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Remarks to the Forum for Corporate Directors, Orange County, California

Commissioner Daniel M. Gallagher

Forum for Corporate Directors, Orange County, California

Jan. 24, 2014

Thank you, Chris [Cox], for your generous introduction and your invitation to address this truly distinguished gathering.  I was honored that Chris asked me to speak here today.  But it was an even bigger honor to work for Chris when he was Chairman, both as his Counsel and as Deputy Director of the Division of Trading and Markets.  Chris’s incredible intellect and leadership tremendously benefitted the agency during the worst of the financial crisis.  I know I can speak for my colleagues who, like me, toiled in the trenches alongside Chris when I say that Chris was an island of calm in a sea of misguided government intervention.

* * *

This morning, I’d like to discuss two issues that, along with a holistic review of equity market structure, should be at the very top of the SEC’s agenda.  The first is the revamping of our corporate disclosure system, and the other is a set of much needed reforms for the proxy advisory industry.  Each of these issues demands our close attention despite the fact that – at the risk of sounding subversive – neither issue was the subject of a congressional mandate to the Commission.  So while these issues are not among the fashionable diversions of the moment, addressing them would be consistent with what I like to call the Commission’s basic “blocking and tackling” mandates.  We have spent far too little time on such core responsibilities over the last four years, and the neglect is evident.

* * *

Let’s begin with disclosure reform.  The SEC is, first and foremost, a disclosure agency.  Our bedrock premise is that public companies should be required to disclose publicly and in a timely fashion the information a person would need in order to make a rational and informed investment decision.  That is the foundation of our securities law regime and the core principle by which we administer those laws.  We can’t protect investors and foster capital formation in fair and efficient capital markets unless critically important information about public companies is routinely and reliably made available to the public. 

At the same time, we need to take seriously the question of whether there can be too much disclosure.  Justice Louis Brandeis famously called sunlight the best disinfectant.[1]  No doubt – but, as my friend and former colleague Troy Paredes pointed out some years ago, investors can be “blinded by the light” of information overload.[2]  From an investor’s standpoint, excessive illumination by too much disclosure can have the same effect as inundation and obfuscation — it becomes difficult or impossible to discern what really matters.  More disclosure, in short, may not always yield better disclosure. 

* * *

Investors often say that disclosure documents are lengthy, turgid, and internally repetitive.  Today’s mandated disclosure documents are no longer efficient mechanisms for clearly conveying material information to investors, particularly ordinary, individual investors – myself included.  A recent House of Representatives Appropriations Committee report put it like this: 

“Voluminous, overly-complex, legalistic and immaterial corporate disclosures both increase investor confusion and discourage shareholder participation in important corporate governance matters.”[3]

The complexity of today’s disclosure requirements give the Commission cause for self-examination.  SEC rules that require periodic corporate reporting, the detailed instructions that implement them, as well as pertinent staff interpretations and guidance, have been the principal forces shaping modern corporate disclosure.  External forces, too, have played a role, most notably the risk of litigation – much of it absolutely frivolous and solely for the benefit of plaintiffs’ lawyers.  When failing to make an anticipatory disclosure can prompt a shareholder lawsuit, it is rational for those who prepare corporate disclosure documents to prepare for the worst.  The result is a perverse incentive to create prolix disclosure documents that are designed primarily to anticipate and defend against shareholder lawsuits rather than to provide intelligible and pertinent information to the average investor.

* * *

So what should we do?  Should we jump in with both feet to begin a comprehensive review and overhaul of SEC-imposed disclosure requirements under the securities laws?  Or should we take a more targeted approach, favoring smaller steps towards our ultimate reforming goals?  Ordinarily, I would argue for a comprehensive approach to solving almost any problem in securities regulation, since actions in one area frequently have unforeseen and unintended effects in others.

Where disclosure reform is concerned, though, I would prefer to address discrete issues now rather than risk spending years preparing an offensive so massive that it may never be launched.  I’ve been gratified to see that Chair White, too, has expressed an interest in disclosure reform,[4] so I hope and expect that, under her stewardship, the Commission can make real headway on this important issue.  

Although the Dodd-Frank Act did not mandate disclosure reform, the JOBS Act required the SEC to study Regulation S-K, our fundamental regulation governing non-financial statement corporate disclosure, to determine where its requirements could be updated “to modernize and simplify the registration process and reduce the costs and other burdens associated with” it for emerging growth companies.[5]  The resulting Commission staff report to Congress called for a reevaluation of the Commission’s disclosure requirements “in order to ensure that existing security holders, potential investors and the marketplace are provided with meaningful and … non-duplicative information upon which to base investment and voting decisions, that the information required to be disclosed by reporting companies continues to be material and that the disclosure requirements are flexible enough to adapt to dynamic circumstances.”[6]

The staff report further emphasized that “economic analysis must … inform any reevaluation of disclosure requirements.”[7]  It’s hard to disagree with any of those conclusions.

