Last week, the SEC’s Office of the Investor Advocate – which is also known as the “OIAD” – announced that it had delivered this 24-page report to Congress on its objectives for the fiscal year ending September 30, 2026. Priorities include:
1. Investor research and testing on existing and proposed disclosures to retail investors.
2. Informing SEC activities and policy priorities through data collected from nationally representative surveys.
3. Addressing and advocating for the priorities and concerns of retail investors affected by financial fraud, including through the Interagency Securities Council.
4. Private market investments in retirement accounts.
5. China-based variable interest entities listed on U.S. exchanges.
The report describes the Investor Advocate’s disclosure-related objectives as:
Among other things, the Investor Advocate will explore different approaches to making required disclosures more user-friendly and comprehensible to investors, particularly retail investors, while also considering the extent to which this may add to the costs and burdens on issuers and other providers of disclosure. For example, investors may benefit from highlighting or simplifying certain information, streamlining disclosure requirements, and/or reducing or eliminating repetitive disclosures.
A central aspect of this effort will be ongoing engagements by the Investor Advocate with retail investors and other relevant parties to develop a more thorough understanding of how investors use this information and to solicit a range of views on how to improve the effectiveness of the current disclosure system.
I heard a lot of complaints last week at the SEC’s Executive Compensation Roundtable – from both companies and investors – that executive compensation disclosure in particular has become very unwieldly. Hopefully, that means that when the OIAD solicits a range of views, it can find a few folks who can see the benefits of streamlined – and less burdensome – disclosures.
If you’re curious about why this report was delivered, it’s one of two that Exchange Act Section 4(g)(6) requires the Investor Advocate to deliver each year. This one is “forward-looking” for the forthcoming fiscal year. The other – due December 31st – reports on activities for the preceding fiscal year.
The Investor Advocate delivers the Report directly to Congress without any prior review or comment from the Commission, any Commissioner, any other officer or employee of the Commission outside of the OIAD or the Office of Management and Budget. So it doesn’t necessarily reflect the priorities of the Commission.
In addition to considering the impact of streamlined disclosures on investors and companies, the report that the SEC’s Office of the Investor Advocate delivered to Congress says that public-private markets are also a 2026 priority for the OIAD. Specifically:
The Investor Advocate will explore some of the issues surrounding the inclusion of alternative investments – such as private equity and private credit – in retirement savings plans and their implications for retail investors.
That’s a timely endeavor since – as Bloomberg’s Matt Levine has explained, “the new market is public-private.” Here are just a few of the recent developments in this quick-moving space:
– The WSJ reported last week that BlackRock will begin including private investments in its 401(k) target date funds.
– State Street announced back in March that it’s exploring a similar move.
If anyone had unresolved questions on whether the asset managers are prioritizing financial returns over long-term “sustainability” or “ESG” considerations, the fact that they’re hopping on the private equity train should put those doubts to rest.
SquareWell Partners – a Europe-based shareholder advisory boutique for high profile “special situations” – recently published the latest edition of its survey on institutional investors’ views on shareholder activism (available for download).
This year’s survey includes responses from 30+ global investors – representing $35 trillion in assets under management. SquareWell asked how these institutions view activism, what drives their support for activist campaigns, and how boards can engage more effectively to avoid escalation.
Some highlights:
– Most investors (77%) view activism as a useful force for catalyzing change and accountability.
– A key concern (65%) is that activists may oversimplify complex businesses or adopt overly short-term views and cause disruption.
– Board-related activism tied to governance and management change is most supported (71%), while M&A and balance sheet activism receive minimal backing (3%).
– Nearly half of investors are open to engaging before a campaign is public; many also consult peers to gauge broader sentiment.
If you want to stay in the know about shareholder activism – and what your company or clients can do to stay out of the crosshairs – make sure to also check out the “Understanding Activism with John and J.T.” podcast. John and J.T. Ho have been covering all sorts of interesting topics with engaging guests. The episodes are all posted on TheCorporateCounsel.net and DealLawyers.com!
Yesterday, the SEC held its roundtable on executive compensation disclosure requirements. The event was well-attended and featured wide-ranging discussions on the state of executive compensation disclosure today and potential changes that could be made to the SEC’s requirements. Chairman Atkins, Commissioner Peirce and Commissioner Uyeda each delivered opening remarks and Commissioner Crenshaw posted a statement because she was unable to attend in person. These statements touch on many of the issues that were discussed at the roundtable. The statement of Chairman Atkins notes:
The Commission amended Item 402 of Regulation S-K in 1992 to state specifically that “This Item [402] requires clear, concise and understandable disclosure of…compensation…” However, one could say that this well-intentioned, three-decade-old statement has become facetious with the passage of time in light of the lengthy narrative disclosure and numerous tables and charts that appear in today’s proxy statements.
