Wednesday, October 27, 2010

Clarity is the Purpose of Disclosure

"Disclosure has come to be a dirty word. Disclosure has become like shrubbery, a dense thicket of words that are a good place to hide tricks and traps. Clarity is about emphasizing the key pieces of information that someone needs to know... I have great faith in the capacity of people to make good financial decisions — when they have good information. No one makes great decisions — consumers or businesses — if the relevant information is hidden from view."  Elizabeth Warren

The quote from Mrs. Warren appeared in an interview with the Chicago Tribune in which she was discussing the Consumer Financial Protection Bureau.

This quote could just as easily have been applied in the world of structured finance.  A product that has become synonymous with opacity.  

Currently, there is a global regulatory effort focused on rewriting the disclosure rules for the structured finance industry.  My firm has responded to each regulator when they have requested public comments.  

The responses use a brown paper bag to demonstrate that "when" information is disclosed is as important as "what" information is disclosed for structured finance investors.  The Brown Paper Bag Challenge highlights the difficulty investors have trying to value a specific security based on out of date information.

The responses use a clear plastic bag to demonstrate the solution to the "when" problem is to provide current information.  The way to accomplish this for structured finance is through observable event based reporting.  If you have ever looked at your credit card account over the Internet, you know that observable event based reporting is the way that all firms handling daily billing and collecting track loan-level information.

There has been significant push back from the structured finance industry on addressing "when" in the new disclosure regulations.  The TYI, LLC response on October 21, 2010 to the SEC discusses the objections raised by the industry.

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