Markets & Stocks
Investors earn fair access
October 23, 2000: 12:05 a.m. ET

Fair Disclosure requires companies to give public same data as investors
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NEW YORK (CNNfn) - Controversial regulatory rules that prevent companies from favoring selected Wall Street analysts with top financial news ahead of the public take effect Monday.

Adopted by the U.S. Securities and Exchange Commission on August 10th, the rule, Regulation FD (Fair Disclosure), requires companies to disclose profit warnings, earnings reports and any other information it issues to analysts simultaneously to the public via press releases or other notifications.

graphicThe initiative is borne of a drive by the SEC, and its Chairman Arthur Levitt, in particular, to democratize the investment process, to include all investors by discouraging cases where only a select group of Wall Street players wield the power of information.

"High-quality and timely information is the lifeblood of strong, vibrant markets. It is at the very core of investor confidence," Levitt said in August.

"But when that information travels only to a privileged few, when it is used to profit at the expense of the investing public, when that information comes by way of favored access rather than by acumen, insight or diligence, we must ask, 'Whose interest is really being served?'" Levitt stated.

The benefit of early information

Many Wall Street professionals -- analysts and money managers -- have benefited from an early heads-up from companies that were about to warn about falling profits.

"Instead of slowly leaking it out and giving a few people a chance to sell, and then the stock drops by few points, it ends up being a bombshell," Steve Colton -- manager of the $276 million Phoenix-Oakhurst Growth and Income fund - told Reuters.

One glaring example is that of Abercrombie & Fitch Co. (ANF: Research, Estimates), which came under fire in October 1999 when the clothier tipped off an analyst at the brokerage firm of Lazard Freres about the company's sluggish third-quarter growth, about a week before the news was revealed to the public.

graphicThat early information led to a sell-off in the popular retailer's stock, prompting several shareholder lawsuits and an SEC investigation.

Although the SEC acknowledged the important role analysts play in interpreting financial data, the commission said every investor should have access to the same information at the same time in order to maintain confidence in the markets.

Releasing information only to analysts, Levitt said, has created an atmosphere in which corporate management treats that information as a commodity - "a way to gain and maintain favor with particular analysts." "That also has put pressure on analysts to report favorably on a company in order to maintain access to inside information," Levitt added.

Critics have maintained the laws will create more severe price swings in the stock market because individual investors are ill equipped to interpret corporate news that has not been processed by Wall Street's trained professionals.

However, many companies already offer such information through live conference calls and Internet Web casts on earnings and other subjects. That trend has accelerated since the SEC first proposed the rules last December.

SEC approves measure 3-1

The SEC approved the measure 3-1 at a public hearing after the initial proposal was revised, in response to concerns by Wall Street and half of the commissioners, one of whom voted for it after the changes.

Regulators honed the rule to cover only communications by senior company executives and those employees who usually speak with securities industry professionals or major shareholders.

The rule was also narrowed to exclude communications with the news media or ordinary course-of-business talks with a company's customers or suppliers.

graphicCompanies found to have violated the rule would be subject to civil injunction or fines. The SEC will enforce the new law, and focus on blatant violations, rather than on complicated arguments about small details, experts say. But this has not kept companies from treading lightly to avoid becoming the poster child for the new rules.

Most U.S. corporations -- 90 percent -- are planning to make policy changes regarding the release of market sensitive information, according to a survey of 60 companies in a recent Thomson Financial/Carson poll.

Stock analysts, long accustomed to extensive one-on-one sessions with high-ranking corporate executives, already have been getting the cold shoulder. They now will have to rely more on old-fashioned research: crunching numbers and talking to customers.

Impact on the market

The rules may mean there is more information available about a company, but not necessarily good information, according to the National Investor Relations Institute (NIRI), which asked the SEC to delay implementation so companies would have more time to develop compliance plans.

"There will also be more information about companies in the public domain," Chief Executive Louis Thompson Jr., said in a posting on NIRI's Web site. "But the quality of that information may not be the same as before, simply because companies will be more cautious about what they say to both the buy and sell side." Back to top

--from staff and wire reports