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The SEC's new rule on fair disclosure has been widely supported in principle. But working out the mechanics of compliance is creating headaches and uncertainty for many companies.

As the calendar goes, the Securities and Exchange Commission's Regulation FD (for "fair disclosure") is very new, having been officially implemented late last October. But to hear the SEC tell it, the practices it addresses -- selective disclosure of important information by corporate executives to favored analysts and institutional investors -- have been going on for a very long time.

It's not hard to see why the SEC thinks this rule, also known as the rule on Selective Disclosure and Insider Trading, is a good idea. During the comment stage in spring and summer of 2000, the agency received more than 6,000 letters, most of them from individual investors who saw the rule as a vital step towards long-overdue equality with big institutional investors and fund managers.

Indeed, Stephen Cutler, the SEC's Deputy Director of Enforcement, tells stories that suggest that any small investor who's not paranoid about selective disclosure must he crazy.

"In June of this year, the CFO of a called analysts in seriatim fashion to discuss negative information," Cutler says. "After he called the first analyst, that analyst advised his trading desk and best clients that he didn't expect the firm to meet its earnings target. By the time the CEO had called the third analyst on his list, the company had lost 6 points. By the end of the day, it lost half of its value. But the company never issued a press release."

That's just for starters. Cutler goes on to talk about a company that, in October 1999, alerted analysts to a slowdown in sales. The analysts put the word out to their sales forces. Top clients got the first calls, of course, and the stock dropped 8 points in a little over a day. The company waited almost a week before telling the rest of the world that its sales weren't going to meet the market's expectations, and the stock fell an additional 19 percent on that news.

And then there's the one about the CEO who got confidential at a cushy conference where institutional investors nibbled lobster salad and foie gras. "He shared with attendees information about diminishing inventories and increasing market share," Cutler relates. "Before the day was over, the company s stock had risen 37 percent." The company didn't bother to issue a press release about the news.

Cutler says he has "dozens" of similar examples. Such selective disclosure of information to privileged market professionals unquestionably puts John Q. Public at a disadvantage in the trading and investing game. But until October, the SEC couldn't do much to combat it.

In fact, in a 1983 decision known as Dirks v. SEC, the U.S. Supreme Court had all but enshrined selective disclosure, writing that "such information cannot be made simultaneously available to all of the corporation's stockholders or the public generally." The effect of this decision was to immunize corporate tippers from prosecution under insider trading rules unless the SEC could prove they'd breached corporate policy by disclosing information to analysts. "It was terribly difficult for anyone to show that this kind of conduct wasn't happening pursuant to a corporate policy," Cutler explains.

That's why the SEC issued Regulation FD, which gives Cutler's enforcement crew the weapon it needs to go after corporate tipsters by requiring that any material information intentionally disclosed to analysts or shareholders must be simultaneously disclosed to the public. If a corporate official happens to inadvertently blurt out some material information in a meeting with an analyst, for example, the company has 24 hours to inform the rest of the investing public.

It's hard to argue with the intent of FD, and very few people do. The devil is in the details.

Alan M. Bennett, vice president and controller of Aetna Inc., says, "I think that overall it's probably a good thing. But it's going to take some time to sort out implementation of the rules. How do we have dialogues with analysts who follow our stock and stay in compliance? How do we talk about what the company's plans are with respect to future earnings? Those are the key issues. For now, we are not having one-on-one analyst meetings. Generally, we would have had analyst meetings to talk about next year, but we're not going to do that until we can figure out how to do it."

Michael Rosenbaum, president of the Financial Relations Board, a Chicago-based investor relations firm, says that companies are getting contradictory information from their attorneys. "A number of companies have been advised not to say anything to anyone about anything because nobody wants to be the poster child for bad disclosure. But other attorneys are encouraging clients to be fully open to the investment community and continue to have analyst meetings -- but to make sure they have disclosed everything in a release before the meeting."

No wonder a survey conducted in September by FEI, the Business Roundtable and the American Society of Corporate Secretaries found puzzling variations in how companies planned to live with FD. Almost a quarter of respondents said that the rule would result in their releasing less information to the market. (For more on the results, click on the survey link on FEI's Web site,

Jim Davis, senior vice president and chief financial officer of Tulsa-based Parker Drilling Co., says compliance with FD may expose companies to other legal risks. "If you put out a forecast, whether in a press release or Webcast or whatever, if you don't caveat every statement you make, you run the risk that some enterprising shareholder or attorney is going to compare actual results with forecasted results and sue you if actual doesn't meet forecast," Davis explains.

