Disclosure 2.0: Can Technology Solve Overload, Complexity, and Other Information Failures?

In recent years, securities law scholars have either renewed an old attack on mandatory issuer disclosure or questioned the effectiveness of securities disclosure in the context of modern financial instruments. Some scholars argue that mandatory disclosure rules prove ineffective because investors suffer from “information overload.” Others claim that securities disclosure cannot describe adequately the complexity of modern firms and finance. These academic criticisms of mandatory securities disclosure provide some of the intellectual underpinnings for recent efforts to roll back some mandatory securities disclosure rules, such as the SEC’s Disclosure Effectiveness initiative. This Article questions these critiques of securities disclosure, including their empirical foundations and their validity given the Efficient Markets Hypothesis. It describes how disclosure must grapple with three types of complexity: contractual complexity, which describes the intricate contractual terms or structural features that financial instruments may have; derivative complexity, which describes how certain securities derive their value from other assets or multiple layers of assets; and systemic complexity, which describes how the value and risks of any security may depend not only on underlying assets, but also on changes elsewhere in financial markets. This Article then investigates whether other SEC initiatives to use technology to improve securities disclosure (such as the XBRL rules and loan-level data tagging in securitizations) and more ambitious proposals (such as moving towards real time and interactive disclosure) can help investors navigate these three types of complexity without “overloading” them. The Article concludes that improving more “old-fashioned” disclosure on the purposes for certain securities issuances, the due diligence performed by issuers and intermediaries, and the incentives of those parties might have a far more profound effect on the understanding of investors and the disciplining of issuers and intermediaries than either rollbacks of disclosure regulations or hi-tech disclosure solutions