This article was featured on Advisor Perspectives.
The SEC has launched a monumental rule-making effort to enact mandatory climate-risk disclosure; the goal is “consistency, comparability and reliability,” according to Chairman Gary Gensler. Let’s hope it succeeds and the same principles are applied to disclosing the roles and purposes of broker-dealers and investment advisors.
The chairman’s views on enforcement and disclosure principles suggest what rulemaking should look like.
While teaching law at Washington University in 2003, former SEC Commissioner Troy Parades wrote, “the most hotly contested debate in the history of securities regulation” is about mandatory disclosure.
It’s about to get hot again.
The chairman has set out his thinking on enforcement, the letter and spirit of what rules mean, and the high standard disclosure should meet. He spoke in May to some 1,700 FINRA market participants.
He said he is “animated by working families and what the SEC means to them,” and, as an example, that, “best interest means best interest.”
Why? “Going right up to the edge of a rule or searching for some ambiguity in the text or a footnote may not be consistent with the law and its purpose,” according to Gensler. He called the 33 Act the, “truth in Securities Law. Telling the truth matters.”
The chair urged his audience to, “think about the spirit of the law. It’s about protecting investors”.
This was just a start. In early July before the SEC’s asset management advisory committee, he spoke on his concern with funds that “hold themselves out” as green, sustainable, or low carbon.
He asked what information is behind those claims and whether there is truth in the advertising. Gensler likened this to walking down a grocery store aisle and seeing “fat-free milk.” There is no question what fat-free means. Quantifiable data, such as grams of fat, are on the label.
That is not so, though, with “sustainability-related investing,” because, as Gensler pointed out, “There is currently a huge range of what asset managers might mean by certain terms or what criteria they use.”
Investors should be able to, “drill down to see what’s under the hood of these funds,” Gensler said.
In late July, in a webinar on the principles for responsible investment, Gensler went further and set out his vision for a high standard for the quality of climate-risk disclosure. He used Olympics athletic performance as an example.
Climate risk disclosure, according to Gensler, should provide greater clarity than it currently does. That means consistent and comparable measures of public company performances over different industries and times, just as Olympic records of athletic performance can be compared in like events over time.
Gensler said disclosure cannot rely on “generic text” to be “decision useful” to investors. Qualitative or quantitative information in “sufficient detail” is needed. That means quantitative measures such as metrics on greenhouse gas emissions and financial impacts or progress towards climate-related goals, according to Gensler.
The Wall Street Journal just published a front-page story on current voluntary disclosure efforts and ratings it calls “inconsistent and incomplete”. Among the examples it cited, Microsoft offers a “96-page data heavy report” while Berkshire Hathaway “stands out for the paucity of its disclosure” in a three-page report. Meanwhile, Twitter boasts, “removing 70,000 plastic toothbrushes from its offices.”
Disclosure in securities regulation for retail investors has a deservedly poor reputation. Among investor advocates, conflict of interest disclosure is especially ineffective if not harmful, as Yale’s Daylian Cain reminds us. Gloomy academic literature is buttressed anecdotally. Take the Ameriprise financial planning service ADV brochure. “How we get paid” takes 16 pages, or roughly 10,000 words. Is this what “decision useful” looks like?
Gensler’s SEC wants to change this. The Journal says the SEC wants, “to impose order on the free for all.” Former SEC Commissioner Robert Jackson called this a “monumental task.” A good starting point is what the SEC does not do. The SEC does not implicitly fault investors for being confused by disclosure that lacks consistency, comparability, reliability — or plain language clarity.
Instead, Gensler set out principles for disclosure, i.e., tell the truth. Claim only what is proven. Use uniform metrics and common terms and criteria. Use sufficient detail to be “decision useful.”
A good start, indeed. The same discipline is sorely needed for disclosure describing the roles and purposes that distinguish investment advisors who meet a fiduciary standard from brokers who adhere only to the new broker-dealer standard.
