IN Placebo Ethics, Usha Rodrigues and Mike Stegemoller (“R&S”) show that Section 406 of the Sarbanes-Oxley Act and its implementing rules have failed to generate disclosures that shed enough light on conflicts of interest and related ethical issues involving senior financial executives at publicly traded companies. They suggest two different stories of failure. One is on the part of those making disclosure decisions at public companies, presumably lawyers, who fail to comply with the letter or spirit of the Section 406 rules. The other is on the part of policymakers, particularly at the Securities and Exchange Commission (“SEC”), whose dim articulation of the rules and subsequent failure to enforce enabled such widespread evasion. R&S seem quite troubled by both.

My comments are about these supposed failures and, more generally, the diffusion of securities law compliance norms among publicly traded issuers. I fully agree with R&S that Section 406 has failed to produce much of value. I am less convinced that many thoughtful observers ever expected it to, or that the investing public has somehow been lulled into thinking otherwise.

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