The Disclosure Paradigm

 

Prof. Adam J. Levitin
Georgetown University Law Center
October 11, 2013



A






Gd
0

CD

 

 

Why Disclosure
Regulation?
1. Enables efficient risk pricing (‘33 Act)
– Informing of particular risks (dolphin-safe labeling)
– Informing of potential risks (risk-factors in prospectus)

2. Enables comparison shopping (TILA, auto safety star ratings)
3. Levels informational asymmetries between buyers and sellers
(lemon laws)
4. Levels playing field among buyers (Reg FD)
5. Enables private monitoring of market (HMDA)
6. Shaming encourages better market behavior (restaurant hygiene)
7. Fosters market confidence and hence depth and liquidity
8. Politically easier than substantive regulation

 Does Disclosure Work?
• Short answer: it depends.
– Scant empirical work on disclosure
efficacy.

• Some obvious successes
– Flammable gas odorization
– Railway crossings
– Williams Act (takeover warning)

• Some obvious failures
– GLBA privacy notices
– WARN Act

 K.I.S.S.
• Efficacy is negatively correlated
with complexity of information
disclosed.
– Amount of data (number of variables)
– Amount of data (number of data
points)
– Format of data (analyzability)
– Timing of disclosure (pre- or posttransaction)

 Australian ATM Fees
• Fees for using ATMs from other
banks (“foreign ATMs”)
– Prior to Mar. 2009, foreign ATM fees
not disclosed at ATM.
• Only disclosed on bank statement up to
one month later.

– As of Mar. 2009, fees must be
disclosed at ATM before transaction.

• Effect?

 Australian ATM Fee Disclosure
80%
70%
Share of ATM Transactions
60%
50%
40%
30%
Foreign ATM fees
must be
disclosed. March
2009.

20%
10%
0%

Home ATM (#)
Home ATM ($)

Foreign ATM (#)
Foreign ATM ($)

 Australian ATM Fee Disclosure
Average ATM Withdrawal (Seasonally Adjusted)

$205
$195

Foreign ATM fees
must be
disclosed. March
2009.

No effect on
$185
Home bank ATM
withdrawal
$175
amounts.
$165
$155
Foreign ATM
$145withdrawal
amounts
increase.
$135

Home ATM

Foreign ATM

 Unit Price per Ounce
$6.23/oz.

$4.98/oz.
$5.97/oz.
$4.54/oz.
$4.45/oz.
$6.29/oz.
$5.31/oz.
$7.56/oz.

 Unit Price Per Ounce
$4.45/oz.
$4.54/oz.
$4.98/oz.
$5.31/oz.
$5.97/oz.
$6.23/oz.
$6.29/oz.
$7.56/oz.

 Consumer vs.
Institutional
• Consumer paradigm may be appropriate for many
institutional investors and issuers.
• Institutional sophistication varies.
– Goldman Sachs vs. muni bond issuer
– Quant hedge fund vs. Landesbank

• No one wants to admit to lack of sophistication.
– But least sophisticated parties are often managing funds
for even less sophisticated entities (non-profits, local gov’t,
individuals)

• Limits on third-party bonding.
– Accuracy of rating agency ratings.
– Ratings not available on all products.

 Adapting the Consumer
Paradigm to Institutions
• Effective disclosure requires
substantive term regulation to
standardize non-negotiated terms.
• Existing standardization requirements.
– Trust Indenture Act mandatory terms.
– Blue Sky Law mandatory terms.

• Proposed standardization requirements.
– Mortgage securitization documentation.

 Is Disclosure Enough
• Disclosure can be improved via standardization.
• But it might not be enough to protected less
sophisticated investors.
– Non-waiveable duties for transactions involving public
funds, non-profits, ERISA-qualified plans (trustee-like
parties).

• Investor protection may require disclosure +
standardization + duties.
• Will any of this matter without better
enforcement?