Our rules must be grounded in achieving the Commission’s three-part mission: investor protection, fair, orderly and efficient markets, and capital formation. These rules should be cost-effective for companies to comply with and provide material information to investors in plain English. Most importantly, the information required to be disclosed should be material to the company and understandable to the Supreme Court’s objective reasonable investor. The outcome of our rules is not effective when companies require highly specialized lawyers and compensation consultants to prepare disclosure that the reasonable investor struggles to understand.
Today’s roundtable is one of the first steps in considering whether the current executive compensation disclosure requirements achieve these objectives, and if not, how the rules should be amended. In connection with this process, I previously asked the Commission staff to consider several questions in this area and for the public to provide their views on those questions. Thank you to those who have already submitted comment letters. For others who intend to submit a letter, please do so as soon as possible over the next several weeks, to provide the staff time to consider and incorporate your views into any potential rulemaking proposal.
Commissioner Peirce focused her remarks around the theme of missing the forest for the trees, noting:
Some executive compensation rules seem more responsive to the general public’s curiosity than a genuine investor need for material information. Painstakingly calculated tallies of perks, like rides on the corporate jet, housing allowances for overseas assignments, or car services give us a tiny window into executives’ lives, but do little to fill out an investor’s picture of the company. Lately, our rulemakings have taken a “more is better” approach to executive compensation disclosure. These tack-on rules to the growing alphabet of Item 402 of Reg S-K—we are almost all the way through the alphabet—do not provide new information. Instead, these rules re-package and re-present data that investors mostly already have. Or they add details that are immaterial. Do investors even look at this “new” information? And if they do, are we confident it gives them a rational basis to evaluate a security’s price?
Consider, for example, pay ratio disclosure and pay-versus-performance disclosure. In his statement of dissent on the pay ratio rule, then Commissioner Dan Gallagher noted that it could have been “marginally less useless” if it were limited to U.S. full-time employees. While not a ringing endorsement of the rule or any of its possible permutations, his comment highlights that even with respect to a rule mandated by Congress as this rule was, the Commission retains some latitude to implement it in the best way possible. More recently, pursuant to another Dodd-Frank mandate, the Commission adopted the pay-versus-performance rule. The overarching feedback I hear on the rule is that it is a regulatory “tax” on public companies without a corresponding benefit for investors. Management, and the high-priced consultants and lawyers they hire, spend hours preparing the various narratives, tables, and graphs that produce nothing but yawns of disinterest from investors.
More concerning than the direct costs of producing executive compensation disclosures are the costs that arise from the distortion of corporate behavior in response to executive compensation disclosure mandates. Perhaps a company opts for a compensation scheme that is less effective at aligning incentives because of the way such a scheme will be reflected under SEC disclosure rules that do not necessarily represent economic reality. Or perhaps a company opts not to provide security for its executives because it appears in a laundry list of examples of perks in a 2006 Commission release that incidentally declines to define what a perk is. Now may be time for the Commission to return to a more nuanced approach to personal security disclosure that considers the context in which those measures are provided. Some companies have even gone so far as to eliminate perks altogether while offsetting such “cost-saving” measures with increases to base salaries. Executive compensation disclosure, along with other disclosures, should reflect rather than direct corporate actions.
Commissioner Uyeda focused on a number of SEC rules that have been identified as problematic, as well as concerns with the process in adopting those rules, noting:
Other executive compensation disclosures appear to have dubious purposes. The CEO pay ratio disclosure is one such example. There appears to be little nexus to investor protection concerns. Instead, aspects of the CEO pay ratio rule, and the underlying Dodd-Frank statutory provision, seem to have a “name and shame” motivation. The Commission’s rulebook should not serve to further political agendas. In addition to distracting from the Commission’s primary mission of providing material information with respect to executive compensation, this rule also increases regulatory compliance costs without providing any corresponding investor benefits.
We have received many recent comment letters on executive compensation that are critical of the CEO pay ratio disclosure. One letter noted that the “CEO Pay Ratio does not provide an accurate comparison of pay equity within organizations” as “various industries have different workforce and compensation structures, which prohibit meaningful evaluation.” Another comment letter stated that the CEO pay ratio “does not appear to have played a material role in compensation committee discussions, investor decision-making, or the rapid rate of increase in executive pay relative to that of the wider workforce.” Disclosures that are both costly and complex to produce, while not material to investment or voting decisions, are at odds with good disclosure regulations.
