A quick comment on disclosure…..what is its objective and market function?

There has been much work into the impact of disclosure on investor decision making: it does not work on the whole.  

One of the key issues with most disclosure is that regulators have deemed that disclosure is a communication to all investors, so that they can understand the risks, the details and functions of a given asset/security. 

Perhaps we have got the purpose of disclosure all wrong.  What if disclosure has a higher level market vetting purpose, in the sense that all the relevant information about a security or product has to be market vetted by “experts”?  In this context the very existence of a disclosure document, in the sense that it has passed a market expert validation test, is an endorsement or validation of the durability and integrity of the product/asset for the individual investor.

Dumbing down disclosure makes it useless for all, for the individual investor and for the impartial, independent market expert.  Disclosure needs to be fully transparent to pass muster and regulation must assess the integrity of both the disclosure document and the validation process that passes as fit for purpose the disclosure itself.  Not only the standard of disclosure needs to rise (i.e. the integrity of information) but also the complexity and detail of that information needs to rise to all for more effective market validation.

A recent FAIR Canada post, “Why is Deficient Issuer Disclosure Allowed to Persist?” raises the issue of expert/regulatory validation of disclosure communication.  The purpose of disclosure should not be to leave the ordinary investor in a buyer beware situation, but this is precisely what appears to be happening.  While the FAIR Canada post relates to more complex corporate issuer disclosure I feel that the relevance of the point has ramifications for the client relationship and product point of sale disclosure that applies to the retail financial services market place.

Other references

 http://lsr.nellco.org/cgi/viewcontent.cgi?article=1398&context=nyu_lewp

Leave a Reply