While individual investors rarely read disclosures or give them much thought, advisers should not discount their importance to the fiduciary process. Investment fiduciaries are inherently both producers and consumers of disclosure data.
The duty of care obligates fiduciaries to consider all material information that pertains to the scope of their responsibilities. Investment advisers and managers use public company disclosure data to uncover strengths, weaknesses, opportunities and threats associated with specific companies, industries and the overall investment environment. Their effectiveness as professionals is heavily dependent on the depth, breadth and quality of relevant information they can readily access and apply in their decision-making.
The Securities and Exchange Commission is currently seeking comments on disclosures relating to Regulation S-K, which establishes reporting requirements for public companies. Specifically, the SEC is soliciting comments on Subpart 400 of Regulation S-K that deals with management and governance matters of public companies. The stated purpose of the initiative is to “assess whether the business and financial disclosures in Regulation S-K continue to provide the information that investors need to make investment and [proxy] voting decisions.”
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The request for comment invites input both on potential new disclosure issues the rule should address as well as existing requirements. Comment-worthy new topics cited by the commission include industry-specific disclosures and information about sustainability and governance matters.
The CFA Institute issued a policy alert calling attention to the SEC's request for comments and urging institute members and investors to respond. The alert references relevant research conducted by the institute on topics of special importance to investment professionals: corporate compensation practices, proxy policies, independence and management oversight issues of boards of directors, shareholder engagement efforts and attention to ESG (environmental, sustainability and governance) factors as core business concerns.
The subject areas highlighted by the CFA Institute share three critical characteristics. First, they are directly relevant to management and governance issues of current interest to the SEC. Second, research strongly suggests that business practices in these areas are likely to impact corporate performance, risk exposures and investment potential. And third, the ability of investors and public companies to benefit from insights uncovered in these areas is dependent upon the accuracy, consistency and thoroughness of disclosures required of public companies.
With respect to this last point, it is not a matter of more disclosures, it is a matter of better, more actionable disclosures. The primary impetus for the SEC's current call for comments was the federal “FAST” (Fixing America's Surface Transportation) Act that directed the commission to study the requirements of Regulation S-K to “(1) determine how best to modernize and simplify such requirements in a manner that reduces the costs and burdens on issuers [public companies] while still providing all material information; (2) emphasize a company-by-company approach that allows relevant and material information to be disseminated to investors without boilerplate language or static requirements while preserving completeness and comparability of information across registrants; and (3) evaluate methods of information delivery and presentation and explore methods for discouraging repetition and the disclosure of immaterial information.”
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The three-part directive effectively prescribes the defining characteristics of well-designed disclosures: They should be material, manageable and actionable with respect to the needs of intended recipients. Investment advisers, as fiduciaries serving the best interests of investors, are intended recipients who should recognize their obligations to take full advantage of disclosed information.
Information is material if an intended recipient would reasonably benefit from using it in their decision-making process. Professional investment advisers are obligated to stay current with research in the field and apply that knowledge. The topics cited in the CFA's alert are excellent examples of areas of active research and growing significance for investment decision-making.
Manageability is important from the perspectives of both producers and consumers of disclosures. For entities preparing disclosures, manageability pertains to the feasibility and practicality of collecting and disseminating required information. For disclosure recipients, it relates to the ability to interpret and apply the information.
To be actionable, information must not only be material and manageable, it must be relevant to the specific decisions a particular recipient needs to make. Fortunately for advisers, disclosure data is increasingly being captured by regulators and private-sector data aggregators, and portfolio management technology companies are bringing advanced analytical capabilities online for advisers. Thus, increasing marketplace transparency made possible by improved disclosures is making relevant information more accessible and therefore more actionable.
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Hopefully, the SEC's request for input will generate a particularly robust response from investment professionals by the Oct. 31 deadline. Steady progress in the quest for greater access to high-quality, actionable disclosure information is central to fulfillment of fiduciary obligations and plays an important role in advancing the profession.
Blaine F. Aikin is executive chairman of fi360 Inc.
