Volume 42 | Number 3 Summer 2007
Page 2 of 9
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I. Introduction
Disclosure is a critically important public policy instrument in securities law. Globally, most, if not all, jurisdictions use a disclosure-based system instead of a merit-based system. A disclosure-based system allows securities to be issued and traded where regulators and stock exchanges are satisfied that an issuer meets disclosure requirements. Disclosure is aimed at providing timely, accurate, and complete information to the market, so that investors can make informed choices based on relevant information about the issuer’s activities. It places responsibility for accurate disclosure in the hands of those with the information, who are seeking a wide market in which to raise capital. Disclosure enhances capital market efficiency because it can ensure effective dissemination of information that is material to investor decisions, in turn facilitating the raising of capital in a cost-effective and timely manner. In such a system, judgments about the “merits” of a particular product or issuer are left to the purchaser.
Information about an issuer is a valuable good that drives market moves, with securities trading based largely on a standard of fair access to information.2 However, equal access to information is not a guarantee that information is a ubiquitous good that necessarily leads to fairness in the market, as retail investors have different time, resources, and capacities to digest and make use of the information.3 Yet as a normative starting point, access to information that is full, true, plain, and timely does create the potential for equal use of that information by market participants. Since the premise of securities law is that the market will reward issuers engaged in effective governance, appropriate risk taking, and wealth maximizing activities through the value of shares in the market, consequent credit ratings and other measures, information creates the conditions for those activities to be rewarded.4
Implicit in the linking of disclosure with investor protection is the assumption that investors with fair access to information will make rational choices, rational in this context meaning the capacity to use the disclosed information to act in their own best interests in market transactions.5 However, behavioral economics has questioned whether disclosure in itself is sufficient to overcome particular human decision-making tendencies that inhibit the ability to be rational in market transactions.6 Hence, it is unlikely that there is a model that perfectly protects investors. Moreover, investors draw different conclusions about the same data, which is why there are both buyers and sellers of a stock on a given day. The real issue in respect of disclosure is whether the information is of sufficient quality and quantity to allow investors to make informed investment decisions or assess investment advice.
This article examines selective aspects of disclosure in securities law, specifically, how it serves as a public policy instrument in capital markets. It explores whether the current regulatory framework encourages “full, true, and plain” disclosure, concluding that while the full and true aspects have received considerable attention in recent years, the increasing complexity of products creates challenges for achieving plain and accessible disclosure. This article also examines the potential and limits of electronic-based disclosure, suggesting that the market is ahead of the regulatory system in terms of how disclosure is made and that new measures may be required to protect the integrity of web-based disclosures. It also considers “materiality” as the standard for disclosure, including the interplay between statutory requirements and deference to business judgment in determining what information is considered material information such that it must be disclosed.7 Finally, as a mechanism to deal with some of the issues raised in the article, the final part proposes a new integrated market disclosure document as a means to enhance disclosure as a public policy instrument and create greater uniformity and accessibility to disclosure across multiple jurisdictions.