Regulation FD may calm volatile capital markets


NEW YORK-The Securities and Exchange Commission’s Fair Disclosure Regulation, requiring equal access to corporate information, has roiled the investor relations water in the short run.

However, Regulation FD, which became effective in late October, also promises to calm volatile capital markets over the longer haul, speakers at a recent New York Society of Security Analysts meeting said.

“Investing attitudes and styles have changed over time. There is more short-term pressure, more focus on consensus estimates, more focus on whisper estimates and more pressure to exceed those estimates,” said Mark Aaron, vice president of I.R. for Tiffany Inc. and board member of the National Investor Relations Institute.

“I feel sometimes things have spiraled out of control. Perhaps I am naive, but I hope Regulation FD will change things back to taking longer term looks at companies. … I am suggesting that analysts might forecast estimates in a range instead of focusing on a consensus.”

Michael Rosenbaum, president of the Financial Relations Board, which provides outsourced investor relations services to several hundred public companies, called Regulation FD “fundamentally flawed.” Notwithstanding that criticism, he hastened to offer his belief that it also possesses many positive attributes.

“Wall Street itself has been held hostage to a cult of expectations that really affects short-term pricing. Ultimately, this pressures analysts, especially those whose firms have underwritten the stocks, to get inside information,” he said.

“This will shift the analyst’s role from access to one of value-added insight, looking into intangibles like customer turnover and looking at the longer term.”

Bloomberg News spearheaded the successful effort by the media to convince the SEC it needed to mandate change in the practice of selective disclosure of “market sensitive” information, said Stephen M. Cutler, deputy director of enforcement for the federal agency. By way of example, he said the press “helped expose” the case of a dot-com company that, one day in June, called analysts in “serial fashion,” starting with its investment bank underwriters. During the course of that day, the stock lost half its value, but the company never issued a public statement.

“Regulation FD seeks to address an increasing and disturbing practice that results in those favored reaping profits from early knowledge. This is a variation on insider trading and leads to a loss of investors’ sense in the integrity of the markets,” Cutler said, adding that the opinions he expressed were solely his own.

“At worst, companies could use certain information as leverage, influencing analysts to be more positive, excluding analysts from company meetings because they have written unfavorable reports. … It is certainly the intention of (Regulation) FD to level the playing field for the smaller, regional firms that didn’t have equal access.

“FD also intends to bridge the generational divide (among securities analysts), and portends a return to the days when analysts analyzed.”

Cutler said the new regulation applies to senior corporate executives, including those involved in investor and public relations, all of whom regularly communicate with the public.

“Using low-level employees to make selective disclosures won’t work,” he said.

Regulation FD also applies only to information generally believed to be “material” to a public company’s performance.

“The SEC hasn’t defined this except to say it is what a reasonable investor would deem important. A reasonable investor is not the same as an average investor,” Cutler said.

“If a company is simply wrong and there has been no extreme departure from the standard of ordinary care, it is not our intention to go after close cases.”

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