted to the FTC’s overzealous use of its new powers by lobbying to shape the then-draft Securities Exchange Act.  Their goal was to create a new regulator for the exchanges with the authority to administer the ’33 Act as well, and that came to fruition in the ’34 Act.  And so the SEC was born.

80 years later, however, the problems arising from excessive disclosure remain.  In his SEC Speaks speech last year, my friend and former colleague Troy Paredes expressed his concern that the expansion of mandatory disclosure requirements may lead to “information overload,” not just in volume but also in the complexity of presentation.[2]  In a speech later in the year I reiterated Commissioner Paredes’ concern.[3]

I believe that, just as was the case 80 years ago, the problems arising from too much sunshine impeding economic recovery are among the most pressing issues that we face as an agency.  The Commission’s success has been built on requiring disclosure of material information, that is, information substantially likely to be considered significant by a reasonable investor.[4]  Today, the core of that approach is under attack.

We’ve seen an increasing encroachment of congressionally mandated corporate governance-related disclosure requirements, beginning with the Sarbanes-Oxley Act and accelerating significantly with Dodd-Frank’s say-on-pay, pay ratio, compensation clawback, pay for performance, and hedging disclosure requirements.  These forays into corporate governance, an area traditionally—and better—regulated by the states, distract us from our core purpose.  Worse, other legislative mandates utterly devoid of any connection to investor protection—such as the Dodd-Frank Title XV trifecta of mine safety, extractive resources, and conflict minerals disclosures—have driven us still further afield.

Meanwhile, as I noted earlier this year,[5] activist investors and corporate gadflies have hijacked the shareholder proposal system to advance idiosyncratic and often political disclosures that are irrelevant to—or even contrary to the interests of—the average investor.  And yes, I continue to believe this, despite the crying and wailing that followed my speech.  The activities of these special interests are aided and abetted by proxy advisory firms that are all too willing to recommend votes in favor of these proposals.

At the same time, the Commission has been subjected to a barrage of pressure to attempt to restrict corporations’ exercise of their First Amendment rights to political speech.  Academics through rulemaking petitions and members of Congress through letters—as well as the ever-courageous unidentified persons pushing hit pieces in the so-called media[6]—have been seeking to compel the Commission to regulate indirectly, through disclosure, where direct restrictions have been stricken down as unconstitutional.

Finally, I’m seeing a growing trend of special interests pushing companies to provide “sustainability” and other wholly non-financial disclosures.  A company can of course agree to provide such disclosures, based on the company’s own assessment of the merits and through the company’s own information dissemination mechanisms, for example, on its website.  But I worry that it is only a matter of time before the not-too-subtle “voluntary” push for such disclosures morphs into an express effort to mandate these disclosures by embedding them as new requirements in our rulebook.

The majority of these disclosures are simply not material to a reasonable investor.  Rather, they are being mandated in order to advance social goals by “naming and shaming” corporations.  Other disclosures are being advanced by groups that take the paternalistic view that if investors only knew what is best for them, they would be demanding these disclosures.  I’m honestly not sure which is worse.

Companies’ disclosure documents are being cluttered with non-material information that can drown out or obscure the information that is at the core of a reasonable investor’s investment decision.  The Commission is not spending nearly enough time making sure that our rules elicit focused, meaningful disclosures of material information.  Although there have been incremental improvements over the years, with another such effort currently underway, the last comprehensive overhaul of our disclosure rules was in the early 1980s, with the integration of disclosures under the ’33 and ’34 Acts.

I believe the next few years will be critical for the SEC, in particular for our disclosure-based approach to regulation that has helped make our capital markets the envy of the world.  Will we let our disclose regime be crippled by the pursuit of special interest goals?  Or can we reinvigorate our core mission and put this agency on a path that will help it survive—and thrive—for another 80 years?  It’s my sincere hope that when the SEC Historical Society meets to commemorate the 160th anniversary of the ’34 Act, their answer to those questions will be, “Yes, we could—and did.”

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Thank you again for the opportunity to speak to you today, and I hope you enjoy the rest of today’s program.