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SEC's Levitt Asks Companies to Open Conference Calls
New York, Oct. 18 (Bloomberg) -- Securities and Exchange Commission Chairman Arthur Levitt, stepping up his campaign against selective disclosure, asked companies to let all investors participate in conference calls about important information.
``I appeal to companies, in the spirit of fair play: Make your quarterly conference calls open to everyone, post them on the Internet, invite the press,' Levitt said in the prepared text of a speech he is to deliver tonight to the New York Economic Club.
The point is to give all investors equal access to potentially market-moving information, Levitt said. The commission will consider rules in the next few months ``to close the gap between those in the so-called `know' and the rest of us in the public,' he said.
In another step provide access to more information, the SEC chairman said the commission will issue a preliminary proposal to form a central national stock market that would require electronic links among competing U.S. markets. Such a move would let investors see the best prices to buy or sell shares on any of the markets.
It builds on his request to firms last month to consider creating links among markets for so-called ``limit orders' or customer orders at specified prices. Some brokerages and specialists have expressed concern that Levitt's proposed market links could eventually jeopardize their business.
`Dysfunctional Relationships'
The SEC chairman also criticized what he called a ``web of dysfunctional relationships' among companies, brokerage analysts who follow their performance, and securities firms that rely on their analysts to help get underwriting business.
``In many respects, analysts' employers expect them to act more like promoters and marketers than unbiased and dispassionate analysts,' Levitt said. The SEC chairman urged securities firms to examine their pay practices, and said industry self-regulatory groups should consider ways to make sure investors get more than ``boilerplate disclosure' or ``small-type disclaimers' about the investment banking and advisory relationships between brokerages and the companies their analysts cover.
Levitt also suggested concern about one of the staples of the initial public offering process -- the meetings held in several cities where company officials and their investment bankers explain deliver a detailed message at closed-door meetings to institutional investors.
``We've also all heard about those roadshows where the banker's analysts give investors a select look at an IPO that's not available to ordinary investors,' Levitt said. ``While roadshows obviously serve a valued purpose, they shouldn't be the vehicle for giving a very different look at the company that's not in the prospectus.'
`Disservice to Investors'
Companies ranging from Microsoft Corp. to Wal-Mart Stores Inc. to Exxon Corp. have failed to invite all shareholders to participate in telephone conference calls in recent months in which company officials discussed earnings, investments, and other matters with analysts and institutional investors.
Abercrombie & Fitch Co. drew criticism last week after reports that the company told a Lazard Freres & Co. analyst of sluggish fiscal third-quarter sales five days before the clothing retailer made the forecast public. That announcement sent shares tumbling 19 percent on Wednesday.
Levitt said selective disclosure of information to brokerage analysts is ``a disservice to investors and it undermines the fundamental principle of fairness.'
The new rules the SEC's staff will propose are part of a larger SEC review of insider-trading regulations that began this year. The inquiry comes amid evidence that companies are providing information about profits, production plans, and mergers to analysts before announcing the news to the public.
Practical Limitations
SEC staff will recommend a rule that requires a company to tell the public before, or at the same time, that it notifies analysts and institutional investors of information likely to affect its stock price, officials have said.
Company officials have said there are practical reasons to be considered, including the technical difficulties of inviting an unlimited number of people on a conference call.
Louis Thompson, head of the National Investor-Relations Institute, which represents corporate investor-relations executives, said some changes may be necessary, though the problem shouldn't be blown out of proportion.
``Our capital markets are working pretty darn well,' Thompson said. ``The rules need some tweaking, but I think the self-regulatory organizations should put out more guidance on what companies have to do when they give guidance to analysts.'
In June, PacifiCare Health Systems Inc. shares fell 14 percent after the No. 1 operator of Medicare health-maintenance organizations told selected analysts that second-quarter earnings would fall short of forecasts. A PacifiCare spokesman has said the company stands by its action.
Some companies already have changed their disclosure procedures, including Amazon.com Inc. and Iomega Corp., two companies that broadcast calls over the Internet.
Conagra Policy Change
ConAgra Inc., the second-largest U.S. food company, has let all shareholders listen to executives discussing its financial results, after it was criticized for a March call that included analysts and portfolio managers. ConAgra shares fell 9 percent that day.
After the SEC staff selective-disclosure rules are submitted to the five commissioners, they will decide whether to issue the proposal for public comment. After the comment period, the commissioners would have to decide whether to give final approval to the rule.
In addition to criticizing corporate practices, the chairman also targeted analysts for creating the high-pressure environment that makes companies fear huge stock shifts if they miss estimates.
Levitt said analysts attempt ``to walk the tightrope of fairly assessing a company's performance without upsetting his firm's investment banking relationships.'
Analysts Silenced?
``Our review of the relationship between companies and the analysts who follow them indicates that analysts, all too often, are falling off that tightrope on the side of protecting the business relationship at the cost of fair analysis,' according to the text of Levitt's speech. ``Analysts are a fixture on business pitches and investor roadshows -- doing their bit to market their own firm's underwriting talents and to sell a company's prospects.'
He said analysts who ``go against the grain' may be excluded from conference calls or ``even silenced' by his own firm. ``Is it any wonder that today, a `sell' recommendation from an analyst is as common as a Barbra Streisand concert,' Levitt said, referring to the singer who rarely performs before audiences.
Levitt said he wants securities self-regulatory- organizations to consider whether investors are being told enough about relationships that might exist between an analyst's employer and a company that is being recommended.
Firms should also examine their analyst compensation practices, he said.
``Analysts' compensation is increasingly based on the profitability of their firm's corporate finance division, and their contribution to the deals to which they are assigned,' Levitt said in the text.
Levitt urged international auditing firms to require their affiliates around the world to ``subscribe to the highest possible global standards.' The organizing agreement between affiliated firms and their corporate parents ``must ensure a consistent quality audit on a worldwide basis,' he said.
The chairman also said he asked Jeffrey E. Garten, Dean of Yale University's School of Management, to gather business, academic and accounting leaders to examine whether the current business reporting framework works as the economy has shifted from an industrial economy to one based on services.
Oct/18/1999 18:12
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