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Technology Stocks : SDL, Inc. [Nasdaq: SDLI] -- Ignore unavailable to you. Want to Upgrade?

To: N. David Lessani who wrote (2535)	8/10/2000 11:31:10 AM
From: pat mudge	Respond to of 3951

I'm all for equality --- and SDLI's been a leader by filing conference call notes with the SEC --- but here's an interesting analysis of the bill: August 10, 2000 Commentary Outlaw Selective Disclosure? No, the More Information The Better By Kevin A. Hassett. Mr. Hassett is a resident scholar at the American Enterprise Institute and co-author of "Dow 36,000" (Times Books, 1999). The Securities and Exchange Commission is scheduled to vote today on Regulation FD, a proposal to require firms to release information to everyone if they release it to anyone. The intent of Regulation FD is commendable, and consistent with SEC Chairman Arthur Levitt's long track record of championing the cause of the small investor. The impact of the regulation, however, will likely be the opposite of the chairman's intent. The regulation is an apparent response to several recent episodes where executives shared important negative news with a few analysts. These analysts were able to sell the troubled stocks before individual investors had a clue that something was wrong. That stinks. But economists who have studied the issue know that it is very difficult to write a rule that governs communications without undermining the process that helps make the market the most efficient collector and sorter of information on earth. How difficult? Just take a look at some of the likely consequences of Regulation FD. Analysts interact with firms in at least two ways. They participate in conference calls, and they visit firms, kick the tires and cross-examine the executives. Is a firm hiding something ominous about its future prospects? The best analysts shrewdly design questions that ferret out that information. Analysts do this hard work because they (or their firms' clients) will profit if they are a little bit smarter or faster than the next guy. Regulation FD may, if the final version of the regulation looks anything like the proposal distributed for comment, stop the process in its tracks. Under the new rule analysts' material questions may only be answered by firms if the information is promptly shared with everyone. What's "material" mean? Nobody knows for sure, but rest assured, if an analyst is able to profit from the information, then it might well be found to be material. So the rule may create a world where a firm is subject to an enforcement action whenever an analyst is able to make a good call based on information gathered from a visit that is not simulcast on the Internet. A firm's measured response might be to only interact with analysts and other outsiders at large meetings. If firms do that, then analysts will have little incentive to invest the time necessary to devise difficult questions, and a strong incentive to free-ride on the efforts of others attending the meetings. The quality and quantity of information available to the market will plummet. While the regulation is apparently a reaction to anecdotal horror stories, the SEC has not demonstrated that selective disclosure is an important problem. So why the rush to change the rules? One view supported by some securities lawyers is that this is a classic bureaucratic power-grab. Regulation FD could be conceived as an attempt to go around the insider trading standard promulgated by the Supreme Court. The Supreme Court has ruled that it's only illegal for an insider to give an analyst material information if the insider profits from the revelation. If an executive is trying to make personal gain from a "tip," it's a crime. If he answers a question that turns out to be useful investment information, it's not a crime. In one of the key cases, Dirks v. SEC, the Supreme Court revealed why such a standard is so important. The one-on-one interplay is a vital source of information for the markets, and "it is the nature of this type of information, and indeed of markets themselves, that such information cannot be made simultaneously available to all of the corporation's stockholders, or the public generally." A broadly defined Regulation FD neutralizes the "tip" requirement, and potentially hatches countless lawsuits. Firms must make public any material information given to analysts, even if that information is not an illegal tip. If the firm fails to broadly disseminate information that may be material, it has committed a disclosure violation, and the firm can face severe sanctions. If the regulation is passed, firms will face a difficult choice. If they open up their offices and factories to analysts, there will likely be shrewd operators who make money. If that happens, the information egalitarians at the SEC may be offended and start disciplinary action. This will likely start private suits as well. To defend itself, the firm can, as the SEC suggests, require that attorneys attend meetings with analysts and advise executives on a question-by-question basis whether they can answer. Sounds like fun, doesn't it? Alternatively, the firm can choose to stop talking to individual analysts altogether. This is the outcome that the securities industry rightly fears. As Stuart Kaswell of the Securities Industry Association put it, "The playing field will be more level, but it will be empty." Which is not to say that the SEC should just leave the problem alone. About 40% of firms still strictly limit participation in conference calls, a practice that is not defensible. The SEC could go a long way toward addressing Mr. Levitt's concerns by requiring firms to broadcast conference calls live on the Internet. The SEC may also consider prohibiting the disclosure of earnings numbers to any but the broadest of audiences. Conversations, however, are best left to existing laws

