The SEC's decision to lift the confidentiality of correspondence related to disclosure filings is good news for investors.
The Securities and Exchange Commission ought to use the occasion to end the confidential treatment for another matter, namely letters of deficiency, or notices it sends to registered investment advisers after conducting periodic examinations of the money management firms.
The files the SEC plans to open pertain to disclosure filings reviewed by its divisions of corporate finance and investment management. Staff in these divisions comment on improving the disclosure. Such reviews might lead to several rounds of comments from the staff and responses from the filers before the issues are resolved.
Until now, the SEC released the correspondence only in reply to a Freedom of Information Act request.
As the number of FOIA requests has increased, the SEC believes, as stated in its announcement on the issue: "it is appropriate to expand the transparency of the comment process so that this information is available to a broader audience."
The SEC will begin releasing later this year its comment letters and responses related to disclosure filings its selects to review. Filers may request confidentially for part of their response, which the SEC will scrutinize for justification. The public can request confidential portions through FOIA requests.
Now, the SEC ought to re-examine its policy of keeping confidential letters of deficiency. The letters advise money management firms of lack of compliance with SEC regulations, from minor irregularities to serious violations. Unlike the disclosure filings, letters of deficiency aren't subject to release under FOIA. Investors must rely on the willingness of investment advisers to release to them such letters. But there is little incentive to do so when advisers know the SEC itself doesn't release them.
As Pensions & Investments has noted, some 90% of SEC examinations result in deficiency letters, mostly for technical violations, according to the SEC. Some 3% to 4% are referred to the enforcement division, which could result in publicized action. The confidentiality of the letters means a lot of information about money manager violations is underreported. But a surfeit of even technical violations might be revealing to investors doing business or deciding whether to do business with an adviser.
In this era of financial and corporate reform, the SEC should use its opening of disclosure filing correspondence as a precedent for releasing letters of deficiency. Until the SEC lifts the disclosure ban, plan sponsors ought to insist their money managers, and those they are considering for assignments, provide them with the letters.