Regarding the adoption of clawback rules, the scope and impacts of the rule may have increased uncertainty. Specifically, market participants indicated that there is a lack of clarity as to what type of accounting errors “need to be analyzed and when boxes need to be checked …” Further, third-party analysis indicated that few companies have analyzed the underlying accounting errors potentially requiring a clawback. As such, the benefit of this framework appears minimal. Perhaps these issues could have been avoided if the Commission, in its haste, had not rushed in 2022 to adopt an unadopted 2015 proposal from the Obama Administration without first updating the economic analysis and engaging with the stakeholders as how to best implement this rule.
Commissioner Crenshaw offered a different perspective, raising some questions for discussion:
Compensation Trends. The Chairman has posed a number of questions in advance of these roundtables. Many focus on how compensation is set today. I’m also interested in hearing about compensation trends. Long-term data on executive compensation can be both decision-useful for shareholders writ large and can help us evaluate potential weaknesses in the market. For example, we’re just starting to realize the data from our pay versus performance rulemaking in 2022. And, the figures on “compensation actually paid” metrics are potentially revealing. The data show that the highest paid CEO in 2024, using compensation actually paid metrics, made over $6.9 billion. The ratio of CEO to median employee pay at S&P 500 companies rose to approximately 192:1, and at the companies of the 100 highest paid CEOs, that ratio is 348:1. Do larger data sets reveal compensation trends or practices that may foretell problems down the road?
Material Information. Looking further into the roundtables, the Chair has posed a number of questions on what information is material to shareholders. Feedback from investors on the materiality of executive compensation disclosures has been consistently strong, from comment files in our rulemakings, to everyday conversations, to testimony in the leadup to the seminal Dodd-Frank legislation.
I nonetheless encourage all shareholders to continue to comment on what is the most decision-useful information in response to the questions posed in connection with this forum. In addition, I hope commenters will discuss how data quality can be improved and made more comparable, for example, potentially by reconciliation of non-GAAP financial measures to comparable GAAP measures. I hope we see shareholder and issuer input alike, which goes not only for the preeminent panelists on the dais today, but also market participants of all stripes. Please use the opportunity to make your voices heard in the comment file.
Additionally, staff (at the behest the Commission) has recently taken steps to limit shareholder engagement with management, in the executive compensation and other contexts, by amending staff guidance on 13D and 13G filings. This may put more pressure on the proxy process. How can we strengthen transparency and the quality of disclosures, both in general and specifically in light of these regulatory changes that tend to discourage shareholder communications?
Cost. The Chairman has also posed questions relating to cost. I would encourage panelists to consider all costs in their comments, and not just those incurred by issuers (which, of course, are ultimately borne by the shareholders). Oftentimes, shareholders expend substantial sums analyzing compensation data disclosed in filings. Are there ways to use technology to lower the costs of the entire ecosystem, without sacrificing the quality of data provided to shareholders – and perhaps even improving data quality?
I participated in Panel 2 of the SEC’s roundtable on executive compensation disclosure requirements, and we had an interesting discussion of how the latest iteration of the executive compensation disclosure rules came to be, how investors use the information, the challenges that issuers face when preparing the disclosures and observations on things that could change.
I focused on the executive compensation rules that were adopted after the 2006 amendments, which I referred to as “the rules that everybody loves to hate.” I mentioned that a consistent theme with many of those Dodd-Frank Act requirements that were adopted by the SEC after an extended period of time is that largely the world had moved on with respect to the issue that the legislative directive was seeking to address, so the Commission had the difficult task of adopting rules against a backdrop of practices that had been in place for some time through private ordering. I note that the one Dodd-Frank Act provision that probably had the most meaningful impact on executive compensation disclosure was Say-on-Pay, because it ushered in sort of a golden age of engagement between companies, not just on executive compensation by also on a wide range of other important governance topics. This engagement inevitably led to more disclosure, as companies have tried to address the many hot button issues that investors are focusing on, and I think that has contributed to much longer executive compensation disclosures that go well beyond just compliance with the SEC rules. So when we talk about the length and complexity of executive compensation disclosures, there is a certain element where even if the SEC disclosure rules were to be revisited to reduce some of the disclosure burdens, that does not necessarily mean that disclosures will automatically become shorter because of the desire to meet investor expectations for transparency. I then discussed the Dodd-Frank Act rules that most frequently came up during the course of the afternoon – CEO pay ratio, pay-versus-performance and clawback – highlighting the key areas of concern with those requirements.
