Fair Disclosure Regulation May Reduce Wall Street Transparency

Mike Godfrey, Tax-news.com, New York

23 October 2000

As from today the SEC brings into effect a new 'Regulation Fair Disclosure' or Reg FD which attempts to level the playing field between professional market traders and the little guy by restricting the ability of companies to give privileged access to information through one-to-one or conference call briefings about their affairs.

Regulators are hoping that the new rules will create a fairer and more transparent market-place, but it may have the opposite effect by restricting the flow of information that companies feel they can give out.

Reg FD requires US companies to disclose material information such as earnings guidance or warnings to the public at the same time it is released to analysts and large investors. The final version of the rule was passed by the Securities and Exchange Commission in August, though only after an earlier version was considerably watered down. The rule does not apply to company communications with journalists and other outsiders. It also applies only to discussions by senior managers, and non-US companies are exempt.

Companies have been adapting their methods of communicating with the market in anticipation of Reg FD, by broadening the group of people with whom they share information through conference calls, by restricting the scope of meetings between executives and brokers or fund managers and in other ways.

In the past, market professionals could gain access to privileged information through private meetings, often at lunch or dinner, with executives. Even if the information given is theoretically available to the public through press releases, in practice an astute fund manager (yes, there are some) can get a far deeper understanding of a company's circumstances in these sessions. Even a practised executive finds it difficult in personal meetings to keep to the an agreed 'public' script, and tends to give away more than was planned.

Often a lunch-time meeting is arranged by a brokerage between a ceo and his cfo with say a dozen or so top fund managers. The hail of questions is like machine gun fire, and the hapless ceo spends most of the time with his fork in the air, except when he manages a quick mouthful by deflecting a question to the cfo. The temptation to show off and to gain the confidence of investors by answering their questions fully is very strong. Conference calls are less revealing, taking place in an inherently insecure medium.

It is unsurprising that companies are tending to react by cutting back on briefings, fearing the consequences if an unguarded remark over the Zinfandel puts them outside the law. Less contact between executives and investment managers will result in less knowledge, not just about earnings and corporate strategies, but also about executives themselves. Opinions about managers are a key part of the decision process for a major professional investor.

Reg FD is welcomed by some people, but many believe it will have a negative effect on price stability and liquidity.

'We've seen more disclosure of less informative information," said one professional. 'Conference calls have been opened to a wider band of investing public, but I'm also hearing a lot of give-and-take is more scripted and less free flowing.'

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