"So the process in years past has been that companies talked to analysts in order to enable them to come up with forecasts, and when the forecast turns out to be wrong, the company can rightly say it was the analyst's forecast, not the company's. This provided a necessary legal shield, while giving the company an avenue to disseminate information." Now, Davis says, "We have become more guarded about the answers we give on the telephone to analysts and investors and have, on many occasions, said we can't answer a question because of Regulation FD. While we haven't been to speak at any investor conferences since the implementation of FD, I think we will revamp our presentations, and we'll be far more guarded in the way we answer questions during the Q&A part."

By contrast, at The New York Times Co., corporate communications vice president Catherine Mathis says that FD "won't entail significant changes on our part." The New York Times, like other companies in its industry, issues a monthly news release discussing its advertising revenues. Now, in the wake of Reg FD, those releases will include a statement about earnings for the year.

"The second alteration is that we'll begin to Webcast our conference calls," Mathis explains, "In the past when we'd have an earnings conference call, any shareholder was invited to participate, but now we will Webcast the call and put out a release about when it will be held and how to access it. We'll continue to have conversations and one-on-one meetings with analysts, but we will not comment on any earnings estimate. Where before we might have said we continue to be comfortable with earnings estimates, we won't say that now. We'll make a statement once a month in the ad revenue release, but beyond that we won't comment."

At the other end of the spectrum is a controller and FEI member who spoke very reluctantly and repeatedly asked for assurance that he would not be identified. "We have not disclosed information selectively in the past and don't intend to do so in the future," he said. "One thing we have done is set up a review panel of experts from finance, legal and investor relations areas to look at information before it is taken to an analyst meeting and make sure that any information taken to any group falls within our guidelines.

"Our approach is to educate people in the organization to be careful in what they say and disclose. This is no different from our policy before. But don't quote me. At some point, an enforcement action will be taken against someone, and that will set the tone of how this plays out."

For his part, the SEC's Cutler emphasizes that enforcement of the new rule will be handled cautiously. "We're mindful of concerns about the potential of the rule to chill legitimate communications between issuers and analysts. Categorically, we're not looking for marginal cases. You have to have acted recklessly to violate the rule -- i.e., an extreme departure from a standard of ordinary care. We'll take that seriously."

Gregory J. Millman is a New Jersey-based business writer and frequent contributor to Financial Executive.

EMC: Unabashed Enthusiasm

Polly Pearson, vice president for global investment relations at EMC Corp., has an unconventional view of Regulation FD: She's an unabashed fan. "I think it's great! It's the way professional companies should be behaving. I don't understand the logic of hiding information from any audience. The more familiar everybody is with your stock, the less volatile it should be."

EMC's corporate motto is "Where information lives," so it should be no surprise that this maker of information storage devices and software should have been an early adopter of high-tech shareholder communications. "Since 1995, our conference calls have been open and Webcasted," Pearson boasts. "We had 8,000 investors listen to our last earnings call within 24 hours."

Pearson is fond of saying that she wants to treat Wall Street investors like old family friends. "You can avoid getting into trouble if you communicate consistently and constantly. Two things Wall Street hates are surprises and uncertainty, so communication should always exceed expectations. If something changes in the business model, the best policy is to inform Wall Street right away -- and by Wall Street I mean all markets and all types of investors." In her opinion, Reg FD does nothing to hinder that approach.

"The SEC just doesn't want us to be selective with our disclosure -- they say, 'Please disclose, but let everyone hear your message!'" Pearson characterizes her relationship with analysts as "open and honest," with "constant communication" via e-mail, phone calls and news releases.

Pearson says Regulation FD has made one small difference in the way she operates -- it's made her, if it were possible, even more open and accessible to investors. In September, a month after the rule had been adopted but a month before it became operational, Intel issued a warning that blamed weak European sales for sales far short of what the market had been expecting. "Prior to FD I would have spent my day on the phone, taking all questions from individual investors and analysts," Pearson says. "They'd ask how our business was doing in Europe. That's what I'd do prior to Regulation FD. But now, just to be safe and not upset anybody, we placed calls to wire services before the market opened, and within hours of Intel's announcement.

"I called Bloomberg, Dow Jones, Reuters and CNBC and asked if they wanted EMC's comments. I sent e-mails to anybody who covered the company from an investment perspective and said that EMC's business remains strong and we don't' expect a material impact from the [weakness in the] euro. CNBC ran it all day long. It made my job more efficient that day. I took one-tenth of the calls I'd normally have."

