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Regulation Fair Disclosure (Reg FD) ... and Beyond. (Financial Reporting).

Enacted by the Securities and Exchange Commission just over a year ago, Regulation Fair Disclosure, known as "Reg FD," seems to be accomplishing its promise for fair and equal disclosure of companies' financial information by requiring public companies to disclose all material information to the general public at the same time as to analysts and other selected parties.

Significant findings from an annual PricewaterhouseCoopers LLP survey of 201 publicly held U.S. corporations across industries and market cap sizes include:

* 88 percent said Reg FD should be continued; 10 percent said it should be repealed.

* 68 percent said the SEC should issue specific guidelines about what information is and is not "material;" 27 percent said such guidance is not needed.

* 75 percent overall reported no impact on their company's stock price; 18 percent were uncertain and 7 percent noted a change (6 percent negative; 1 per cent positive).

* More than 90 percent said Reg FD either increased fairness (46 percent) or provided about the same level of fairness as before (45 percent); 7 percent said it decreased fairness.

* 38 percent said it would be more effective if it had stronger "safe harbor" protections; 53 percent said that would not change the effectiveness.

"Despite the dire predictions of the securities industry, the overall impact has not been onerous, but the risk of litigation clearly bears watching," said Frank Brown, global leader for Assurance and Business Advisory Services for PWC.

"All the dramatic negative things that people were predicting to happen, didn't come close to happening," said Robert G. Eccles in an interview. Eccles is a founder and president of Advisory Capital Partners Inc. (ACP), a senior fellow of PWG and co-author of The ValueReporting Revolution; Moving Beyond the Earnings Game. In fact, Eccles says that around the anniversary of Reg FD, a program he was invited to speak at - to present his positive opinion on the rule - was cancelled. The problem: the source sponsoring the event couldn't find a negative voice.

Eccles says he found striking the companies' point of view, expressed in the survey, that Reg FD was really working pretty well. While there's no hard evidence that the world has become dramatically more transparent yet, "it certainly is moving in the direction of greater transparency," he says.

Further, says Eccles, "Reg FD gives companies a great opportunity to quit playing the earnings game, because they can't provide inside guidance to a few select analysts." That, he says, has some analysts aggravated. "If you have a level playing field, then you have to work harder, be smarter, dig deeper." This contrasts with the former approach of certain parties having advantages based on having better relationships with a particular company.

"Reading the crystal ball backwards," Eccles says, "I think Reg FD may not have been as important as it was if the 1990s hadn't been what they were." In the days when stock prices were rising daily, analysts were getting information quickly, which was clearly advantageous to certain people, he explains. Another issue, he argues, is that Reg FD drew strong attention because it's a regulation, but the important area of initial public offerings allocation was largely ignored. Investors were not only disadvantaged by the lack of financial information, but also by not being able to buy IPO stocks, since most of the shares went to institutions that had relationships with the investment banks.

Although we're past the bubbly '90s, Eccles says, "It doesn't matter if it's a bear or bull market or an Internet bubble. The fundamental issue is: do all investors have access to information at the same time? The answer was "no." The issue now becomes: what's more important - early access or having the right information to make long-term decisions?

"What Reg FD does is make it harder to get a short-term tactical advantage, but if you're in a stock for a long period, you don't care about quarterly gyrations, or getting inside tips on earnings. What you want is a broad range of information, so that you can make investment decisions for the long-term," says Eccles. Bottom line, the PwC survey shows that "Reg FD has not interrupted the greater flow of that kind of information to the market."

Companies have already adapted to Reg FD, says Eccles, and it's going to be less of an issue as the world moves in the direction of ValueReporting (TM) and greater disclosure. "You are going to see dramatic things," he says, "including pressure on the sell-side research by the companies and investors to go back to doing fundamental good research, or someone else is going to provide it."

Beyond Reg FD, Eccles says a deeper issue is the quality of sell-side research, which he argues isn't very good. "As more information is made available, the really good analysts are going to have more information to work with than the average analyst, and it's going to have less to do with how people are responding to Reg FD and a lot more to do with the basic sell-side research."

So, is Reg FD a catalyst to drive further changes in the reporting arena? Eccles says, "It can be."

Finally, will the SEC come forward with more guidance on materiality? It's mentioned by Chairman Harvey Pitt (as quoted in an article in The Wall Street Journal) as something that is "open to tinkering with all - or none - of the details, depending on the outcome of the SEC's study."

Eccles argues that it would be good to have more clarity. He reiterates that only 10 percent of the companies in the survey wanted to repeal Reg PD. "That's extraordinary," he says. "Usually companies don't want more regulations. If you think about Reg PD and greater disclosure, and safe harbor all together, [now] that's really the package."
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Article Details
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Author:Heffes, Ellen M.
Publication:Financial Executive
Article Type:Brief Article
Geographic Code:1USA
Date:Jan 1, 2002
Words:964
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