Fair and Fewer Disclosures.
The implications of the U.S. securities and Ex change Commission's enactment of Regulation Fair Disclosure continue to receive mixed reviews. While many of those affected by the rule are finding that it is slowly starting to pay off, others are skeptical that the regulation is producing all of the benefits it was intended to provide.
Regulation Fair Disclosure--commonly known as Reg FD--represents the SEC's first attempt at direct regulation of communications between public companies and investment professionals. Under the regulation, companies are required to disclose profit warnings, earnings reports and any other financial-related information to the public at the same time the information is released to analysts.
Designed to create a level playing field for both large and small investors, Reg FD is now requiring companies to provide all investors with direct guidance about expected future results, in addition to publicly disclosing material information. While the SEC doesn't specifically define materiality in the regulation, the law states that "information is material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision, or if it would have significantly altered the 'total mix' of information made available."
Initial talks about Reg FD were met with opposition. Opponents, including many members of the securities industry, argued that the rule would create a chilling effect that would cause a swing in stock prices, because investors would be left in the dark about information that they were once privy to. Critics also felt the regulation would lead companies to disclose less information to the public.
A recent survey by the National Investor Relations Institute points to slightly different results. According to the survey, 28% of the 577 respondents indicated that they are providing more information to investors as a result of Reg FD. Nearly one-half (48%) are issuing about the same amount of information, while 24% are disseminating less information than before the new rule went into effect last October.
Insurers and analysts have different views on the effects of Reg FD.
Because most companies have already been providing material information prior to Reg FD, insurers are experiencing minimal impact since the rule went into effect.
Nationwide Financial Services, which went public in March 1997, has felt only a slight impact as a result of the regulation. "Being a relatively new public company has allowed us to start with a clean slate in terms of our disclosure policy," said Kevin O'Brien, associate vice president of investor relations.
Since the implementation of Reg FD, Nationwide Financial has made minor alterations to its practices, including the institution of a quiet period three weeks prior to the release of company earnings. In addition, the company is relying on various information vehicles, such as broadcast e-mails and Web-site postings, to release information to the public. "Overall, I think we're putting out the same information, but just in more accessible places," O'Brien said.
Even before talks about Reg FD surfaced, St. Paul Cos. opened up its communication to provide information to the public. However, the rule has affected the company's operations. "We actually give more guidance now than before Regulation FD," said Laura Gagnon, vice president of financial and investor relations. "We include a lot of outlook for factors like loss and expense ratios and premium growth in our press releases. This helps us facilitate maintaining the same level and types of discussions we always had with analysts as far as their assumptions and earnings estimates."
A recent example of Reg FD's impact on St. Paul was the company's issuance of a press release acknowledging its losses as a result of the sinking of the Petrobras oil rig P-36 off the Brazilian coast. "In this incident, we were linked publicly and it would have been reasonable for analysts to believe we would have a significant loss exposure. This is the type of situation where we issue press releases in which we say we didn't have such a loss, because to not have a loss, but people assume you do, is as material as it is to actually to have a loss," Gagnon said.
While insurers say Reg FD is having minimal impact, many analysts are finding that they are receiving less information from companies than before the regulation took effect nearly a year ago.
"There is a concern about the amount of information that companies will give to analysts on an interim basis, so we certainly don't have as much information leading to the quarterly results as we once did," said Alice Cornish, analyst and vice president for Prudential Securities.
While it is too early to say whether it is a good or bad thing, Reg FD has meant less disclosure for analysts, said David Berry, executive vice president and director of research for Keefe, Bruyette & Woods, during an SEC roundtable in April. Because analysts are now prohibited from having conversations with companies on such things as how well the company is doing during a particular quarter, it has contributed to making analysts' jobs more difficult, he said, adding that the opportunity for surprise by companies is greater than it ever was before Reg FD.
Analysts say Reg FD also has affected their daily communications with companies. Many believe that one-on-one conversations, which were once very much part of their daily interactions with companies, have become less valuable information-gathering sessions. "I think Reg FD has made these meetings pretty tense, and in many cases, management is following a script and is reluctant to depart from it," said James Barrett, director of research at Advest. He believes that companies are now more cautious in what they say in one-on-one meetings, because "no one knows where the curbs are in the street and how to proceed." Barrett says he is unaware of any company that is just plowing ahead the way they used to a year ago.
