The duty of disclosure” s ethical and legal background in U.S. securities law

The duty of disclosure is one of the main pillars of U.S. securities regulation. It is an essential concept of the securities act of 1933 and the Securities Exchange Act of 1934. Disclosure also appears to be also as relevant in the newest securities regulation prompted by financial scandals and the newest financial crisis[1]. Moreover, this duty also finds specific regulation for the specialty of the person, such as in the case of Managers Duty of Disclosure.

Despite the clear relevance which has been given to the duty of disclosure there are important critiques and detractors. This opposition revolves around the idea that the implementation of Disclosure is really a measure which does not contribute to shareholder value. The present chapter explains the concept of Disclosure in U.S. securities in the hopes understanding better its origin, its treatment in the securities legislation and the possible differences it might have with the theory of shareholder value. The same process is to be taken for the notion of shareholder value. By understanding what is currently the notion given to these concepts it will be possible to explain the main discrepancies between these concepts (of course if such was the case)

In order to understand the concept of Disclosure in U.S. securities legislation it is necessary to briefly describe its historical background. Afterwards and explanation on the Fairness and Transparency principles will be developed. These principles have a strong relation with disclosure and their explanation will help us understand better the ethical content of disclosure.

In relation to the concept of shareholder value the explanation of this concept will start with the traditional or classical view of the concept, which identifies shareholder value principally with profit maximization. This section would briefly explain the origin of the term and the past and present economic arguments which endorse it. The analysis of the concept of shareholder value will continue with the critiques that the term has received and and explanation of the alternatives which have been proposed, citing examples of the securities legislation were possible. A special emphasis should be made regarding the alternatives to the classical concept of shareholder value which have emerged after the latest financial and economic crisis.

A. The Concept of Disclosure

The financial crash of 1929 was followed by a series of legislative and governmental responses. The first successful response was the Pecora Hearings, an investigation which sought to understand the main causes of the financial crisis. The investigation was initiated by the Senate banking committee in the U.S. Some of the principal findings of the committee were that they knowingly misled investors as to the desirability of certain securities, engaged in irresponsible behavior and offered privileges to insiders not afforded to ordinary investors[2].

One of the successes of the Committee consisted in revealing the series of abuses that preceded the financial crisis of 1929. The Committee was also successful in revealing the inadequacy of the NYE stock market to conduct the investigation on this matter.[3]

Furthermore, the findings of the Committee were very important from two perspectives. In first place, the hearings highly influenced the subsequent securities acts which were to appear. In second place, the hearings set the grounds to the laissez faire doctrine, a current of though which had dominated the economic activity during the late seventeen century and the early 20 century. Furthermore, and equally as important, the hearings served as a mechanism to inform the public on the operations, the organisms and the persons involved in the crisis. 

Franklin D. Roosevelt was the president in charge of providing a response from the government side to the 1929 financial crisis. In some ways, President Hoover unsuccessful strategy of non intervention set the path for President Roosevelt economic and legal measures of response to the financial and economic crisis.

One of the first issues he addressed was the making of legislation for securities supervision or “Legislation for Federal supervision of traffic in investment securities in interstate commerce.[4]” The purpose or main objective was securities full disclosure[5][6]. This principal objective was strengthened with a regime of civil and criminal responsibility. Surely, these efforts were propitiated by the lost of trust of the public in securities market caused by the financial crisis.

The securities act of 1933 was the first relevant securities legislation in the United States and was elaborated after the financial crisis of 1929 and came into life during the great depression[7]. As William O. and Bates George mention, it is one of the means to endorse the social control over finance[8]. The act was a reaction against abuses and consisted as this text also points out in establishing the duty of full disclosure of the security being offered[9].  The principal objective of the securities legislation is to regulate the initial distribution of securities by issuing to public investors and the goal of the registration is the full disclosure of truthful information regarding the character of the securities offered to the public[10].

As can be extracted from the securities exchange Securities Act of 1934, the main objective continued to be the disclosure of information. In fact the Exchange was considered as the disclosure statue[11].nonetheless, the Securities Exchange act of 1934 differed from the Securities act of 1933 as the securities exchange act of 1934 primarily regulated transactions of securities in the secondary market, that is, sales that take place after a security is initially offered by a company (the issuer)[12].

Moreover the Securities Exchange act also established the Securities Exchange Commission and gave broad powers to this entity[13]. Other reasons for the appearance which can be pointed for the appearance of the Securities Exchange act of 1934 are the many complexities and inadequacies of the Securities Act and the need for an independent administrative body to enforce the federal securities laws, regulate stock market practices, and curb the evils in the stock exchanges themselves[14]. Some of the abuses which the Exchange Act intended to correct were speculation and market manipulation[15]

 The Duty of Disclosure, Fairness and Transparency.

The duty of disclosure had in both securities acts a strong connection with   the need to introduce standards of ethics and the ideas of fairness and transparency[16]. The intention behind fairness and transparency was to be able to ensure the confidence of investors in markets[17]. Of course the problem in using the word “fairness” in securities legislation are the difficulties which appear in trying to provide a proper definition of this concept. A good approximation of fairness consists in identifying the notion with the belief that all investors, big and small, insiders and outsiders, should have equal access to relevant information[18].