Our panel also focused on a couple of “hot button” executive compensation topics, including perquisites and named executive officers. The treatment of executive security as a perquisite dominated the conversation over the course of the afternoon, and I talked about why the Commission provided the guidance that it did on executive security in the 2006 adopting release. The SEC has a long history of grappling with the question of whether providing executive security arrangements constitute a reportable perquisite under the SEC’s executive compensation disclosure rules. Prior to the 2006 executive compensation disclosure rule changes and the 2006 interpretive guidance, companies would sometimes argue that all security arrangements were necessary benefits provided to executives and not perquisites, bolstered by “security studies” undertaken to support the determination of whether the benefit must be taxed as income to the executive. I noted that the SEC decided to draw a line in the sand in 2006 that the tax outcome does not necessarily have any bearing on the disclosure outcome under Item 402 of Regulation S-K, creating very different outcomes for benefits like personal security and personal use of corporate aircraft.
On the topic of named executive officers, I explained how we got to the current lineup of the CEO, CFO and three highest paid executive officers, and we discussed what should be the lineup of NEOs, including how investors consider the compensation of executive officers other than the CEO – not surprisingly, the investor representatives believe that the information about the other NEOs is important.
My panel and the other two panels were all very interesting and it was great to get the varying perspectives of each of the panelists. The group certainly raised a number of important issues for the Commissioners and the Staff to consider as they decide their next steps (if any) with respect to the executive compensation disclosure rules.
As this recent Mayer Brown Free Writings + Perspectives blog notes, earlier this week the House of Representatives passed seven bills relating to capital formation:
The House passed H.R. 3394, the Fair Investment Opportunities for Professional Experts Act, by a bipartisan vote of 397-12. This bill will expand the “accredited investor” definition under the Securities Act of 1933 (as amended, the “Securities Act”) to include individuals with certain licenses, qualifying education, or job experience.
H.R. 3422, the Promoting Opportunities for Non-Traditional Capital Formation Act, passed the House by a bipartisan vote of 321-87. H.R. 3422 requires the Securities and Exchange Commission’s (“SEC’s”) Advocate for Small Business Capital Formation to provide educational resources and host events that promote capital-raising options for traditionally underrepresented small businesses and businesses in rural areas.
The following remaining five bills each passed unanimously by voice vote, indicating the House’s bipartisan support for capital formation:
– H.R. 1190, the Expanding Access to Capital for Rural Job Creators Act, would amend the Securities Exchange Act of 1934 (as amended, the “Exchange Act”) to require that the SEC’s Advocate for Small Business Capital Formation include rural small businesses among the categories it monitors for capital access challenges.
– H.R. 2225, the Access to Small Business Investor Capital Act, would allow a registered investment company to exclude from the calculation of “acquired fund fees and expenses” those fees and expenses incurred indirectly from investment in a business development company (“BDC”).
– H.R. 3301, the ELEVATE Act of 2025, would amend the Exchange Act to specify that emerging growth companies, or EGCs, would only need to present two years, rather than three years, of audited financial statements in both initial public offerings (“IPOs”) and spin-off transactions. The bill would also allow a spin-off of an EGC to benefit from the two-year financial statement accommodation, which is currently only available during an IPO.
– H.R. 3352, the Helping Angels Lead Our Startups (“HALOS”) Act of 2025, would codify SEC Rule 148 so communications made at certain “demo day” events would not constitute a “general solicitation” under the Securities Act. The bill also defines “angel investor group” and clarifies the types of sponsors and conditions under which issuers may present without triggering offering restrictions.
– H.R. 3381, the Encouraging Public Offerings Act of 2025, if passed, would codify Rule 163B under the Securities Act and allow any issuer (not just EGCs) to communicate with potential investors to determine interest in a securities offering, either before or after the filing of a registration statement (i.e., “test the waters” communications). The bill also codifies the current SEC Staff position regarding confidential submissions and would allow any issuer to submit a confidential draft registration statement to the SEC for review prior to public filing and updates the public filing condition to allow any IPO issuer to file its registration statement publicly 10 days before the effective date of the registration statement.
I am heading to the SEC’s headquarters in Washington, DC today to join an all-star group of panelists for the SEC’s roundtable on executive compensation disclosure. If you are unable to attend this event in person, you can access a live webcast beginning at 1:00 pm Eastern Time today.
