The Audience for Corporate Disclosure

The Securities and Exchange Commission ("SEC") faces significant questions in its ongoing review of the scope and purpose of its disclosure requirements. Perhaps the most fundamental question is who should be the intended audience for the disclosures the securities laws mandate? Should regulators design disclosure requirements to inform and protect "ordinary" retail investors, to aid sophisticated professionals, or strike a balance between the two? Answering these questions correctly has grown more urgent as technological developments have driven an ever-widening wedge between the needs and capabilities of sophisticated and ordinary investors. Where once the same disclosure document might have adequately served both potential audiences, now a disclosure document designed for ordinary investors will be woefully inadequate for professionals, imperiling accurate securities pricing. This Article draws on an investigation of the economics and mechanics of securities markets to argue that these markets will become fairer and more efficient if regulators design disclosure requirements to minimize the costs sophisticated professionals face. Not only are ordinary investors ill-equipped to make use of corporate disclosures, it is unnecessary for them to do so. In an efficient market, ordinary investors can safely and fairly participate in the market-and earn a market return-simply by investing in a diversified portfolio of securities. As a result, disclosure requirements that maximize market efficiency by facilitating valuation by sophisticated information traders will necessarily protect ordinary investors in the process. Therefore, the sophisticated investor is the proper audience for disclosures. Focusing on the appropriate audience should guide the SEC's ongoing Disclosure Effectiveness Initiative in five ways: (1) reducing efforts to encourage "plain English" in disclosure documents; (2) expanding disclosure of the forward-looking information that is central to valuation; (3) moving more completely to standardized machine-readable formats and content; (4) rejecting simultaneous dissemination of information as an independent disclosure goal; and (5) requiring fine-grained disclosure of "pure information" in place of intermediary depictions of reality. Finally, courts should redefine "reasonable investor" to focus the term on sophisticated information traders, as they are the primary) guarantors of accurate market prices.