Over time, the suite of disclosure documents for securities offerings has grown longer and longer. Prospectuses, prospectus supplements and product supplements for structured notes are no exception.
A variety of factors combine to explain the phenomenon. In no particular order:
- Modern PC technology makes cutting and pasting a breeze.
- Market participants have attempted to keep their documents in line with the most recent guidance (and warnings) from the SEC and FINRA.
- Many market participants are engaged in a bit of a “risk factor arms race.” Many people can feel a bit uneasy if they see a competitor adding a new risk factor that they haven’t yet added.
And last but not least:
- Many market participants are striving to improve their documents. That process often concludes with the addition of new disclosures or explanations.
There are currently pressures in the market that cut in different directions—in some ways, encouraging issuers to use longer disclosure documents; in other ways, to use shorter, more focused disclosure documents.
Let’s look (perhaps a bit unscientifically) at the SEC’s April 2012 sweep letter.1 Of the 14 numbered comments in the letter, 10 seem to tend towards additional disclosures.2 One comment,3 relating to the format of offering documents, could be construed as a request to provide shorter, more tailored, disclosure documents.
In contrast, note the following quote from Richard Ketchum at FINRA’s May 2012 annual conference: “before any complex product is offered to a retail client, your financial adviser should be able to write down on a single page why this investment is in the best interests of your client.”4 Market participants strive to make their documents easily understood by retail investors, and that often means that brevity and simplicity are critical features. And, of course, European market participants are working on preparing forms of “KIIDs,” (“key investors information disclosures”), which are designed to summarize the key terms of retail structured products in a readily digestible size.5
The trick, of course, is ensuring that all material information is conveyed, while helping to ensure that the information provided will actually be useful, easily accessible and read by investors.