Archives For disclosure

There must have been a great gnashing of teeth in Chairman Wheeler’s office this morning as the FCC announced that it was pulling the Chairman’s latest modifications to the set-top box proposal from its voting agenda. This is surely but a bump in the road for the Chairman; he will undoubtedly press ever onward in his quest to “fix” a market that is flooded with competition and consumer choice. But, as we stop to take a breath for a moment while this latest FCC adventure is temporarily paused, there is a larger issue worth considering: the lack of transparency at the FCC.

Although the Commission has an unfortunate tradition of non-disclosure surrounding many of its regulatory proposals, the problem has seemingly been exacerbated by Chairman Wheeler’s aggressive agenda and his intransigence in the face of overwhelming and rigorous criticism.

Perhaps nowhere was this attitude more apparent than with his handling of the Open Internet Order, which was plagued with enough process problems to elicit a call for a delay of the Commission’s vote on the initial rules from Democratic Commissioner Rosenworcel, and a strong rebuke from the Chairman of the House Oversight Committee prior to the Commission’s vote on the final rules (which were not disclosed to the public until after the vote).

But the same cavalier dismissal of public and stakeholder input has plagued the Chairman’s beleaguered set-top box proposal, as well.

As Commissioner Pai noted before Congress in March:

The FCC continues to choose opacity over transparency. The decisions we make impact hundreds of millions of Americans and thousands of small businesses. And yet to the public, to Congress, and even to the Commissioners at the FCC, the agency’s work remains a black box.

Take this simple proposition: The public should be able to see what we’re voting on before we vote on it. That’s how Congress works, as you know. Anyone can look up any pending bill right now by going to And that’s how many state commissions work too. But not the FCC.

Exhibit A in Commissioner Pai’s lament was the set-top box proceeding:

Instead, the public gets to see only what the Chairman’s Office deigns to release, so controversial policy proposals can be (and typically are) hidden in a wave of media adulation. That happened just last month when the agency proposed changes to its set-top-box rules but tried to mislead content producers and the public about whether set-top box manufacturers would be permitted to insert their own advertisements into programming streams.

Now, although the Chairman’s initial proposal was eventually released, we have only a fact sheet and an op-ed by Chairman Wheeler on which to judge the purportedly substantial changes embodied in his latest version.

Even Democrats in Congress have recognized the process problems that have plagued this proceeding. As Senator Feinstein (D-CA) urged in a recent letter to Chairman Wheeler:

Given the significance of this proceeding, I ask that you make public the new proposal under consideration by the Commission, so that all interested stakeholders, members of Congress, copyright experts, and others can comment on the potential copyright implications of the new proposal before the Commission votes on it.

And as Senator Heller (R-NV) wrote in a letter to Chairman Wheeler this week:

I believe it is unacceptable that the FCC has not released the text of this proposal before Thursday’s vote. A three-page fact sheet does not provide enough details for Congress to conduct proper oversight of this rulemaking that will significantly impact both consumers and industry…. I encourage you to release the text immediately so that the American public has a full understanding of what is being considered by the Commission….

Of course, this isn’t a new problem at the FCC. In fact, before he supported Chairman Wheeler’s efforts to impose Open Internet rules without sufficient public disclosure, then-Senator Obama decried then-Chairman Martin’s efforts to enact new media ownership rules with insufficient process in 2007:

Repealing the cross ownership rules and retaining the rest of our existing regulations is not a proposal that has been put out for public comment; the proper process for vetting it is not in closed door meetings with lobbyists or in selective leaks to the New York Times.

Although such a proposal may pass the muster of a federal court, Congress and the public have the right to review any specific proposal and decide whether or not it constitutes sound policy. And the Commission has the responsibility to defend any new proposal in public discourse and debate.

And although you won’t find them complaining this time (because this time they want the excessive intervention that the NPRM seems to contemplate), regulatory advocates lamented just exactly this sort of secrecy at the Commission when Chairman Genachowski proposed his media ownership rules in 2012. At that time Free Press angrily wrote:

[T]he Commission still has not made public its actual media ownership order…. Furthermore, it’s disingenuous for the FCC to suggest that its process now is more transparent than the one former Chairman Martin used to adopt similar rules. Genachowski’s FCC has yet to publish any details of its final proposal, offering only vague snippets in press releases… despite the president’s instruction to rulemaking agencies to conduct any significant business in open meetings with opportunities for members of the public to have their voices heard.

As Free Press noted, President Obama did indeed instruct “agencies to conduct any significant business in open meetings with opportunities for members of the public to have their voices heard.” In his Memorandum on Transparency and Open Government, his first executive action, the president urged that:

Public engagement enhances the Government’s effectiveness and improves the quality of its decisions. Knowledge is widely dispersed in society, and public officials benefit from having access to that dispersed knowledge. Executive departments and agencies should offer Americans increased opportunities to participate in policymaking and to provide their Government with the benefits of their collective expertise and information.

The resulting Open Government Directive calls on executive agencies to

take prompt steps to expand access to information by making it available online in open formats. With respect to information, the presumption shall be in favor of openness….