EMC's goal is to reach as broad an investor base as possible. Pearson takes her show far beyond the institutional investor conference circuit, seizing opportunities to tell the company's story at conferences put on by the National Association of Investment Clubs (NAIC) and in other retail investor venues. "I also presented at a Webcast cosponsored by and Charles Schwab," she says. "We also do executive interviews with Motley Fool,, SmartMoney and others. We try to be accessible to investors of all sizes.

"It's really important and helps the long-term stability of the stock to have a balance between institutional and retail investors, U.S. and international investors, and investors from all types of investment disciplines, whether value, index or growth. The more balanced your shareholder base is, the more protected you are for sustained valuation increases. So we don't just tell our story to one subset.

"We actively market our message to investors of all sizes and geographies," Pearson adds. "We now have more than one million retail investors. We are one of the 10 most commonly held stocks by members of NAIC. And though almost every technology company is underwater in 2000, we've been up anywhere from 50 to 80 percent [through late November] -- so I think some of the diversity has helped."

Pearson says that twice every year, EMC offers the market a look forward at management's expectations. "The first is at the January conference call that announces the prior year's financial results and lays out the following year for investors. Then, in June, after the second quarter, we provide an update. In January 2000, we told Wall Street our revenue [gain] would be greater than 25 percent, and later said our revenue would be up close to 30 percent for fiscal 2000. If you lay it on the line, be honest and tell them what expect, all the guesswork goes away. If you have something that's material for investors to hear, go to the mass market first and then take every phone call in world."

When she spoke to Financial Executive in late November, Pearson was on a plane returning to Massachusetts from an investor conference in Arizona. "This is why FD is good," she explained. "A year ago, that conference would only have been accessible to the 500 institutional fund managers invited to attend. But today the media was invited and filmed and/or broadcast our presentation live, globally. Bloomberg News recorded the audio and flashed up graphics. CNBC filmed the whole presentation and presumably aired clips. By tomorrow, the presentation I gave will be on our Web site so investors can download and mail lit] to friends. If you are accessible and open at all times, there shouldn't be a lot of gray areas when it comes time for the conference call."

Tiffany Sees

Pros & Cons

Shortly after Regulation FD went into effect, Mark Aaron, vice president for investor relations of Tiffany & Co., recalls receiving a call from an analyst with a question. "You know I can't answer that question, and especially not with Regulation FD!" Aaron replied. Her comeback: "Well, it didn't hurt to ask, and if you told me, you'd be the one that got into trouble -- not me."

Though he took it as a joke, Aaron also cites the analyst's retort as a reminder that companies have to be careful about giving even immaterial indications of business trends, or expressing comfort or discomfort with earnings estimates. "I've already had one or two people call me and ask me if I'd comment on my mood," he says. "It's pretty bizarre when analysts can't get current business updates and are reduced to asking IR people what mood they're in."

He's concerned that companies "can't do the interim and frequently innocent hand-holding with Wall Street" that has helped keep communication lines open in the past. He thinks the rule might have provided more flexibility for companies to talk with analysts, at least early in the quarter, about their expectations going forward.

Aaron says his biggest concern with the new rule is not its provisions and penalties, but that his peers at other companies seem to be overreacting to it. "A lot of them are questioning whether they should continue going to conferences, participate in break-out sessions, have one-on-one meetings with analysts or have any meetings with investors unless someone else from the company is present to witness what they're saying. That's paranoia."

Aaron has made a few, minor changes to his modus operandi in the wake of FD's implementation. For example, Tiffany's CEO planned to make a comment at a recent investor conference to the effect that sales trends were good. "In prior years, we might have just made the comment," Aaron says. "This year, I told the CEO we ought to issue a press release right before he said it."

Aaron sees no need to discontinue one-on-one meetings with analysts or investors when discussion of earnings and analyst expectations usually took no more than a minute out of the typical one-hour meeting. "Now maybe we'll have 59-minute meetings," he says. "Since Regulation FD, my calendar has been busy as ever having meetings with investors who want to learn about the company. I know what's material and what we've disclosed, so I can have a meeting and keep it totally above board."

Though he considers FD only a small cloud, Aaron thinks it may have a big silver lining. Wall Street, he suggests, has gone overboard in its obsession with earnings estimates. "The pressure to deliver short-term performance has led to demands for more frequent updates. There's been more focus on consensus estimates, and then on whisper estimates. Meeting expectations is no longer acceptable -- you have to exceed them a little. It seems that the whole process is spinning out of control, and a lot of people on Wall Street have forgotten what long-term investing is really about. Maybe Regulation FD will bring people back to earth and force them to do more fundamental, thought-provoking research."
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Title Annotation:fair disclosure
Author:Millman, Gregory J.
Publication:Financial Executive
Geographic Code:1USA
Date:Jan 1, 2001
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