SEC Rulemaking: Transparency Is Not Enough

Part Two of Two Parts

The TakeAway: Dodd-Frank Provision Reduces SEC Accountability, While Digital Tools Can Transform Transparency into Action

Yesterday, as we were writing optimistically about the new SEC transparency and outreach initiatives, a showdown was brewing. The issue:   the SEC and Fox Business News were sparring over provisions in Section 9291 of the Dodd-Frank Act that exempts the SEC from complying with Freedom of Information Act (FOIA) requests.  Fox, whose FOIA requests for information on the Bernie Madoff scandal were rejected by the SEC based on the new provisions, cites lawyers’ claims that the “provision covers almost every action by the agency.”  However, the Washington Post reported that the Dodd-Frank restrictions apply only in investigations of wrongdoing, and that FOIA applies to other SEC information, including communications with Congress and the business community.  SEC Spokesperson John Nester explained that organizations under investigation “insist on confidential treatment of their documents, [so] this new provision also removes an opportunity for brokers, investment advisers and other registrants to refuse to cooperate with our examination document requests.”

As the SEC positions itself to write controversial rules affecting corporate governance – particularly rules affecting shareholders’ ability to nominate candidates to director boards (“proxy access”), as well as have an advisory vote on executive compensation (“Say-on-Pay”) – the question of transparency will come up again, especially because legions of lobbyists are lining up to push for rules that favor their corporate clients.

Why should we be concerned?  Isn’t a commitment to transparency enough?

We should be concerned because even the paltry shareholder power authorized by Dodd-Frank threatens the status quo, which has worked quite well for entrenched corporate interests.  If shareholders can nominate candidates – a long-sought goal for corporate governance reform advocates – then the prevailing power balance will be altered.  Transparency in the rulemaking process will help thwart the ability of special interests to skew decision making in their favor.

At least, that’s the way the theory goes.

In practice, however, transparency is not enough.  Transparency, like sunshine, is a state of being.  As Harvard expert Archon Fung and colleagues argue in Full Disclosure: The Perils and Promise of Transparency, the primary value of transparency lies in what you do with what’s being revealed, and whether or not it leads to improved decision making: a “transparency action cycle.”

For the SEC rulemaking process to work effectively, not only must it be transparent; it also must promote a process of engagement that assures end users (e.g., shareholders and taxpayers) are able to make better decisions.

The SEC’s latest disclosure reforms, as well as its rulemaking, are in response to attempts to game the system.  They are aimed at reducing hidden risk and improving corporate governance.  But for them to work, they must reflect the interests of the public, not lobbyists and corporate interests.   For these rules to take effect in 2011, they need to be written in August or September.

Perhaps the time has come for a broader citizens’ movement – another form of “citizens united” – armed with Web 2.0 tools to help make our capitalist system work on behalf of the beneficial owners – and the wider public – it was intended to serve.  There are several existing options:

  • The newly-launched Beta version of the Federal Register was launched on Monday, the 75th anniversary of the Federal Register Act.  According to the National Archives press release, the FR 2.0 Beta website features improved navigation and search tools, and takes advantage of social media;
  •, which was launched in 2003 as part of the “eRulemaking” program, enables the public to comment directly to nearly 300 Federal agencies;
  • A dedicated page on the SEC website for making and viewing comments specific to Dodd-Frank;
  • Other platforms, such as one provided by, that can aggregate and submit views of individuals.

Other digital platforms and tools for increasing investor and taxpayer engagement have yet to be developed.  We at the Murninghan Post will continue to monitor these issues and innovations, and plan to launch a Wiki aimed at strengthening corporate accountability and sustainability.  Not exactly the shot heard ‘round the world, but a decent start.  We think the Founding Fathers would approve.

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