The FCC is not an “executive agency,” and so is not directly subject to the Directive. But the Chairman’s willingness to stray so far from basic principles of transparency is woefully inconsistent with the basic principles of good government and the ideals of heightened transparency claimed by this administration.

Dear Gene and Ken:

I must say that I was totally flabbergasted when I read your recent blog posting on insider trading.  I know that your usual posts on investments, which I often cite to friends, are well-informed and empirically-supported; your work over the years on these topics is important and influential—and rightly so.  Unfortunately, in this post, you have deviated from your usual high quality.  Anyone current on the topic of insider trading will recognize that you have been careless in your selection of anti-insider-trading arguments and that you omitted from your brief note the major part of the argument about insider trading: whether and how much it contributes to market efficiency.  To say this is a strange omission coming from Fama and French would be an understatement.

Your first error is to assume that the insider trading debate is about informed trading only by “top management”.  I suspect that this error may flow from my original argument for using insider trading to compensate for entrepreneurial services in a publicly held company, a matter you do not mention and which I will not pursue here except to note that “entrepreneurial services” does not equate to top management.  Strangely no one seems to notice that most of the celebrated cases on the subject have not involved corporate personnel at all (a printer, a financial analyst, a lawyer and Martha Stewart).

I was more surprised, however, to see you repeating the oldest myth in the whole field, one that even the SEC gave up on as wrong many years ago and which frankly is no longer a part of the respectable debate on this topic: that a trade by an insider “disadvantages” the party on the other side.  (I will let pass the peculiar mistake of relating this by inference to a duty owed to existing shareholders when insiders are selling—how about insider sales to perfect strangers to the corporation?  Is there an inchoate fiduciary duty?).  I challenge you to show me any way in which the anonymous buyer or seller in an exchange transaction is harmed because that transaction just happens to involve an insider on the other side.  In fact, you cannot.  The specialist might be assumed to be vulnerable to losses from insiders’ being in the market, but careful research has shown that even they are totally unconcerned about the presence of insiders (other than as usurpers of their rents, and disclosure laws from the ’33 Act to Regulation FD have ensured that the specialists’ sphere of operation is well-protected) and that this so-called “moral hazard” argument is simply insignificant in the real world

Then you repeat another of the old myths surrounding the topic of insider trading:  that allowing it will create a further managerial moral hazard since it will give an incentive to top managers (who I presume are supposed to be able to manage this mischief without anyone else knowing about it—weird) to produce bad news rather than good news.  There is not, in the entire enormous literature on the topic, one iota of evidence for this statement, although some law professors, who are generally better at making arguments for a legal brief than they are at doing rigorous economics, may still mouth it. True, there could indeed be a small end-period problem with trading on bad news.  But, even if there is, it must be of little significance compared to the benefits to shareholders and other investors of allowing insider trading.  There are many forces, including reputation and market competition, operating to induce managers to produce good news, and there is no limit on the amount of this the market will continue to reward them for.  But there are no incentives other than this highly theoretical one encouraging managers to produce bad news.  A bit too much of this and the manager is ruined, while the possibility of making a gigantic killing to justify some once-in-a-lifetime malfeasance with inside information is all but non-existent.  This would be a very foolish bet for any corporate manager to make, and not surprisingly there is no evidence that they do so.

As for the idea that they will delay disclosure (a special form of the bad news/moral hazard argument), as Harold Demsetz pointed out over 40 years ago, the insider will have every incentive not to delay but to speed up disclosure so he can get the highest rate of return on his transaction.  Again there is not one bit of evidence suggesting that this delay ever occurs in the real world and some very strong evidence (the best is by Lisa Meulbroek) that insider trading of the illegal variety quickly moves stock price in the appropriate direction.

On this point, I can’t help but ask what is your theory of how stock market pricing came to be so efficient?  Surely it is not a result of the SEC and disclosure laws—a joke if it were not all so expensive (on which see, among other things, my son’s Hydraulic Theory of Disclosure article).  The studies that have looked have found a mixed result, at best, and the best of these (starting with Stigler’s in 1964 and Benston’s in 1973) find that the market was just as efficient before the SEC and the ’33 and ’34 Acts as it was after.  Gilson and Kraakman certainly did not supply a satisfactory answer to this question that they addressed many years ago, even though they were trying desperately to prove that something besides insider trading was making the market so efficient.

Obviously this is a much larger topic than I can address here, but I must admit to being most dismayed by your implication that the goal of instantaneous communication of new information to all market participants is a worthy ideal that in some way might be aided by disclosure regulation or a ban on insider trading.  We know very well who was pushing all along for a ban on insider trading: the market professionals who stood next in line for new information if they could just get those pesky insiders out of the picture.  They certainly were not interested in universal, equal access to information, nor was the SEC who aided and abetted them in this project.  Given this well-known history, do you really mean to stand with those rent seekers?

I have greatly admired your work for many years, as you know, and I hope I may have missed something in your short blog post.  But precisely because I admire your work—and because many others do, too—I felt an obligation to respond to your problematic comments on this point.  I look forward to your thoughts in response.

Yours cordially,

Henry Manne