New Disclosure System Protects Ukraine’s Investors
USAID is funding the establishment of a new electronic disclosure system, including a web-site, to provide real-time access to the documents that public companies are required to file with the Ukrainian Securities and Stock Market State Commission (SSMSC).
What is disclosure? What is the relationship between disclosure and good investor protection? Consider the following quote attributed to Louis Brandeis, U.S. Supreme Court Justice: “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” Brandeis’ statement was made in the context of the Great Depression and the turmoil in global financial markets of the early 1930s before President Roosevelt’s reform programs led to the passing of the Securities Act of 1933, the Securities Exchange Act of 1934, and the creation of the U.S. Securities and Exchange Commission. During those years, financial transparency became the remedy of choice against the fraud and market manipulation that shook the financial markets of the U.S. and contributed to the global crisis of the 1930s.
Why is disclosure such a strong recurring theme? Because it is an effective tool for improving investor protection. Without good disclosure, it is easy to take advantage of minority investors. With any disclosure regime some of the responsibility for protecting the investment is shifted to the investor himself; however, informed self-interest has proven to be quite effective.
The relevance of disclosure hasn’t really changed since the 1930s. The mission of the Ukrainian Securities Commission in the early 21st century is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. As more and more Ukrainian first-time investors turn to the markets to help secure their futures with pensions, pay for homes, and send children to college, the government’s investor protection mission is more compelling than ever.
The world of investing is fascinating and complex, and it can be very fruitful. But unlike the banking world, where deposits are guaranteed by the government, stocks, bonds and other securities can lose value. The best way for investors to protect the money they put into the securities markets is to do research and ask questions.
The laws and rules that govern the securities industry in Ukraine today derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and as long as they hold it. To achieve this, USAID’s Capital Markets Project has helped the Ukrainian Securities Commission develop a system for public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive and accurate information can people make sound investment decisions.
The result of this modern electronic disclosure system is a far more active, efficient and transparent capital market that facilitates capital formation so important to Ukraine’s economy. To ensure that this objective is always being met, USAID’s project continually works with all major
market participants, including pension investors in Ukraine’s securities markets, to listen to their concerns and to learn from their experience in developing a world-class electronic reporting database of disclosure documents.
With good information, the perception of risk in the markets is reduced, as is the cost of capital, and better management of enterprises is encouraged. Disclosure regimes do not appear to be designed for this purpose, but better markets and better disclosure seem to make for better companies. Better-run companies, in turn, contribute to greater economic efficiency and a greater capacity to generate wealth, which benefits the investor and all of society as well.
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