Audited financial statements provide a fundamental investor protection for registered securities offerings. The final rules we are adopting today will expand the circumstances in which issuers of registered debt securities offerings that are guaranteed or collateralized by affiliates may skip the requirement to provide audited financial statements for those affiliates, and instead provide an alternative form of disclosure.[1] Further, these rules reduce the amount of alternative disclosure that companies must provide and give management greater flexibility to determine the content of that disclosure.[2] Finally, the rules let companies provide these reduced disclosures outside of financial statements, such that they will not be subject to the assurances of an auditor.[3] Thus, the final rules will result in less disclosure for investors, and disclosure that is less detailed, less comparable, and less reliable. While I am appreciative of the work of the staff on these rules, I cannot support them.

Today’s rules form part of the Commission’s Disclosure Effectiveness Initiative under which the Commission is reviewing Regulations S-K and S-X for ways to improve the disclosure regime.[4] It makes sense to take a comprehensive look at disclosure requirements and seek ways to improve them for investors and for businesses. But careful scrutiny of successive rulemakings under the umbrella of the initiative reveals there are certain unexamined, unproven, and, in some instances, downright implausible assumptions undergirding these efforts. These assumptions are evident in today’s rulemaking.

As an initial matter, it’s important to note that we have not identified a problem or issue in this market that we seek to address. Indeed, the release provides data showing an increase in registered debt offerings in recent years.[5] As to the specific subset of registered debt offerings affected by these rules, we apparently do not have data on their number or volume. Thus, we cannot make a fair assessment of whether we are wise to expend our time and resources in this area, much less whether we have taken the right approach.

More importantly, today’s release, as with certain other proposals and rules under the Disclosure Effectiveness Initiative,[6] rests on a kind of “regulatory intuition” in two areas. First, it assumes, without evidence or data, that less disclosure and greater reliance on materiality judgments by management will yield better disclosure for investors. In fact, there is evidence of risk associated with relying too heavily on management’s materiality judgments,[7] but we do not weigh, nor even adequately recognize, that risk.

We might at least take comfort that we are on the right track if investors—among the stated beneficiaries of our actions—had asked for, or even supported after the fact, the proposed reduced disclosures and protections. But they have not.[8]

As a number of commenters on this rulemaking observed, we should be chiefly concerned with the views of investors on disclosure.[9] They are, after all, the end users of the information. Nevertheless, we substitute our own judgment about what disclosure is best for investors in place of what they have actually told us they want.[10] For example, at the proposing stage for today’s rule, investors expressed concerns that we were permitting the alternative disclosure that is allowed by these rules in lieu of subsidiary financial statements to occur outside of the financial statement footnotes.[11] Their concern was that such disclosure is not audited. The proposal at least contemplated requiring the alternative disclosure to be made in financial statement footnotes in some subsequent periodic reporting by the parent companies. The final rule, however, abandons this approach, permitting the alternative disclosure to occur outside of the financial statements at the time of registration and in all subsequent periodic reporting, swinging even further in the direction that troubled investors.

The second product of regulatory intuition in the release is the assumption that if we reduce certain disclosures and protections, thereby potentially reducing the attendant costs to issuers, the result will be an increase in the number of registered debt offerings affected by these rules. Again, we have not supported this hypothesis, but rather rely on a broad intuition that reducing burdens on issuers will increase the number of public offerings.[12]

From there we proceed full circle to this implausible assertion: that reduced disclosure will actually result in increased transparency. The release states that “[t]he proposed amendments were intended to benefit investors by… improving transparency in the market to the extent more offerings are registered.” [13] That is a tough case to make, and we have not done so in the release. Moreover, it ignores the effect of these changes on retail investors. Retail investors’ holdings are concentrated in the public markets, and thus transparency for them is largely reduced by these rules changes.

I am concerned that we are not consistently taking a balanced approach to rulemakings under the Disclosure Effectiveness Initiative. It is important to listen to, and carefully balance, the concerns of both registrants and investors when considering regulations that affect them both directly. We also should not rely too heavily on regulatory intuition, but should gather and analyze relevant data, and carefully weigh competing considerations accordingly. These rules, unfortunately, do not adequately consider investor concerns, nor are they sufficiently grounded in economic data and analysis. I therefore respectfully dissent.