Analysts, Portfolio Managers Say Volume, Quality of Information Have Fallen Under Regulation FD, AIMR Member Survey Shows.

Business Editors

CHARLOTTESVILLE, Va.--(BUSINESS WIRE)--March 26, 2001

81% Believe It's Easier for Companies to Minimize Investor Communication Now; 71% Believe New Disclosure Rule Has Contributed to

Market Volatility

In a survey released today by the Association for Investment Management and Research, 57% of analysts and portfolio managers say the volume of substantive information released by the public companies they research has decreased since the U.S. Securities and Exchange Commission's Regulation FD ("fair disclosure") took effect in October.

In contrast, only 14% say the volume of substantive information has increased. Not just quantity of information but quality has decreased as well, according to 56% of respondents (versus 15% who say quality has increased).

Many of the investment professionals responding to the survey, which AIMR sent electronically to more than 6,000 of its U.S. members in February, expressed concern that companies can use the new rule as an excuse to provide less information to investors: 81% agreed with the statement, "Now that Regulation FD has gone into effect, companies that want to minimize communication with investors can do so more effectively." On the other hand, only 27% agreed with the opposite statement, "Companies that want to maximize communication with investors can do so more effectively now."

Furthermore, 71% of respondents believe Regulation FD has contributed to market volatility - a lot (25%), some (34%) or a little (12%). Many respondents commented that this increased volatility is due to a lessening of earnings guidance and consequently more earnings surprises.

AIMR Senior Vice President Patricia D. Walters, CFA, who directs professional standards and advocacy for the global association of investment professionals, said, "Clearly, many of our members feel that too many companies are taking an excessively conservative stance and misinterpreting the new regulation to mean that they should have no one-to-one or small-group communication with anyone at all. We don't believe that that is either the intent or the wording of the regulation. Regulation FD only prohibits selective disclosure or private communication of material, non-public information."

Walters emphasized, as well, that the survey results show "there is a real need for a better, more operational definition of materiality, and for companies and investors alike to have a clearer understanding of that definition."

In fact, a significant majority - 84% - of survey respondents agree with the statement, "Now that Reg. FD has taken effect, corporate managements need a clearer understanding of what constitutes 'materiality,'" while more than two-thirds (69%) say the same was true of investment professionals themselves. Three-quarters (77%) agree with the statement, "Now that Reg. FD has taken effect, regulators and the investment industry need to develop a more precise legal definition of materiality."

The survey revealed several additional key issues and trends:

--Sell-side analysts (brokerage firm and investment bank employees who provide earnings estimates and research recommendations to investment managers and investors) generally tended to report more negative experiences with, and feelings about, the effects of Regulation FD than did their counterparts on the buy side (analysts and portfolio managers who work for investment funds, banks and insurance companies and make investment recommendations or decisions for their clients). For example, sell-side respondents were more likely to say that the volume of substantive information had decreased (69% compared to 53% on the buy side) and that overall quality of information had decreased (65% compared to 53%).

--Respondents report substantially more decline in the quality of oral communication (conference calls, in-person meetings, etc.) with the public companies they research than in the quality of written communication (press releases, fact books, public disclosure documents, etc.). Regarding oral communication, almost two-thirds (62%) say candor has deteriorated (compared to just 5% saying it has improved) and more than half (52%) say clarity has deteriorated (versus 9% saying it has improved). However, respondents were more evenly split on their opinions of the quality of written communication. Almost a third (31%) say the frequency of written information from companies has improved (versus 22% who say it has deteriorated), and 27% say timeliness has improved (versus 18% who say it has deteriorated).

--On balance, it appears that investment professionals collectively are doing more of their own fundamental analysis than before: 28% say they are doing more fundamental analysis since Regulation FD, versus only 4% who report doing less. This includes, for example, more review of public documents and filings (31% doing more versus 2% doing less), evaluations of companies' competitors (28% doing more versus 2% doing less), and discussions with their customers (22% doing more versus 5% doing less) and vendors (19% doing more versus 4% doing less).

--Similarly 25% report doing more quantitative analysis (computer-based analysis of publicly available data on a corporation), compared to 3% who say they are doing less.

"Fundamental analysis is an indispensable part of investment decision-making," Walters explained, "and has been a cornerstone of our Chartered Financial Analyst(R) curriculum and examination program since its inception. AIMR works hard to improve the quality and quantity of corporate financial reporting information available in annual reports and other public disclosure documents, so that more and better information is available as inputs to that analysis. So we obviously believe an increase in the use of fundamental analysis in forming investment recommendations can only be a good thing for investors.

"On the other hand," Walters noted, "good recommendations require information availability. If the total information flow to the market has decreased, as survey respondents believe, then additional fundamental analysis may not be sufficient to overcome that decrease and the quality of recommendations may also decrease."

Indeed, the reported increase in fundamental and quantitative analysis doesn't appear to be substantial enough to compensate for the perceived reduction in volume and quality of information, at least as far as earnings forecasts are concerned: 43% of investment professionals (52% of sell-side respondents and 39% of buy-side respondents) say their confidence in the accuracy of their own corporate earnings forecasts has declined, versus only 4% (1% sell side and 5% buy side) who say their confidence has increased.

Many of the survey respondents commented that they felt that reduced information flow was fueling more rumors and speculation about what might "really" being going on behind the scenes at some companies where communication is the most minimal.

Companies can "hide behind (Regulation FD) when their fundamentals are deteriorating," one respondent commented. "In the past, company management could send signals indicating trends likely to impact results," another wrote. "Now there are complete surprises, which result in more short term volatility."

AIMR Member Survey: Effects of Reg FD

"Lack of information has resulted in more surprise announcements of revisions," another said. "That increases the risk perception of the entire market, thereby driving down valuations."

AIMR, a non-profit professional organization with 49,000 members in 97 countries, sent the survey electronically in early February to more than 6,000 of its U.S. members who are equity analysts, fixed-income analysts, credit analysts and portfolio managers. AIMR received 423 useable responses - a 7% response rate. Of these, 316 (75%) identified themselves as buy-side professionals and 107 (25%) called themselves sell-side professionals. The survey has a margin of error of plus or minus five percentage points, at a 95% confidence level.

The survey was timed to the end of the fourth-quarter 2000 earnings-announcement cycle. The 2000 fourth quarter was the first earnings period during which Regulation FD was in effect.

Last year, AIMR opposed the rule then being proposed by the U.S. Securities and Exchange Commission that would prohibit companies from disclosing in private or small-group settings any material information not previously disclosed. AIMR argued that, although well intentioned, Regulation FD would inadvertently have the opposite of the intended effect because corporations would curtail the information flow to the market to avoid having to decide "on the spot" whether certain information would be deemed to be material by the SEC after the fact.

A copy of the survey data, as well as AIMR comment letters on the original rule proposal, are available at AIMR's Web site, http://www.aimr.org .

Headquartered in Charlottesville, Va., with a regional office in Hong Kong, the Association for Investment Management and Research is internationally renowned for its rigorous Chartered Financial AnalystTM (CFA(R)) curriculum and examination program, which has more than 86,000 candidates from 143 nations enrolled for the June 2001 exams. In addition, AIMR is internationally recognized for its investment performance standards, which investment firms use to document and report investment results, as well as for its Code of Ethics and Standards of Professional Conduct. More information is available by calling 800-247-8132 or 804/951-5499 or visiting http://www.aimr.org.