New Reg. FD Aims at Leveling Playing Field
In Providing Data to Institutional & Individual Investors
By Don Allen, The Allen Group/IR Associate to Hilary Kaye Associates
The Securities & Exchange Commission's new Reg.
FD (Fair Disclosure) promises to bring major changes in the way
public companies disseminate financial information to institutional
and individual investors. SEC Chairman Arthur Levitt first publicly
expressed his concerns about selective disclosure of financial information
as far back as September of 1998, in a speech at New York University.
Levitt felt that executives at the majority of public
companies were providing material information to financial analysts
and professional money managers in advance of making the same information
available to the general public, and that this put individual investors
at a disadvantage. Often, by the time a retail investor could take
any action on company financial news, the market had already taken
a run up or down and the individual ended up at a disadvantage.
Reg. FD, which takes effect on October 23, is the
result of Levitt's concerns. It calls for a number of changes in
corporate practices to preclude selective disclosure and level the
playing field between institutional and individual investors.
Under the new regulation, companies must disseminate material information
via a news release or a Form 8-K filing (with the SEC) either before
making that information available to selected analysts, institutional
investors or existing holders of the company's securities - or simultaneous
with the disclosure. If a company executive, director, investor
relations or public relations officer makes an inadvertent disclosure
of material information that has not been publicized previously,
then the company must issue a news release within 24 hours or before
the stock market opens, whichever comes first.
The new rule encourages companies to provide information and earnings
performance guidance to everyone simultaneously. In the past, many
companies conducted conference calls with securities analysts and
institutional investors following the release of quarterly financial
results. The majority of U.S. companies surveyed by the National
Investor Relations Institute (NIRI) already are taking steps to
open up these conference calls to the general public and the news
media by broadcasting them on the Internet simultaneous with the
telephone conference call.
According to NIRI, companies now should also consider putting their
earnings guidance in the quarterly news release or in the Management
Discussion & Analysis section of their quarterly Form 8-Q report
filed with the SEC. On a practical basis, it's no longer advisable
for company officers to provide "a nod and a wink" guidance to analysts
or indicate whether the officers are "comfortable" with industry
estimates of future performance. If a company does provide forward-looking
guidance in its published news releases or SEC filings, these should
be accompanied by appropriate "Safe Harbor" statements about forward-looking
information in order to head off litigation.
The new rule is expected to have the greatest effect on the common
practice among many companies of providing guidance to financial
analysts as to future performance. Private meetings with analysts
will put executives at risk under the new rule. The common practice
of making corporate presentations at conferences sponsored by investment
bankers or brokerage houses may continue, but once a company has
made its presentation to a large group session, the subsequent use
of "breakout" sessions will likely be discontinued.
Violations of Reg. FD aren't subject to private litigation under
the new rule, but the SEC may take administrative action against
a company or individual who violates the regulation. Communications
with the news media are not subject to the rule, but the National
Investor Relations Institute recommends to its members that any
material non-public information should only be provided to the media
via a broad news release.
Although the burden of issuing information falls on the company,
NIRI feels that it would be wrong for companies to use Reg. FD as
an excuse for reducing their communications with Wall Street. There's
a lot of information about a company that can be provided during
discussions with analysts that doesn't relate directly to earnings
guidance and, of course, information that has already been made
public is still good fodder for marketing of a company's stock.
Corporate officers and investor relations managers who want to learn
more about the new Reg. FD can obtain a copy of the rules from the
SEC web site at: www.sec.gov/news/endseldi.htm