Last year, the SEC released very ambitious proposals for disclosures on climate-related issues with these soothing words: “Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures.” In the abstract, this message contains a good deal of sense. But in the concrete, the proposition contains some major ambiguities that need resolution to make good on this promise, especially in climate-related cases.

The first question: why would the government need to mandate disclosures of information when private parties, including sophisticated investors, can undertake their own investigations? The advantage of that voluntary system is that it does not require a public official to define exactly what must be done to secure “full and fair disclosure.” Parties who pose hard questions to issuers without getting satisfactory answers are free to go elsewhere. So the correct background assumption is that at best, the securities law should serve as a backup device to private inquiries, not as a first line of defense.

But it would be a mistake to assume that this backup never comes into play. Long before the passage of the Securities and Exchange Acts of 1933 and 1934, the common law had developed rules to deal with fraud, which necessarily had to address both concealment and nondisclosure. The danger of fraud is that it misstates the relative value of key items, especially when the seller makes it appear that his shares have extra value when they don’t. Two bad consequences follow. First, he swindles a buyer who pays $100 for an item worth only $75, and thus bilks his target of $25. Second, that individual imbalance also generates social costs by moving resources from higher- to lower-value uses. Yet the prohibition against fraud can easily be circumvented by stating some facts while omitting others. Whenever there is asymmetric access to information, the ability to conceal, or fail to disclose known facts, can have those same deleterious effects, which is why the SEC mantra of “full and fair disclosure” resonated long before the modern laws were passed.