A similar but more specific approach to fairness consists in identifying fairness with the notion of transparency. In this case all parties would have access to information relevant to asset valuation, in which case the parties will not have more options. Moreover, the notion of transparency fairness has found the endorsement of some relevant sector of academics and international Organizations. This sector believes transparency, fairness and disclosure increase confidence in investors which also provides the essential liquidity in the market for the markets to work in an efficient way. This line of argument has found space in international regulation[19]. This demonstrates that according to another relevant sector which finds national and international support, transparency and Fairness are principles which can lead to efficient results.

Once an explanation of the concept of disclosure has been explained it will be possible to describe the different arguments relating disclosure and shareholder value. This is a critical issue which is related to the advantages that these measures can really suppose to shareholders. As indicated previously the main objective of the present work consists in analyzing whether the duty of disclosure of managers present in the U.S. securities legislation presents a real interest to shareholder interest.

Both fairness and transparency are relevant manifestations of ethical standards in US securities regulation.

[1] Such is the case of the Dodd Frank Act, in which case there is a specialize legislation in corporate disclosure. See specialized Corporate Disclosure Title XV of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

[2] Introductory comment: A historical Introductory comment: A historical Introduction to the Securities Act of 1933 and the Securities Exchange Act of 1934. Boston College Law School. July 1988.

[3] For a detail explanation of the Pecora Hearings and the role of the Committee see Moss, David, Bolton Cole and Kintgen, Eugene. The Pecora Hearings. Draft. February 13, 2009.

[4] President Roosevelt message to congress March 1933.Ibid. Page 11.

[5]  According to president Roosevelt, the full disclosure would add up to the ancient rule of caveat emptor, the doctrine let the seller beware. Ibid page 12.

[6] An expression which greatly depicts disclosure is a quote by Louis D. Brandeis which was conveniently used by Roosevelt in dealing with the need of disclosure. This expression said that “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants, electric light the most efficient policeman” Source: Brandeis University. Justice Luis D. Brandeis. http://www.brandeis.ed/legacyfund/bio.html.

[7] Moss David, Bolton Cole, Eugene Kintgen “The Pecora Hearings” Draft February 13, 2009

[8] Douglas. William, E. Bates George, The Federal Securities act of 1933 (Last accessed 13/08/2013)

[9] See Landis, James M: the legislative history of the securities act page 37.

[10] Introductory comment: A historical Introductory comment: A historical Introduction to the Securities Act of 1933 and the Securities Exchange Act of 1934.

[11] Taken from Benston, George J. The Required disclosure and the stock market: An evaluation of the securities exchange act of 1934. American Economic Review, Vol. 63, No. 1 (mar., 1973), pp. 132-155. http://www.jstor.or/stable/1803131

[12] Sarkar, Deepa paper prepared for Cornell Law school Clinic. Source (Last accessed 15/08/2013).

[13] The establishment, the functions and the composition of the Securities Exchange Commission can be found in the 4th section of the securities and Exchange act.

[14] Introductory comment: A historical Introductory comment: A historical Introduction to the Securities Act of 1933 and the Securities Exchange Act of 1934. Boston College Law School. July 1988

[15] To understand the reach of market manipulation see W Moore and M. Wiseman Market Manipulation and the exchange act. The University of Chicago Law Review. http/www.jstor.or/stable/1596296.

[16] The principle of transparency in regulation is well explained by the APEC-OECD Regulatory Reform. 2001 According to this work transparency relates to the openness and impartiality of decision making in the design, introduction, administration and enforcement of new or amended regulations. The reform also describes the specific advantages of transparency, an enumeration that serves to understand the relevance of transparency and fairness in disclosure.

The reform considers that transparent and fair regulatory systems are essential to the development of deep and

Liquid capital markets. In second place a system of regulation which is transparent to market participants instills the confidence needed to attract suppliers and users of capital, improves market efficiency and contributes to increased overall economic activity and investment.

Thus according to the OCDE two major contributions of transparency are the improvement of efficient markets and an increase in Public Trust and Confidence. Source:  Promoting Fair and transparent regulation.  Source:

[17] VII. Source: Benston, George J. Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934. . Investor´s Confidence in the Market-Risk and Fairness The American Economic Review, Vol. 63, No. 1 (Mar., 1973) pp 132-155.

[18]Ibid. According to the author the stock market could be considered “fair” if the prices of securities at any point in time are unbiased estimators of their intrinsic values, at least with respect to the financial data which corporations must disclose under the 34 Act. Ibid. page 152.

[19] An example of an international organization which promotes fairness and transparency in securities legislation is the International Organization of Securities Commissions. One of the principal objectives of this organization consists in “ cooperate in developing, implementing and promoting adherence to internationally recognized and consistent standards of regulation, oversight and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks.” One of the specific examples is the issuance of a paper on the objectives and principles of securities Regulation that urged the adoption by all regulators of processes which are consistently applied, comprehensible, transparent to the public, fair and equitable. (Source: Promoting fair and transparent regulation in Securities Markets: A presentation to the APEC_OECD Co-operative initiative on regulation in Securities Markets. Source: )


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