To: N. David Lessani who wrote (2535)	8/10/2000 11:41:05 AM
From: pat mudge	Respond to of 3951

Based on this article, one of the key issues is access to conference calls. <<<< August 10, 2000 Commentary Outlaw Selective Disclosure? Yes, Markets Must be Fair. By Robert J. Shiller. Mr. Shiller is a professor of economics at Yale's International Center of Finance and author of "Irrational Exuberance" (Princeton University Press, 2000). Today the Securities and Exchange Commission will hold a hearing on Regulation FD. The proposal would require that when public firms release material information to analysts, they also immediately release the same information to the public. The regulation would prevent analysts' customers from trading on the information before others do, an unfair advantage. The proposed regulation is an excellent idea, and ought to be adopted. Yet it has not been well received by many companies' investor relations officers, who are concerned with yet another SEC regulation they must follow. They say that the regulation may have a chilling effect on the dissemination of information. If the risk of making an error subjects them to potential enforcement actions from the SEC, they might just not be as forthcoming. It's true that the SEC has many regulations and rules that must seem like nuisances. And the complex rules are often frustratingly ambiguous. In the case of Regulation FD, there is fundamental ambiguity as to the definition of "material" information. Reasonable people can certainly differ on what kinds of things help them forecast performance. Indeed, some people question whether there should be any rules against insider trading at all. Is such trading really unfair? Fairness is a slippery concept. You might say that any securities trading is "unfair" whenever one party has more information than another, and yet no one proposes a general law against such trades. It's also true that insider trading could conceivably work toward making market prices more accurately reflect information, and thus be better signals for the allocation of resources. But slippery as the concept of fairness may seem, it certainly requires rules like Regulation FD. The public has inferred a promise that they will have equal access to material information, and we must ensure that this promise is kept. The enormous liquidity and integrity of U.S. financial markets is unsurpassed in the world. Roughly half of all American adults are owners of stocks, directly or indirectly. The high public involvement is testimony to public trust in these markets. This trust is a precious thing that cannot be won back quickly if it is ever lost. It also didn't spring up naturally. The SEC had to be invented, and many details worked out. The SEC is a peculiarly American invention, now widely admired and copied around the world. Its intellectual origins lie in the works of a number of influential thinkers who wanted to see financial markets serve their stated purpose as efficient allocators of capital and as genuine savings vehicles. Notable among these thinkers was Louis Brandeis (later a Supreme Court justice), who, in his 1914 book "Other People's Money," spoke of the central importance of open disclosure of company information to the public. "But the disclosure must be real. And it must be a disclosure to an investor. It will not suffice to require merely the filing of a statement of facts with the Commissioner of Corporations or with a score of other officials, federal and state. That would be almost as ineffective as if the Pure Food Law required a manufacturer merely to deposit with the Department a statement of ingredients, instead of requiring the label to tell the story." Brandeis' influential book was one of the factors that ultimately led, 20 years later, to the establishment of the SEC. In its early years, the SEC sometimes showed hostility towards business. In 1937 Chairman William O. Douglas (who also later became a Supreme Court justice) spoke of "the exploitation and dissipation of capital at the hands of what is known as 'high finance,'" and referred to many business people as "financial termites." But, as years wore on, there arose a sense of cooperation between business and the SEC. Now businesses routinely and voluntarily go beyond its requirements.Most large businesses today are in full compliance with proposed Regulation FD, even before it has been approved. It's important for the SEC's regulations to keep pace with the development of information technology. Part of the motivation for Regulation FD has to do with the advent of the Internet. Web technology has made the Internet conference call possible. Now, hundreds of thousands of people can listen in while analysts have their meeting with firms' officers. Firms can put information immediately up on their Web sites. Firms can electronically file new material information with the SEC, which in turn will put this up on its Edgar database on the Web. It is no longer true that the best way for firms to reach large numbers of investors is through the analysts and their customary communications to investors. The new technology puts us in an entirely different world. While Regulation FD does not specify a particular method of making information immediately known to the public, these Web methods are the logical ones we can expect. With Web technology, we can make new material information known to all investors simultaneously. The new technology shifts the fair dividing line between private and public information.