Chairman Cox, the Senate, and State Sponsors of Terrorism

At the hearing earlier this week before the Senate Banking Committee, Chairman Cox was also put on the hot seat about the efforts to disclose companies doing business in countries listed by the Department of State as sponsors of terrorism.  We have discussed these efforts on this Blog.  They were not a good idea.

In response to questions from Senator Shelby (R-Al), Chairman Cox noted that the SEC had to "screen out completely any SEC involvement" in "qualitatively assessing" the information.  The company's disclosure should "speak for itself."  As a result, the Agency relied on exactly what the company wrote, providing links to the full text.  For the tool to work, however, human beings had to "go through and search" the filings for the information and provide the links and that "meant it was hard to keep it up currently."  If the information changed in a current report on Form 8-K, "our tool was not capable of pulling that up. It would have to wait until their next annual report.  Because of the premium that the SEC places on full complete, accurate disclosure we thought it was important to get that tool right or not do it at all."

Senator Shelby noted that "it is very important" for the public to know that "we all know" who could be companies "aiding and abetting terrorism." 

The Chairman's answer here was fair enough but it deflected the major failing in the area.  Cox rightfully noted that the SEC had an obligation to keep the information on the web site current and that this placed burdens on the employees of the Agency.  True enough but the problem was more systemic.  The "tool" used to locate the information only examined annual reports.  As a result, it was apparent from the outset that any change in between annual reports would not be picked up.  In other words, it was destined to be out of date. 

But the exchange also illustrates far broader problems with the approach.  Chairman Cox indicated that the staff would have no qualitative involvement in the disclosure.  In other words, the SEC would create a site that listed companies doing business in countries designated as supporting terrorism but would make no qualitative assessment of the type or degree of involvement.  By definition, therefore, there would be companies listed that had only a benign purpose for operating in the country.  Yet inclusion in the site would create the impression that the company was supporting terrorism, at least for anyone who did not read all of the information by following the relevant links.

The SEC should remain qualitatively uninvolved.  But if there is no qualitative component to the information on the site, it will by itself mislead.