Rethinking the Disclosure Paradigm in a World of Complexity

In a prior article, Professor Schwarcz examined the factors that differentiate Enron's questionable use of off-balance sheet special purpose entities, (SPEs) from the trillions of dollars of "legitimate" securitization and other structured-finance transactions that use SPEs. The presence of meaningful differences, Professor Schwarcz argued, may inform regulatory schemes by providing a basis to distinguish which such transactions should be allowed or restricted. In that connection, Professor Schwarcz encountered the dilemma that some structured transactions are so complex that disclosure to investors of the company originating the transaction is necessarily imperfect - either oversimplifying the transaction, or providing detail and sophistication beyond the level of even most institutional investors and securities analysts. In this article, Professor Schwarcz focuses on solutions to this dilemma, arguing that complexity forces a rethinking of the long-held disclosure paradigm of securities law.