The mantra is: a level playing field for all investors. But the recently approved Securities and Exchange Commission rule that seeks to eliminate selective disclosure may redefine the relationship between companies and the analysts that cover them so that less, not more, information is available.
In fact, a survey conducted by the National Investor Relations Institute just before the SEC's final vote on Regulation FD (for "fair disclosure") showed that 42 percent of the nearly 2,500 companies polled would limit their communication practices with analysts, and 12 percent would limit their practices "significantly."
Regulation FD, approved by a 3 to 1 vote on August 10, requires that any company making an intentional disclosure of material information do so through public disclosure and not on a selective basis. In addition to leveling the playing field, the regulation seeks to end what the SEC believes is an increasingly common tit-for-tat relationship between companies and their analysts in which, in exchange for more-favorable coverage, a corporation will feed certain analysts data not available to the majority of investors. The SEC rule cites only anecdotal evidence of this practice.
The 24-Hour Deadline
That new rule also requires an issuer that unintentionally discloses material nonpublic information to make public disclosure of the same information within 24 hours. Public disclosure is defined as filing a Form 8-K with the SEC, or issuing a press release to a "widely circulated news or wire service" or at a publicly accessible forum, such as a press conference. The SEC will also allow companies to issue a release on a corporate Web site; however, it is not considered a replacement for either of the first two options.
A flood of comments by retail investors was largely supportive, but criticism from the brokerage, analyst, and financial-services sectors, and companies that make their money from confidentially disclosed information, such as rating agencies and the media, played a role in revisions to the final rule. The approved version specifically exempts disclosures made to ratings agencies, the media, customers, and suppliers.
The final rule also makes clear that failure to disclose under the rules will not constitute fraud. And it was amended to apply only to senior executives who regularly deal with the analyst and investor community. Still, the rule isn't sitting well with finance chiefs or analysts, who feel it is largely unenforceable.
"How is the SEC going to enforce these rules?" asks Elliott Rogers, managing director and head of the technology research group at Credit Suisse First Boston, in New York. "It's almost like the military's 'don't ask, don't tell' policy. If I call up Joe Schmoe and he's having a bad day, and I say, 'How are things going?' and he says, 'They could be better,' does he have to issue a public release about that?"
"The rules are what a lot of weak companies are going to hide behind," adds Rogers. "They'll say, 'We aren't going to answer your questions, because we haven't told all the other analysts.' If one analyst asks a good question, should he or she be denied the information because his or her peers didn't think to ask it?"
Richard Lindsay, CFO of Boston Beer Co., in Boston, agrees that the dynamic between analysts and corporations will be affected, and not necessarily for the better.
"It's definitely going to create tension," says Lindsay. "With the analysts, you build up a trust. You talk to them. They get used to your voice patterns. They have the ability to put things in a larger context. Most CFOs are looking at this rule and saying, 'I know what they're talking about here, but how are we going to do it?'"