The Administrative Origins of Mandatory Disclosure

History looms large for securities regulation. For many in the field, the “founding” of the U.S. mandatory disclosure regime in the 1930s carries deep meaning, infusing current actions with legitimacy and purpose.

The familiar origin story is undeniably compelling. The brightest legal minds of their generation were called down from the ivory tower to help FDR rein in the excesses of Wall Street. Inspired by their intellectual mentor Louis Brandeis, they overcame fierce resistance from the securities industry (who opposed regulation) as well as from the corporatist wing of New Deal reformers (who favored a broader economic planning role for the government) to craft a legislative solution that was so well-conceived that it has remained in place essentially unchanged for nearly a century – the Securities Act of 1933.

But there’s just one problem: it’s not actually what happened.

In a new paper, “The Administrative Origins of Mandatory Disclosure,” I present a revisionist history of the origins of mandatory corporate disclosure. Drawing on archival sources and other primary documents, I challenge three core assumptions that underlie standard accounts of SecReg’s “founding” moment.

First, I challenge the view that the drafting and enactment of the statute (the Securities Act of 1933) is the major defining event that established the essential character of the regime. To the contrary, I show, real mandatory disclosure in the 1930s substantially contradicted the regime Congress laid out.

In the statute, Congress provided that issuer’s registration statements would become “effective” automatically 20 days after filing unless the agency commenced a formal action based on a “material” misstatement or omission. Congress had emphasized that, during the 20 day statutory waiting period, the agency would conduct only a “preliminary” and “cursory” review of the registration statements for “obvious” departures and squarely considered and rejected giving the agency discretionary authority to accelerate the effectiveness of amended filings. The fixed 20 day waiting period crystalized in the text was designed to provide certainty, enabling issuers and their underwriters to prepare for the sales on a pre-determined date with a measure of confidence.

This carefully calibrated statutory regime was never implemented. Instead of relying on formal proceedings to police inadequate disclosures as the statute directed, agency staffers responded to virtually all registration statements with “deficiency letters” flagging problems and demanding the company make revisions or withdraw the offering. Instead of conducting a “preliminary review” for “obvious” problems as Congress directed, the agency conducted what it described as a “careful and critical” analysis of every statement it received. Instead of these statements becoming automatically effective after 20 days as the statute envisioned, the vast majority of registration statements were delayed far beyond that timeframe, and the timing in virtually all cases was subject to the unpredictable and varying exercise of agency discretion. Instead of policing only “material” omissions or misstatements in registration statements as Congress had directed, the agency by its own admission used the deficiency letter process to correct non-material errors. And, notwithstanding Congress’ express refusal to give the agency discretionary authority to “accelerate” effectiveness of amended filings, the agency made extensive use of precisely this authority.

Thus, the Securities Act failed to authorize, much less explain, the reality of mandatory disclosure in the 1930s.

Second, I challenge the conventional view that the invention of mandatory disclosure reflected a deliberate rejection of the corporatist model of economic regulation – in which government would partner with big business to plan the economy (as embodied most famously by the National Industrial Recovery Act) – in favor of a “Brandeisian” philosophy of economic regulation – in which the government would maintain an adversarial relationship with business (making rules and suing businesses who violated them), and otherwise let market forces operate.

To the contrary, I show that the adoption of the real mandatory disclosure system (sketched above) was above all an expedient and creative administrative response to a shortfall in administrative capacity. Out of the gate, the agency confronted a tremendous mismatch between the overarching task and the limited resources at its disposal. Abandoning the statutory system and creating the deficiency letter one helped the agency close this capacity shortfall by (among other things) transforming elite private securities professionals (lawyers, accountants, bankers) from adversaries to partners of the regime, enabling the agency to draw upon these private actors’ substantial expertise and manpower in carrying out the mandate.

But the agency’s ingenious pivot also fundamentally transformed the essential character of the regime. Although the statute was thoroughly Brandeisian, the deficiency letter system moved things closer to the corporatist model. Key disclosure and accounting rules were developed in secret as a co-production of agency staff and elite securities professionals, who enjoyed unique access to the machinery of government.  The deficiency letter system gave rise to widespread belief – and occasionally reality – that the government was doing more than merely enforcing disclosure rules, but was affirmatively engaged in economic planning, approving and disapproving of particular corporate issuances on the merits.

Thus, the adoption of the deficiency letter system may have redeemed the mandatory disclosure system, but only by compromising its core philosophy.

Third, I challenge the view that elite lawyers like Landis, Frankfurter, Brandeis, and others who shaped the Securities Act are the regime’s true intellectual founders. To the contrary, understanding the origins of real mandatory disclosure requires looking past these iconic lawyer-intellectuals to the obscure mid-level agency official actually responsible for inventing, implementing, and overseeing the real mandatory disclosure regime – Baldwin Buckner Bane. I provide the first biographical account of this critical overlooked figure. As I show, Bane’s background and intellectual commitments sharply distinguished him from the legal icons ordinarily treated as the founders of the regime. And it is precisely Bane’s unique perspective and position that empowered him to jettison the statutory regime and replace it with the administrative system as he did.

The upshot: contrary to conventional accounts, real mandatory disclosure was more of a derogation of the hyper-elite legal culture of the 1930s than a product of it.

For many securities regulators, lawyers, and scholars, the origins of mandatory disclosure has provided a source of meaning, legitimacy, and professional identity. This paper may invite critical reflection on the weight this narrative has been asked to bear.