* * *

So, notwithstanding the approximately sixty – yes, sixty - Dodd-Frank-mandated rules we have yet to complete, it’s my strong belief that it’s time to get started on disclosure reform.  I’d like to share, based in large part on what I’ve heard from market participants, a few examples of some good, practical issues on which the Commission should focus.

One such issue is “layering disclosure” based on the recognition that some information is inherently material, such as a company’s financial statements, while some is not – for example, the pay-ratio calculation required by Dodd-Frank.[8]

Another issue is the need to streamline Form 8-K disclosure.  Does each of the categories of information now required to be disclosed on Form 8-K really require almost immediate disclosure when a change occurs? 

I also believe that we should make a targeted effort to reduce redundancy in filings by providing authoritative guidance explicitly telling issuers where they must disclose and where, by contrast, they need not disclose particular types of information. This would enable those looking for that information, including professional analysts and advisers, to find it or identify its absence easily.

Also in the name of reducing redundancy, it’s high time that we gave priority to streamlining proxy statements and registration statements.  Permitting some of the required financial information to be included in an appendix to the proxy, for example all financial tables other than the summary compensation table, would aid both investors and issuers.  As for registration statements, we could permit forward incorporation by reference in Form S-1 registration statements. That would permit a registrant automatically to incorporate reports filed pursuant to the Exchange Act subsequent to the effectiveness of the registration statement.

We also need to renew our focus on the potential of technology to improve corporate disclosure, acknowledging that our present requirements are almost certainly not those we would have devised for today’s technology-enabled world.[9]  Here, I would be remiss if I did not cite data tagging as an investor-empowering analytic tool for ensuring that information is disclosed and presented in a manner that promotes ease of comparison and analysis.  The SEC’s move to data tagging is an innovation for which Chairman Cox deserves the lion’s share of the credit, and it took vision and persistence, not to mention one heck of a terrific staff.  But make no mistake:  we have not come anywhere close to realizing the potential technology holds for improving our disclosure system.

One small way to further integrate technology into our disclosure regime would be to test a standardized, online disclosure system that requires one-time online disclosure of basic corporate information, mandating that it be updated as necessary with changes tracked, rather than rotely repeated each year in annual disclosure documents.

In addition, we could increase the reliability and authoritativeness of SEC disclosure guidance by issuing significant guidance only with the explicit endorsement of the Commission, rather than as staff guidance.  Guidance issued under a Commission imprimatur would allow registrants to feel more confident in relying on it – especially, I’d note, from a litigation standpoint.

We must also recognize politically-motivated disclosure mandates as the ill-advised anomalies they are and, as an independent, bipartisan agency, express our opposition to the use of the securities disclosure regime to advance policy objectives unrelated to providing investors with information material to investment decisions.  Our new Form SD, adopted to implement a pair of wholly social policy mandates,[10] serves as an example of such policy-driven forays.

These are just examples, and I’m sure that all of you could supplement this short list. 

* * *

But we can’t stop there.  No discussion of disclosure reform would be complete without addressing the issue of corporate governance – and no discussion of corporate governance would be complete without considering the role of the proxy advisory industry.  I have spoken about this issue repeatedly, and I’ve been glad to see that the subject of proxy advisor reform has, over the past twelve months, been the subject of a Congressional hearing, academic articles, media reports, rulemaking petitions and even, I’m especially happy to say, a recent SEC roundtable. 

Proxy advisory firms have gained an outsized role in corporate governance, both in the United States and abroad.  In the United States, I am sorry to say this is largely a result of the unintended consequences of SEC action.  In 2003, the SEC adopted new rules and rule amendments that required an investment adviser exercising voting authority over its clients’ proxies to adopt policies and procedures reasonably designed to ensure that it votes those proxies in the best interests of its clients.[11]  By adopting this rule, the Commission sought to address, among other goals, an investment adviser’s potential conflicts of interest when voting a client’s securities on matters that affected its own interests.  The Commission’s adopting release noted that “an adviser could demonstrate that the vote was not a product of a conflict of interest if it voted client securities, in accordance with a pre-determined policy, based upon the recommendations of an independent third party.”[12]

Proxy advisory firms realized the potential windfall offered by these new rules, and sought guidance from the SEC staff accordingly.  The result was the issuance of two staff no-action letters that effectively blessed the practice of investment advisers rotely voting the recommendations of proxy advisors.[13]  I have spoken frequently and at length about the perceived safe harbor that these letters created and the fiduciary and other concerns they raise, and I have called for prompt Commission action to address the harm they have done.[14]

In a 2010 concept release often called the “proxy plumbing release,” the Commission revisited the question of proxy advisory firms by highlighting several issues, including conflicts of interest and the lack of accuracy and transparency in formulating voting recommendations.[15]  Attention to proxy advisory firms has, since then, increased both in the United States and abroad.[16]    

Last month’s Commission roundtable on the issue brought together a distinguished and diverse group of participants to discuss the role of proxy advisory firms and the services they provide.  Participants included representatives from proxy advisory firms, institutional shareholders, pension funds, investment advisors, legal practitioners and groups representing corporate secretaries and directors.  Among the topics discussed were the influence of proxy advisers on institutional investors, the lack of competition in this market, the lack of transparency in the proxy advisory firms’ vote recommendation process and, significantly, the obvious conflicts of interest when proxy advisory firms provide advisory services to issuers while making voting recommendations to investors.[17]