Heading to the SEC for this event later today reminds me of one of my all-time favorite stories from my time at the SEC. When the SEC considered amendments to the executive compensation disclosure rules back in 2006, I had the great honor of working on that rulemaking under the direction of then-Corp Fin Director Alan Beller and my wonderful boss and mentor, Paula Dubberly. This rulemaking initiative had generated some significant media interest at the time, because ever-rising executive pay had found its way into the zeitgeist of the mid-2000s, as the U.S. economy struggled following the Dot-Com bust while CEOs and other executives continued to receive what were perceived as outsized pay packages.
When I showed up in the SEC’s auditorium to assist with presenting the proposed rules for consideration by the Commission, I was surprised to see television cameras in the room, which is unusual for Commission open meetings. Alan and Paula also arrived, with Alan wearing an eye patch after suffering a serious eye injury just a few days before the open meeting. We sat down and went about the fairly mundane task of presenting our proposed rule amendments to the Commission, to be followed by the usual give-and-take with the Commissioners (including then-Commissioner Paul Atkins). Unbeknownst to me, the entire proceeding was being broadcast live on C-SPAN, and some alert C-SPAN watcher called my wife to tell her that I was on television. My wife then watched the program with my then five-year-old son John, who was very intrigued to see his dad appearing on television along with his SEC colleagues.
When I arrived home that night, my son met me at the door, visibly excited, and blurted out “Dad, I didn’t know you work with a pirate!” It took me a moment to figure out what he was talking about, but I quickly realized that Alan’s eye patch had given John the false impression that Alan’s profession was something other than Director of the Division of Corporation Finance. Given that my son was in his full “Pirates of the Caribbean” phase and was a huge admirer of Jack Sparrow, I took advantage of my fatherly prerogative to refrain from disabusing him of his notion, allowing me to bask in the glow of his admiration and avoiding the inevitable disappointment associated with explaining to him that I was actually on live television talking about executive compensation disclosure.
Many of the issues that were raised by Chairman Atkins in his statement regarding today’s roundtable certainly ring true for those of us who are involved in the preparation of executive compensation disclosures, as well as the investors who are reviewing those disclosures when making investment and voting decisions. I have always observed that approaching executive compensation disclosure requires a delicate balancing act – while the amounts paid for salaries, bonuses and equity awards are not quantitatively material for most companies, the qualitative materiality is important to consider when an investor is trying to understand how the company is governed, and how the executives are incentivized toward achieving business success. While that qualitative materiality element is important, the risk for information overload is high, given the fact that compensation programs often include numerous elements that can be very complex in some situations.
For my observations on areas that the Commission should consider if it decides to proceed with rulemaking, be sure to check out the upcoming May-June 2025 issue of The Corporate Executive. For the latest on comment letters that have been submitted to the SEC on this topic, check out this recent blog post from Liz on The Advisors’ Blog on CompensationStandards.com.
At this time each year, I selfishly dedicate some blog space to a tribute for my dear friend and mentor Marty Dunn, who passed away five years ago this month. Marty was a distinguished member of this community and a legendary member of the SEC Staff.
I have been thinking a lot about mentorship these days as Liz and I record our podcast series “Mentorship Matters with Dave & Liz,” and today I want to focus on how Marty’s generous mentoring continues on for me to this day, even though he is no longer able to serve as my mentor in the traditional sense. I often find myself asking “What Would Marty Do?” when confronted with a tough question or situation, and then I try to remember how he would approach that question or situation, break down a problem or pursue an opportunity. While I do not always come out on things the same way that Marty would have, stepping back and adopting his analytical approach is often very useful for me when seeking an answer or solution. Asking this simple question also keeps his legacy alive for me, and that is comforting in and of itself.
For example, one of the many things that Marty had mastered during his life was how to entertain and engage an audience. In his many speaking engagements over the years, he was always able to make things both fun and interesting, which audiences appreciated when sitting through a day of otherwise very dry panel presentations. When I was involved with planning the Northwestern Law Securities Regulation Institute that took place in January of this year, we were looking for an interesting and entertaining way of presenting the many issues that practitioners encounter when dealing with executive officers and directors. I of course asked myself “What Would Marty Do?” and recalled a panel that he and I had done way back in 2013, when Marty had conceived of conducting an entire panel in the format of the ESPN show “Pardon the Interruption,” which provided a very fast-paced format for covering a significant amount of substantive material. Fortunately, the panel was so popular back in 2013 that the organizers of the Securities Regulation Institute had distributed a thumb drive with a recording of the panel, so adopting that format for this year’s program was an easy sell once everyone saw how well it had worked in the past. We did the program earlier this year using Marty’s PTI format and it received great reviews, thus confirming my belief that still looking to Marty for inspiration and mentorship provides me with valuable insights, along with an opportunity to maintain our connection.
