A Call to Reform US Disclosure-Based Regulation

The US approach to regulating the securities markets is underpinned by disclosure, and US policymakers have tended to respond to corporate and systemic crises by strengthening disclosure requirements. For example, in response to the global financial crisis, the US Securities and Exchange Commission recently adopted new rules enhancing disclosure of risk oversight by the board of directors, executive remuneration, and conflicts of interest of compensation consultants. US disclosure-based regulation, however, suffers from two critical failings. First, it lacks coherence in that shareholder rights are presently too weak to compensate for the hands-off regulatory approach. Second, disclosure has been deployed excessively as a regulatory tool, resulting in inundation and poor quality of information as well as other unintended outcomes. Moreover, disclosure has been ineffectively used to address issues that are better tackled through substantive regulation. To remedy these deficiencies, US policymakers should strengthen shareholder rights – perhaps by emulating the UK model – so that US investors will truly be able to hold boards and management accountable. In addition, regulators should periodically review the continuing relevance of existing areas of disclosure and require companies to prioritize disclosures by tiers, provide summaries, and limit the length of discussion. US policymakers could also bolster the SEC’s authority to impose substantive regulation so that it would be less reliant on disclosure to regulate problematic conduct. As US policymakers continue contemplating measures to strengthen the US financial system, they should give serious consideration to reforming the existing disclosure-based approach so that the US regulatory regime will be more robust and fit for purpose in the future