Regulation FD under attack.
What do people here think of this? I am getting quite annoyed at people trying to weaken this reg already.
Full article at:
fortune.com
Excerpt:
While the self-regulation salvo keeps Congress at bay--at least for now--Wall Street is working its magic on Fair Disclosure. Imposed last October, Reg FD requires that top executives and investor-relations officers release all important, or "material," information--everything from earnings forecasts to big capital investments to research breakthroughs--to all investors at precisely the same time, via press releases, Webcasts, SEC filings, or conference calls open to the public.
That seemingly fair, simple edict caused an earthquake on Wall Street. For years companies leaked inside information to favored analysts in exchange for glowing reports and ratings. (If the analyst didn't play ball, the company would stop the flow of precious tips.) The analysts then passed on the exclusive information to their institutional and other high-roller investors, handing the pros a big edge in trading. The grateful clients repaid the firms with fat commissions.
The biggest mutual funds had their own methods. Those buy-side behemoths own so much stock in certain companies that their analysts could simply demand data denied the little guy. Harvey J. Goldschmid, the former SEC general counsel who helped draft FD, discussed selective disclosure with dozens of companies. "The practice of leaking inside information to analysts was widespread," he says. "Many CEOs and CFOs said that they found the process unsavory or distasteful but felt compelled to do it."
Thanks to FD, analysts who once met one-on-one with the CEO are now told to wait for the conference call. This has naturally outraged Wall Street firms, who feel as if a vital competitive edge has been stolen from them. "The analyst community is in revolt," says John C. Coffee Jr., a professor at Columbia Law School. "Analysts are no longer getting on a platter the information they used to sell to mutual funds."
To some extent, though, Wall Street has a point. The firms contend that information on corporate strategy, the industry environment, and technical details on products--the "softer stuff" that companies used to discuss with analysts but would never put in a press release--is no longer getting to the market. The firms also complain that their analysts can't grill executives with detailed follow-up questions that allow them to fully understand the publicly disclosed data. And investors are paying the price, they say.
Still, Wall Street recognizes that a frontal assault on FD would unleash a PR disaster. So the firms have crafted a subtle strategy to weaken the rule: trying to redefine the "material" information that companies must disclose to everyone. "The securities industry is making a concerted effort to undermine FD," says former SEC chairman Arthur Levitt. "But the rule is so clearly in the public interest that it's very difficult for those who oppose it to be explicit."
Right now the scope of what's considered material could hardly be broader. It's defined as anything that "a reasonable shareholder would find important." For companies, that's just about anything an analyst would want to know too. But the industry wants the SEC to remove the broad blanket and specify a list of issues that can be considered nonmaterial and therefore selectively disclosed.
Broadening that definition, they argue, will quicken the flow of information and thus reduce stock volatility. "It will clear out the cholesterol," says Marc Lackritz, the SIA's president.
The argument, despite powerful opposition from veterans like Levitt, is gaining strength on Capitol Hill. "FD is making managements more conservative in giving out data," grouses Baker, who generally supports the SEC regulation. "We will take a long look at FD." Other lawmakers have expressed similar views.
The danger is that Wall Street's campaign is a Trojan horse. If the lobbying succeeds, and Congress does end up pressuring the SEC to weaken Fair Disclosure, the clubby relationship between analysts and CEOs could be kindled anew. Who's to say that, to buy a favorable recommendation, top executives won't leak truly important information about inventories or other items on the "nonmaterial" list?
Rather, the best course is to leave the broad, vague definition in place. FD will sift the great analysts from the overpaid schmoozers. After all, what's wrong with putting the "search" back in research? |
