Humans are often entertained by illustrations of absurdity through reality.
For instance, Treasury Secretary Jack Lew months ago said he’d like to address tax inversions but lacked authority. Yesterday, Treasury imposed rules to limit inversions. My reading of Section Two of the U.S. Constitution reveals no lawmaking authority vested in the executive branch.
I could compile a book of examples. I won’t. Instead, I’ll offer one for the IR chair and the public-company executive suite. In 1975, Congress added Section 13f to the Securities Act to “increase the public availability of information regarding the securities holdings of institutional investors.” I was eight years old then and had no idea I’d spend my adult life working in the capital markets with thus far no update to the provision.
NIRI CEO Jeff Morgan said in his weekly note to members yesterday that the Board had held its annual meeting with the SEC to discuss disclosure. “I am not sure we came to any concrete agreement on how we might traverse down the road to improving disclosure,” Jeff wrote. He was talking about the burden of it.
In August 2000, the SEC imposed Regulation Fair Disclosure (Reg FD) to “promote the full and fair disclosure of information by publicly traded companies and other issuers.” Following and vastly increasing disclosure-costs was The Sarbanes-Oxley Act of 2002 (SOX as we call it), passed by the U.S. Congress to protect shareholders and the general public from accounting fraud and errors and to improve accuracy in corporate disclosures. I remember that my company spent about $2 million as a small-cap NASDAQ-traded firm with $200 million in revenues complying with Section 404 and other requirements the first year.
I recall an ensuing variety of rules through the Financial Accounting Standards Board and SEC Staff Accounting Bulletins, all adding time, effort, cost and disclosure.
It goes on. Public companies now make compensation, governance, risk and sustainability disclosures. Officers in effect sign away their Constitutional protections as citizens on documents filed with the SEC. And under the labyrinthine Dodd-Frank Act, companies must among other duties somehow report on whether minerals used in manufacturing have “conflict” origins.
Meanwhile, Section13f molders, immutable in a mutable equity world. If the point of disclosure is fairness and transparency, why does it apply only to issuers?
Speaking of mutable, suddenly following Michael Lewis’s literary grenade, Flash Boys, Congress, the SEC, and the Financial Industry Regulatory Authority (Finra) are whirling dervishes over the “lack of transparency” in trading markets. The SEC and Finra have moved to require permutations of data that ostensibly cast light into the equity market’s nether regions.
Yet simultaneously, both US listing stock exchanges raised fees for public companies despite the fact that the 75% of trading occurring off these platforms is entirely free to issuers. And the data? Until 2010, NASDAQ broke out all trading volume for issuers according to broker-dealer and platform. Now, 40% of it is on the Trade Reporting Facility, a black hole for issuers still, while Finra and the SEC with frowning countenances and stern tones demand that dark pools – brokers with alternative trading systems that don’t display prices or accept all orders (which report into the TRF black hole) – post volumes.
George Orwell and Aldous Huxley with their inventive dystopian literary imaginations would be hard-pressed to formulate a fictional world so categorically riddled with contradiction and double standards.
There is no legal or rational justification for these colossally mind-bending dichotomies. SEC and Finra, if you’re reading, there’s a simple solution to trading data for all: Follow Canada’s example and post the trades comprising 100% of volume, by broker, on a one-day delay. Nobody up there is crying about it.
After all: Why should disclosures in dark pools now exceed what’s in the displayed market? Create one rule and apply it to everybody. Problem solved.
And public companies, we need to demonstrate in the streets if necessary until Congress gets off its behind and provides the equal protections that the Constitution demands. It’s inexcusable that a stock can trade 400 times in a half-second and ownership reports about the activity come out 45 days after the quarter ends.
How about we end these double standards? If we could get past our busy schedules and our fear, the Collective We in the IR profession would make it so.