The SEC, Corporate Disclosure, and State Sponsors of Terrorism

We write often enough on this Blog about the need for accurate and complete disclosure. The spate of backdating cases brought in federal court have all revolved around theories of false disclosure.

But we didn't think we would have to write about the Securities and Exchange Commission engaging in its own form of inaccurate disclosure.  On June 25 of this year, the SEC began operating a "web tool" on its site that would identify those companies doing business in countries designated by the State Department as "State Sponsors of Terrorism."  This included Cuba, Iran, North Korea, Sudan, and Syria.  According to one source, the list contained both US and Canadian companies and apparently included such illuminaries as Benetton S.p.A., Four Seasons Hotels Inc., Nokia Corp., Xerox Corp., Unilever PLC, and Reuters Group PLC.

Earlier this week, the site was taken down after sharp criticism, replaced with a note from Chairman Cox.  Chairman Cox noted that the site had attracted over 150,000 hits in its short life, with "Iran was the country most frequently clicked on".   It turns out, however, that the information for the site was taken from annual reports, not other documents filed with the Commission.  As a result, there apparently were instances when the annual report was out of date, causing the information provided by the web tool to be inaccurate.  In other words, the Commission was misinforming the market.  Chairman Cox noted the role of the inaccurate disclosure in the shut down of the site.  

• "Because of the importance the SEC places on complete, accurate, and timely disclosure, we are particularly impressed with the concerns that have been expressed about the tool's inability to access more current data about a company's activities in a terrorist state since the date of their most recent annual report. Since more recent disclosure could include the fact that a company has completely terminated its activities in a country, that information could be material to a complete understanding of the disclosure in the last annual report."

As a result, the Commission plans to "improve the web tool" to meet these concerns.  As an alternative, the staff is "considering whether the use of interactive data tags applied by companies themselves could permit investors, analysts and others to easily discover this disclosure without need of an SEC-provided web tool at all."   

This effort was handled poorly.  It ought to have been apparent from the beginning that any disclosure system relying primarily on annual reports would have gaps and inaccuracies.  It was also an enormous oversight not to provide a mechanism for companies to dispute the findings or characterizations with respect to their activities.  The staff members of the Commission work hard but they do not have a monopoly on accuracy.  Some type of process would have helped protect the integrity of the process.

But mostly, one has to wonder why the Commission is expending its resources on this matter.  The information is already in the public domain, available to any person or organization that wants to examine it and publicize it.  Putting the material together and keeping it current will require resources that ought to be deployed elsewhere.  To the extent the Commission wants to step up activities in the area, do it through the comment process on filings.  The resources could be deployed more effectively, for example, by assigning additional staff to the task of obtaining increased disclosure by companies doing business in these countries and letting the public decide the best way to use the information. 

But none of this really gets to the most significant issue raised by the effort.  We have discussed often on this Blog (and I have discussed in my paper) about the role of the Commission in corporate governance and, in particular, the use of disclosure to alter governance practices.  Corporate governance is at least connected to disclosure.  The terrorism web site goes way beyond this and is unconnected to the Commission's mission of promoting accurate and complete disclosure.  It inserts the Commission directly into social policy and the political thicket, a place that independent agencies usually try to avoid. 

Thus, this Commission, appointed during the Bush Administration, favors a "web tool" that facilitates disclosure related to terrorism.  A Commission appointed in an administration headed by Al Gore might favor a "web tool" that shows the companies that emit the most greenhouse gases.  Other administrations (and the Commissions they appoint) might want web tools that show companies dealing with autocratic governments (Saudi Arabia and China leap to mind) or paying the least amount of taxes.  In other words, there is nothing that limits the "web tools" provided by the Commission to terrorism.  Any social issue or policy will do.   

It is this door that Chairman Cox is opening.  It is unnecessary, a waste of resources and sets a bad precedent.  He ought to keep the door closed.