New SEC Disclosure Rule May Create 'Black Market' For Information
National Investor Relations Institute Boston Chapter Panel Expects Regulation
FD to Push Stock Volatility Up and PE Ratios Down
BOSTON, Oct. 23 /PRNewswire/ -- The Securities and Exchange Commission's new regulation mandating fair disclosure may spawn a "black market" for information, with stock analysts and institutional investors furtively sharing financial data as a means of circumventing the new law, said a leading Wall Street research manager at a recent panel discussion hosted by the Boston chapter of the National Investor Relations Institute (NIRI).
Regulation FD ("Fair Disclosure"), which the SEC begins enforcing today, is designed to prevent broker-dealers, investment advisors, money managers, hedge funds and other financial professionals from trading securities based on information that has not been disclosed to the general public. The regulation covers the disclosure of so-called material information, such as projected earnings results or the launch of a significant new product, information that would prompt a reasonable investor to buy or sell a stock.
Rick Martin, director of research for Tucker Anthony Capital Markets in Boston, said he believes that the new rule could create a kind of insiders' "black market" - with information as the principal commodity. Instead of relying on the company's public pronouncements, Martin said some securities analysts and professional investors may come to rely upon each other for vital details about a company's expected future results. "There will be situations where information will be whispered among the sell-side and buy-side" as a way to get around these regulations, Martin said.
Martin and other panelists said that the quality of securities analysis had deteriorated in recent years, as more and more analysts relied upon information supplied directly by the companies they followed, particularly in the area of earnings guidance, instead of depending on original research.
"Talking to a person eyeball-to-eyeball is what creates value," said George F. (Gerry) Bennett, Jr. of MFS Investment Management, Inc. in Boston. "We want to hear strategic thinking - where a company is headed, the products they are thinking about. Research is not an accumulation of facts but analyzing those facts."
How will Regulation FD change the dynamics of the securities markets? The NIRI panelists agreed that, by constricting the flow of material information from a company to a selected group of analysts, the new law would require analysts to deliver far more hard-hitting, proactive and original research. "FD will take us back to the old days of getting information from your competitors, your customers and your suppliers," Martin told the NIRI Boston audience. "In general, analysts will have to go back to doing the work they used to do."
Since more provocative, original research increases the potential for divergent views on a company's potential, panelists suggested that Regulation FD also would cause far more price volatility for some stocks, and drive price-to-earnings ratios down. Ultimately, panelists said, companies will need to weigh the risk of disclosure liability against the potential for increased volatility of their stock price.
About the National Investor Relations Institute (NIRI)
The Boston Chapter of the National Investor Relations Institute, www.niriboston.org , is the second largest and one of the oldest chapters of NIRI, a professional association of corporate officers and investor relations consultants responsible for communication among corporate management, the investing public and the financial community. With over 5,000 members in 31 chapters around the country, NIRI sets the highest standards in education designed to advance the practice of investor relations and meeting the growing professional development needs of those engaged in the field.
SOURCE Boston Chapter of the National Investor Relations Institute (NIRI)
CO: National Investor Relations Institute (NIRI)
ST: Massachusetts
IN: FIN
SU:
10/23/2000 16:10 EDT prnewswire.com |
