If a prospectus falls in a forest, does it make a sound?
The SEC's overly cautious approach to change leaves them disconnected from the modern investor and the markets they serve.
In 1934, the SEC was established. One of its primary responsibilities is safeguarding investors by ensuring they have access to essential information that enables them to make informed decisions. This includes enforcing transparency and disclosure requirements for publicly traded companies. After 90 years of an excruciating proclivity to reject modernization, we have:
- 1,000% increase in the length of a prospectus – the average length in the 1930s was 20 pages.
- Corporate expenses, which investors pay for, are estimated to be $20 -$30 billion annually for SEC compliance.
- Less public companies -in 1996, there were about 8,000 publicly traded companies on U.S. stock exchanges, but by 2020, that number had dropped to around 4,000.
- Investors are less likely to read a prospectus than ever before.
Every day that passes, they fall further behind as they clutch desperately to outdated processes and the written word as the remedy for investor information. Like Captain Ahab, who obsessively pursues Moby Dick, the SEC is fixated exclusively on the written word and resists change despite its limitations and inefficiencies. Ahab’s relentless chase parallels how the SEC approaches the desperate need for better education and disclosure with more pages of redundant, repetitive, unread disclosure. Why? Stare decisis, which means “to stand by things decided.” The SEC is staffed and led by attorneys. Attorneys are taught and conduct their profession with an eye towards stability and predictability but at the expense of new ideas and technologies. So, the absurd is perpetuated and then relied upon as precedent. Investor risk = need for longer prospectuses and more corporate filings. It is time for a change.
Many industries have increasingly adopted video and interactive communications to replace or supplement traditional written communications. Platforms like Duolingo, Coursera, Udemy, and Khan Academy use video lectures, interactive quizzes, and virtual labs to teach subjects traditionally taught through textbooks and written assignments. Applications such as MyFitnessPal and Fitbit offer video tutorials for exercises and interactive interfaces for tracking health metrics. Platforms like Zillow and Redfin provide 3D virtual tours and video walkthroughs of properties, replacing or complementing written property descriptions. AR tools allow customers to virtually try on clothing, makeup, or accessories before purchasing. Companies use platforms like LinkedIn Learning and Skillsoft for video-based training with interactive quizzes and simulations. HR departments use interactive platforms to onboard new employees, and sensitivity and code of ethics training are conducted with video tutorials and interactive sessions. What has been the progress on investor education and disclosure at the SEC? On average, 200 additional pages of prospectus per company and the ability to access it via the internet (it took 13 years from the proposal to adoption of the rule to allow prospectus delivery via the internet). Their overly cautious approach to change leaves them disconnected from the modern investor and the markets they serve.
The SEC budget has been increasing at a double-digit rate for the last several years, remarkably avoiding the embrace of modern-day technological advances that improve education and information.
Just imagine having a Duolingo-style platform for learning capital market terms. Or a LinkedIn learning course focusing on essential investment disclosures. Envision a Fitbit-like assessment tool to determine investor suitability. Achieving this goal requires expertise in the subject matter (including but not exclusively lawyers), knowledge of instructional design principles, engagement experts, understanding of cultural competence, and familiarity with various learning technologies, including learning management systems and multimedia tools.
Aspirations for a better-informed investor are achievable if the SEC adopts modern principles and technologies. Without change, they are stuck and on their way to a 300-page prospectus that fewer and fewer will read.
Mark Goldberg served as chair and director of several financial services associations, CEO of brokerage firms, and today as an independent director of several company boards. He has advocated on behalf of both investors and those who serve them for over 38 years. He has provided expert testimony at congressional hearings, and the Department of Labor, and has been constructively engaged with the SEC and FINRA over many decades.
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