I am not certain about many things in this world, but one thing that I am certain about is that we will have many things to talk about this year at our “Proxy Disclosure & 22nd Annual Executive Compensation Conferences,” which are taking place on October 21-22 at Virgin Hotels Las Vegas and via a virtual option if you are unable to attend in person.
Here are just a few of the great panels that I am looking forward to on our extraordinary agenda and involving our expert speakers:
– The SEC All-Stars: Proxy Season Insights
– The SEC All-Stars: Executive Pay Nuggets
– E&S: Balancing Risk & Reward in Today’s Environment
– How Activists Think: Understanding Activism Podcast LIVE
– The Proxy Process: Avoiding Surprises — On Time, On Budget & On Value
– Compensation Disclosures You Need to Fix
If you plan to attend in person, be sure to arrive early enough on Monday to attend the Welcome Party + CCRcorp’s 50th Anniversary Celebration, which will take place from 4:00 pm to 7:00 pm PT on October 20. Register today and take advantage of our Early Bird Rate by emailing info@ccrcorp.com or calling 1.800.737.1271.
Kevin LaCroix recently highlighted on The D&O Diary Blog a recent WSJ opinion piece titled “Quarterly Reports are Written for AI” by Hebrew University Business School Professor Keren Bar-Hava, which describes how the use of AI has changed the way analysts review MD&A. Kevin’s blog notes:
Professor Bar-Hava studied 108 MD&A reports from 27 top U.S. firms during the period 2021-24. She found that, by contrast to the earlier studies noted above, in which better-performing companies tended to have simpler, shorter reports, a different pattern has emerged. She found that positive tone has steadily increased, even when financial performance declined. Words like “growth,” “resilient,” “opportunity” have become more common. Terms signaling uncertainty, such as “might” or “could,” have declined.
Even “more strikingly,” she observed, the “most positive reports often came from the worst-performing firms.” Professor Bar-Hava says this is “no coincidence,” it is, rather, “strategy.” Tone, she says, has “become a tool to manage how algorithms ‘feel’ about performance.” It also “creates a risk” – that is, “the growing gap between what’s said and what’s true.”
What is happening, Professor Bar-Hava explains, is that companies are responding to “AI-induced disclosure pressure – the incentive to write in a way that performs well under algorithmic scrutiny.” The result “isn’t always more transparency.” It may be the opposite; the result may be “performative optimism crafted to influence machines, not people.”
Professor Bar-Hava identifies three levels on which the “AI-induced disclosure pressure” operates:
– Exposure pressure. AI flags vague or evasive language. Companies feel compelled to sound confident, even when the outlook is uncertain.
– Competitive pressure. Algorithms benchmark tone across peer firms. If a competitor sounds stronger, you look weak by comparison.
– Reputational pressure. AI feeds analyst dashboards, investor platforms and news summaries. One poorly framed sentence can ripple fast.
Professor Bar-Hava rightly notes the potential implications of these developments for possible liability under the securities laws. She notes that the SEC in the past has issued rules intended to improve narrative disclosure, “encouraging clarity, conciseness, and plain English.” But tone, she says, is “now a powerful drive of perception,” and it remains unregulated. That, she says, is a “blind spot.” AI driven tone scores are “influencing market behavior.” And if markets are being gamed, she says, “investors are misled.”
Professor Bar-Hava suggest that “tone” should be treated as “a material disclosure element.” We should monitor linguistic choices, as we do accounting choices, especially as “algorithms become the first line of interpretation.” Otherwise, we risk “building a world where clarity is polished but meaning is lost.”
The final paragraph of Professor Bar-Hava’s article makes an important point, which is that corporate boards “must understand that they’re writing for two audiences, people and machines.” Machines she says, don’t read between the lines, “they read the lines.” If we care about truth in reporting, “we must care how it sounds, not merely what is says.”
It is a somewhat disturbing thought that we are moving down a path of having AI write our disclosures for analysis by AI. I feel that such a trend could only be welcomed by plaintiffs’ lawyers and SEC Enforcement lawyers. As Kevin notes in his blog, “if a company is using AI to improve the way the company’s MD&A is scored under AI-driven analysis, the board must try to ensure that there is no gap between what’s said and what’s true.”