Some insurers agree that communication has become less open. "In the past, you could have a more candid conversation with somebody than you can today," said O'Brien of Nationwide.
Getting the Word Out
Press releases continue to top the list of ways companies are spreading material information. However, the Internet and Web casts are quickly becoming common methods to disseminate Reg FD information.
According to the NIRI study, 84% of companies say they notify investors and the media of upcoming conference calls through news releases, while 75% post notices on their companies' Web sites, and 55% rely on push technology via e-mail alerts to investors. The use of Internet broadcasts to announce earnings information has grown significantly. Prior to the SEC ruling, 60% of companies provided full public access of quarterly earnings results and guidance through conference calls, according to NIRI. Since Reg FD, 80% of companies are now relying on the use of Internet broadcasts.
"The Internet has helped create an explosion in the availability of information. Now, basically anyone with a computer can tap into a Web site and receive information," said George Stansfield, a director in the legal department for Axa. Although foreign issuers are not subject to Reg FD, certain issuers with a significant U.S. presence, such as Axa, are influenced by its practices. A recent example was when Axa held its year-2000 earnings conference call in March, making it accessible not only to financial analysts but also to the public through a simultaneous Internet broadcast and replays of the call made available on the company's Web site for several days thereafter, Stansfield said.
Evaluating Its Effectiveness
"At the end of the day, Reg FD has been a good thing, but it's just changed the rules a bit," O'Brien said. While many would agree that the regulation has opened the doors to equal dissemination of information to investors, analysts and the public, Reg FD continues to come under-criticism by others.
With the fluctuation of the stock market over the past several months, some investors and analysts are blaming Reg FD for the volatility of share pricing in the market. "Prior to FD, companies assisted analysts by giving them very specific direction. Now they have to do more work in terms of really understanding the economics of the busi ness and how different things impact the economics," O'Brien said.
Others disagree, saying the blame lies outside the regulation's guidelines. "I think people are blaming some of the market volatility we've had recently on Reg FD instead of blaming it on the fact that companies and analysts in retrospect, especially for some of the more volatile stocks, may have just overestimated how good things were going," said Ira Malls, senior vice president and director of research for Legg Mason, a Baltimore-based financial services company.
The SEC, which recently conducted a survey to look at Reg FD's possible link to pricing volatility, concluded that the new disclosure policy has not led to an increase in stock-market volatility.
The trial bar is also keeping a close watch on Reg FD. "I think [Reg FD] is a challenging rule, one that has different impacts on different companies," John Huber of Latham & Watkins said in a recent SEC roundtable panel discussion. Small and midsize companies are feeling the greatest effects from the rule, according to a recent survey by the American Bar Association.
One of things Reg FD is likely doing is making due diligence harder, said Barrett. Prior to its implementation, companies used to perform industry checks by talking to suppliers, big customers or competitors, but now analysts are detecting more resistance from other sources in providing this information, he said.
Despite its negative implications, those affected by the rule are also finding some positive results. In addition to providing more forward-looking information, many believe it makes such information more accessible. "The idea behind Reg FD was to level the playing field between institutional and individual investors in terms of access to information," Stansfield said. He believes this has resulted in individual investors having greater direct access to certain types of corporate information than in the past, such as the ability to directly access earnings conference calls and presentations. "What I cannot really judge is the extent to which individual investors have actually tapped into this information," he said.
Despite opposition, most concede that Reg FD has opened the door to fair disclosure.
"I expect that within the next 12 months we will have a better idea of how this is all going to shake out," said Richard Busis, a senior member of Cozen and O'Connor. "I would say that for many companies what the regulation is bringing so far is fair dissemination of less information."
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|Title Annotation:||Regulation Fair Disclosure|
|Comment:||Fair and Fewer Disclosures.(Regulation Fair Disclosure)|
|Date:||Jun 1, 2001|
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