SEC Turns Disclosure into a Game of 'Where's Waldo?'

When it comes to investor protection, ensuring that investors have easy access to clear disclosure information is, quite literally, the least regulators can do. But these days even that seems to be a step too far for the folks at the Securities and Exchange Commission (SEC).

There's a long list of examples of the SEC's failure to provide investors with useful information, whether it is pre-engagement information about broker-dealers' costs, conflicts of interest and legal obligations or clear, dollar-amount disclosures of the costs investors pay for investments such as mutual funds and annuities. But these tend to be in areas where the SEC has failed to take action, where excuses could be offered about the difficulty of finding time to address the issue amidst the press of other, congressionally mandated rulemaking requirements.

Last week the agency proved that, even when it does take action, its preferred approach is to make it considerably more difficult than it needs to be for investors to receive information that is crucial to an informed investment decision. The vote in question came on crowdfunding rules, which though strengthened over the original rule proposal in other important ways, have the potential to turn crowdfunding disclosures into a game of "Where's Waldo?".

The rules permit crowdfunding intermediaries to satisfy their disclosure obligations by sending an electronic message notifying investors that the information is available on the website without providing them with a URL or hyperlink or otherwise directing them to the exact location on the website where the information can be found. The information that could be "disclosed" this way includes financial information as well as information on the risks of the investment.

The Commission's failure to fix this gaping hole in its electronic delivery requirements cannot be excused as an oversight. Both CFA and the SEC's Investor Advisory Committee brought the problem to the Commission's attention in comments on the rule proposal. While we agreed that it is reasonable to require investors to accept electronic delivery of disclosures as a condition of participating in an electronic marketplace, and we supported allowing issuers flexibility in determining the exact means through which the information could be delivered, we urged the Commission to require inclusion of a URL or link to the information in order to satisfy the requirement that the disclosure had actually been "delivered."

As the bipartisan IAC wrote in its unanimously adopted crowdfunding recommendation:

Past experience and research tell us that, if we want investors to read disclosures, we need to make it as easy as possible for them to access that information ... [T]he proposed approach would impose inappropriate and unwarranted burdens on investors to seek out required disclosures, particularly in circumstances where issuers have information they are reluctant for investors to see. In addition, it poses a significant risk that issuers and intermediaries would use this less transparent delivery mechanism to deliver information they prefer to obscure, thus lending itself to disclosure practices that are not simply opaque but also abusive.

While the Commission acknowledged those arguments in the final rule release, it offered no meaningful response to the concerns raised. What response it did offer, buried in footnote 716, simply states:

[W]e are not requiring intermediaries to provide a link to direct investors to the intermediary's platform or the issuer's website where the information is located. We believe that the final rule provides some flexibility to intermediaries when providing required information through electronic messages given that intermediaries are well-positioned to determine how best to ensure compliance with all applicable regulatory requirements. We also believe that, because of the widespread use of the Internet, as well as advances in technology that allow funding portals to send various electronic messages, our final rule requires sufficient notice to investors.

In other words, making it much harder than it needs to be for investors to find important information is good enough for the SEC. And making it much easier than it ought to be for crowdfunding portals to bury negative information isn't a problem to be solved, it is evidence of the rule's "flexibility."

If they won't even support cost-free, pro-investor disclosure policies, do you suppose we can at least get SEC officials to clearly disclose that the agency has become the industry's rather than the investor's advocate?