By Lauren | June 22, 2009
My friend Sam was in a foul mood a few days ago. He brought me the annual report published by a respected mutual fund in which his aging mother was heavily invested. “Look at this!” he fumed. “Over two hundred pages long, and it doesn’t say anything useful. Just think how many trees get cut down and pulped to produce CYA reports that go straight into landfills. What a waste!”
I explained to Sam that, in an effort to avoid financial scandals like the infamous one that brought down Enron and the Arthur Anderson accounting firm a few years ago, the federal government has imposed regulations requiring financial firms to make extensive and detailed disclosures. The idea is to provide more information so investors can make better decisions. Sam was unimpressed. “This can’t be what Congress had in mind. Yeah, there’s a lot of data here, but it’s not organized so people can understand it. I could read this report cover to cover and I still wouldn’t know whether Mom’s made a good investment or not.”
Sam had a point. Unfortunately, it can be extremely difficult to summarize complex financial information so that ordinary people can understand it. The people who have to compile these reports have a miserable task. If they don’t include every last scrap of information, they can get in trouble for failure to disclose. On the other hand, if they do include every piece of data that could possibly be relevant, their reports can be too unwieldy to be useful to the investors who receive them.
The answer may be for financial firms to provide hard-copy executive summaries of their annual reports to their investors while posting supporting information online. That approach could provide full disclosure while giving investors a higher-level, understandable look at how their financial interests are being served. But for companies who take compliance seriously (and any smart company does), that approach could be fraught with risk. Congress and the Obama Administration are taking a hard look at how to more effectively regulate the financial services industry. While they’re at it, this would be a great time to revisit the financial disclosure rules. A little rewriting might make it easier for financial firms to provide investors with relevant information that they’ll actually be able to use.