The SEC recognizes its role in ‘information overload’ but what can it do?

12th November 2013

‘Information overload’ presents a formidable challenge both in our personal lives and our work lives.  We are continually bombarded with information, and some of us have reached breaking point.  According to research it is estimated that the average person needs to recall 10 passwords a day, one third are forced to write them down in order to remember them, while a further third forget them completely. But the causes of ‘information overload’ are far more widespread than this.  Mary Jo White, The Chair of the US Securities and Exchange Commission (SEC), acknowledges the SEC may also have a part to play.  Michelle Fabian FSN writer asks what if anything can the SEC do? 

 

 

 

Mary Jo White recognises “when disclosure gets to be ‘too much’ or strays from its core purpose it could lead to what some have called ‘information overload’- a phenomenon in which ever-increasing amounts of disclosure make it difficult for an investor to wade through the volume of information they receive, to ferret out the information that is most relevant.”  But there is a fine line; without proper disclosure, investors are unable to make informed decisions. 

One area the SEC is considering is whether there are specific disclosure requirements that simply aren’t necessary.  For example, in the past some of the information concerning stock prices was only available to shareholders in the annual reports, but today this information is widely available in real-time on the internet.  However, there are some overriding concerns about removing such information from the annual reports.  For it is one thing to reduce repetition across multiple disclosures within the annual report itself and another to allow external sources to act as substitutes for disclosing the information, since these resources cannot be validated or held accountable in the same way.

However, while the SEC certainly has a role to play in simplifying reporting, part of the reason for the excessive disclosures can be attributed to external influences such as today’s litigious climate.  Over-time cautionary language has become more extensive, not necessarily as a result of SEC requirements but fuelled by legal advice from attorneys assisting in the preparation of statutory filings.   

In addition other external drivers such as the voting power of shareholders has also had an impact on disclosures, such as executive remuneration, to the extent that some companies now produce in excess of 40 detailed pages in their quest to better explain the compensation packages and justify their rational to investors.

Finally in the SECs quest to review ‘information overload’ it also challenges whether investors would benefit from disclosures that are more tailored to the industry in which the company operates and also whether investors are getting the information they need when they need it?  While having industry specific disclosure may assist in the quality of the information and enable more concise disclosures, it is the SEC’s suggestion of more timely and frequent disclosure which may ring alarm bells with many.

 Back in 2002 a landmark decision was made by the SEC to provide real-time access to company filings and companies themselves had begun using their own websites as a medium to provide information to investors.  However, the rapid evolution of social media has enabled companies to strike relationships with their investors like never before.  Investors expect more frequent and timely communication, although these often take more abbreviated forms such as a ‘Tweet’ or a Facebook update.  But in the SEC’s quest for a reduction in ‘information overload’ communicating via such channels may simply increase the burden on companies to produce more frequent updates which may in turn compromise the quality of the information.  And worryingly, these methods of communication may not be considered suitable substitutes to more traditional means and could merely add to the information reporting requirements.

The challenge faced by the SEC is an un-enviable one, the matter has been addressed multiple times over the past 35 years, yet the information burden remains greater than ever.  But CFOs also suffer ‘information overload’ battles in their internal reporting environment.  All too often senior management demand more reports without ‘turning off’ existing reports which become defunct yet clutter up the system.  Further still, information is often duplicated across multiple reports but fearing a backlash from stakeholders the reporting function is reluctant to eliminate reports altogether. 

And like the SEC the internal reporting function faces issues around the timeliness and frequency.  In an ‘always-on’ culture, management expect 24/7 access to information and want to be kept abreast of the latest developments.  However, for many, determining the frequency and appropriate medium to deliver this information is still in the experimental stages.

As with internal reporting the SEC will need to tread a fine line between delivering the information stakeholder’s need and what they may want.  There is no one system of disclosure that will satisfy everyone. Ultimately the goal must be to provide investors with the information they need to make informed investment and voting decision and allow our capital markets to flourish.  Perhaps the SEC’s work on simplification will provide useful lessons for simplifying internal reporting as well.

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