VIEWPOINT by Christopher Cox
The SEC’s mission statement requires us to facilitate capital formation. In our regulation of the nation’s capital markets, the SEC is a partner in making America more productive.
But not everything we do is a net contributor to American productivity. Not all of the SEC’s rules and policies are clearly written, and easily understood. Not all of the disclosure we mandate in our role as the “investor’s advocate” is really useful to investors. I pledge to do everything in my power to correct that.
Since the day I began, I have been focused on translating legal gobbledygook into plain English. Clearly defined rules are necessary for people to conform their conduct to the standard the law expects of them. And clearly written disclosure is necessary for investors to gain the benefits of market information.
When it comes to giving investors the protection they need, information is the single most powerful tool we have. It’s what separates investing from roulette. If the SEC is truly to succeed in helping investors and in ensuring compliance with the law in the securities industry, we’ll need nothing less than an all-out war on complexity.
Some years ago, under Chairman Arthur Levitt, the SEC began a crusade for plain English in investor documents. It was a noble first step that has been carried on by each of my predecessors. During my time at the commission, I hope to advance this cause still further.
Reduce Jargon
One of the ways we can do this is to reduce our use of jargon,insider shorthand that works in our own little circles, but effectively excludes those without the decoder ring.
To this end, both Financial Accounting Standards Board Chairman Bob Herz and I have announced our combined efforts to combat complexity in accounting. This will be an across-the-board effort that will benefit issuers and investors alike.
We have other initiatives as well. When it comes to disclosure documents intended for investors, nothing is more complicated than the description of executive compensation. We aim to simplify it, and make it more meaningful.
Now, let me be clear about what this does not mean. The commission does not intend to, and never will while I am chairman, dictate what any employee of a company makes, whether it’s the CEO or the mail clerk. Those are marketplace decisions.
Better Judgment
Not only will improved disclosure of company information be useful to shareholders, it will also help directors, by getting them better market information about executive compensation decisions in other companies. It will help make their judgments better-informed, and less susceptible to challenge in expensive lawsuits that cost shareholders and companies alike.
It’s been 13 years since the SEC last revised its rules for executive compensation. In that time, the nature of executive pay has changed drastically. The rules simply haven’t kept up. The result is that too often technical compliance with disclosure rules doesn’t adequately capture the details of the latest compensation packages.
Making our mandated disclosures useful to investors is the idea behind another SEC initiative: interactive data.
The beauty of interactive data is that it will not only make today’s 10Ks, proxies and mutual fund prospectuses more useful to investors, but it will also eliminate much of the time and expense that companies currently devote to filing SEC reports.
800 Forms
Today, the SEC has over 800 different forms. Each form is required to have its own cover page. The genesis of this requirement dates back to when reports were hand-filed in steel cabinets. Back then, the cover pages helped Commission staff do the filing,but today, they provide no useful information to the public, or to the SEC.
Despite the fact that every individual company is required to file many different forms, these cover pages ask over and over again for the very same information in a slightly different format. In other words, more stuff no one needs, or wants.
If one goes beyond the cover pages to the entire form, to focus only on the truly unique information in each one, it’s been estimated that instead of the 800 forms now required, the SEC might have need of no more than a dozen.
Individually Identified
The key to making this happen is looking at the data on the forms independently from the forms themselves. That’s what we mean by interactive data. Computer codes can tag each piece of information on a report, and tell us what it is: operating income, interest expense and so forth. That way, every number in a report or financial statement is individually identified, both qualitatively and quantitatively.
For individual investors, this means they’ll be able to use more sophisticated software tools to analyze the information from SEC filings in real time. For the SEC, it means we could organize our database not around individual reports, but instead around the companies who file them.
Investors and analysts wouldn’t have to hunt around for each separate form,all the information would be in one place, organized by company. And I haven’t even gotten to all the forms for proxy materials, annual reports, securities ownership, tender offers and mergers and acquisitions. Today, every one of these forms has to be filed and processed separately. Rube Goldberg would be proud.
Live Data
But the very best thing about interactive data is that the data will all be immediately accessible to investors, in real time.
Some 700,000 reports are filed electronically on the SEC’s EDGAR system. But EDGAR (that stands for electronic data gathering, analysis and retrieval) is more than 20 years old.
And a shortcoming of having such a fossilized system is that all of the information in these nominally “computerized” SEC reports isn’t searchable.
Investors and analysts who conducted 375 million online searches of the EDGAR database in fiscal 2005 had to manually retype the information before they could even begin to use it in spreadsheets. (Or they had to pay someone to do that for them.) The only way to make this less efficient would be to require the use of an inkwell and a quill pen.
Interactive data will change that, making the information in SEC reports immediately downloadable by investors and analysts the world over, via the Internet.
I’ll mention one more area where the SEC is moving to demystify disclosure for individual investors: mutual funds.
The SEC is moving to clarify the disclosure of the layers of costs and fees in those products, and of how those costs hit the investor’s bottom line. This improved disclosure will also clearly identify when a broker has a special financial stake in selling those products.
Our new proposal will call for getting disclosure to retail investors when they need it most: at the point of sale. And it will permit using the Internet as the platform for providing point of sale disclosure.
Simple Summaries
That way, mutual funds and other retail investments could make simple, plain English summaries available to individual investors, who could click through for more detailed information if they wished.
More sophisticated investors, as well as analysts and intermediaries, could find all the detail they wanted by drilling down into the densest minutiae. But because of the Web-based disclosure, individual investors wouldn’t have to be buried with information.
And all this can be done at considerable cost savings to both issuers and their investors.
I’m very excited about these opportunities to make it easier and safer for Americans to invest. In waging this war on complexity, the SEC will be doing its part to increase America’s productivity and the efficient functioning of our market economy.
Cox, former OC congressman, is chairman of the Securities and Exchange Commission. This article is excerpted from his Dec. 12 speech to the Economic Club of New York.