The feedback we have received confirms that the roundtable was an important first step towards proxy advisory reform.  While not everyone agrees on what the next steps should be, I see a common thread: there is a clear need for reform and sustained SEC attention.  The spirited, in depth discussions that took place at the roundtable and a burgeoning proxy advisory services comment file are evidence enough.[18]  In that vein, I want to take this opportunity to ask each of you to join in thinking about the influence of proxy advisory firms and I encourage you to provide your views to the Commission.  Start by asking yourselves whether the current role of proxy advisory firms and rote reliance on them by institutional investors advances the best interests of shareholders.  I think the answer is obvious, but the Commission can benefit from your views on which reforms would be most impactful.

* * *

In conclusion, I very much hope you will engage vigorously in the conversation regarding reforms to both our corporate disclosure system and the proxy advisory industry.  We need to hear directly from those of you who are daily and directly affected by the status quo.  As helpful as they have been, we don’t need any more concept releases or roundtables.  In both of these priority areas, we have a good idea of the problems and what needs to be done to fix them – and even where to begin, which is often the hardest part of enacting reforms.  There is no reason for further delay.  We have an opportunity to make good, incremental progress in this area.  We should not let a fixation on the perfect put at risk, or even delay getting started making such progress.

I appreciate the opportunity to share these thoughts with you this morning and look forward to your engagement – as well as your questions.

[1]   Louis D. Brandeis, Other People’s Money at 92 (1914).

[2]   Troy A. Paredes, “Blinded by the Light: Information Overload and Its Consequences for Securities Regulation,” 81 Wash. U. L. Q. 417 (2003). Available at: .

[3]   House Rep’t 113-172, Financial Services and General Government Appropriations Bill, 2014, at 71.

[4]   M. J. White, “The Path Forward on Disclosure,” speech to the National Association of Corporate Directors — Leadership Conference 2013 (Oct. 15, 2013). Available at:

[5]   JOBS Act, sec. 108(a).  The SEC Staff’s report was issued on December 20, 2013.  See, “Report on Review of Disclosure Requirements in Regulation S-K” (Dec. 2013) (“S-K Report”), available at

[6]   S-K Report at 93.

[7]   Id. at 94.

[8]   Section 953(b).

[9]   Professor (and former SEC Commissioner) Joe Grundfest and former SEC Director of Corporation Finance Alan Beller made this point in their 2008 paper, “Reinventing the Securities Disclosure Regime: Online Questionnaires as Substitutes for Form-Based Filings,” Rock Center for Corporate Governance, Stanford University, Working Paper Series No. 2 (Aug. 4, 2008). Available at:

[10]   The Commission adopted Form SD (17 CFR 249.448), in conjunction with adopting its rule to implement Section 1502 of the Dodd-Frank Act (“Conflict Minerals”) (Rel. No. 34-67716 (Aug. 22, 2012)). That same day, the Commission also adopted a rule to implement Section 1504 (“Disclosure of Payments by Resource Extraction Issuers”) of that Dodd-Frank Act, to which Form SD would also apply (Rel. No. 34-67717 (Aug. 22, 2012)). Both rules were subsequently challenged in court. The district court upheld the conflict minerals rule; its decision was appealed and argued in the D.C. Circuit on January 7, 2014.  The resource extraction rule was vacated and remanded to the Commission.

[11]   Final Rule: Proxy Voting by Investment Advisers, 68 FR 6585, available at

[12]   Id. Emphasis added.

[13]   See “Investment Advisers Act of 1940—Rule 206(4)-6: Institutional Shareholder Services, Inc.” SEC letter to Mari Anne Pisarri, September 15, 2004, and “Investment Advisers Act of 1940—Rule 206(4)-6: Egan-Jones Proxy Services,” SEC letter to Kent S. Hughes, May 27, 2004,

[14]   See Commissioner Daniel M. Gallagher, “Remarks before the Corporate Directors Forum,” January 29, 2013 available at; See Commissioner Daniel M. Gallagher, “Remarks at 12th European Corporate Governance & Company Law Conference,” May 17, 2013 available at; See Commissioner Daniel M. Gallagher, “Remarks at Society of Corporate Secretaries & Governance Professionals,” July 11, 2013 available at; See Commissioner Daniel M. Gallagher, “Remarks at Georgetown University’s Center for Financial Markets and Policy Event,” October 30, 2013 available at

[15]   See Concept Release on the U.S. Proxy System, July 14, 2010, available at

[16]   See Commissioner Daniel M. Gallagher, “Remarks at Transatlantic Corporate Governance Dialogue Conference: The Realities of Stewardship for Institutional Owners, Activist Investors and Proxy Advisors,” December 3, 2013 available at

[17]   See SEC’s Proxy Advisory Services Roundtable Webpage available at

[18]   See Comments on Proxy Advisory Firm Roundtable available at

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