Rethinking the Disclosure Paradigm in a World of Complexity

In a prior article, Professor Schwarcz examined the factors that dif-ferentiate Enron’s questionable use of off-balance sheet special purpose entities, (SPEs) from the trillions of dollars of “legitimate” securitization and other structured-finance transactions that use SPEs. The presence of meaningful differences, Professor Schwarcz argued, may inform regula-tory schemes by providing a basis to distinguish which such transactions should be allowed or restricted. In that connection, Professor Schwarcz encountered the dilemma that some structured transactions are so com-plex that disclosure to investors of the company originating the transac-tion is necessarily imperfect—either oversimplifying the transaction, or providing detail and sophistication beyond the level of even most institu-tional investors and securities analysts. In this article, Professor Schwarcz focuses on solutions to this dilemma, arguing that complexity forces a rethinking of the long-held disclosure paradigm of securities law.

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