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Full Disclosure: What Does It Mean to Investors?

New rules from the Securities and Exchange Commission (SEC) are typically non-events. But yesterday, the SEC implemented Regulation FD (for fair disclosure); it affects all investors.

Of course, the driving force of the new regulation is the Internet. Let's face it, securities disclosure rules look quite antiquated. And they should. They were devised in the 1930s, when computers didn't even exist yet.

On the face of it, Reg FD is simple. Public companies are required to make its material announcements - such as earnings - to the public at the same time securities analysts are notified. In other words, the rule prevents selective disclosure.

The rationale for Reg FD is to create a more "level playing field." Why should the Wall Streeters get information before the rest of us?

Yet, as with any new rule - especially as sweeping as this one - there will be evolution. Companies will explore the boundaries. After all, securities attorneys get big bucks for finding exceptions to rules.

It is no surprise that Wall Street is vehemently against Reg FD. I think the main reason is that it means potentially reduced profits for securities firms.

Wall Street's argument is different from this, of course. Their argument? Well, the fear is that Reg FD will "chill" communications from public companies. For example, it is likely that companies will nix informal discussions with analysts or mutual funds. In fact, this makes it more difficult for analysts to devise earnings estimates. Thus, there is a bigger likelihood of earnings surprises, which could add more volatility to the marketplace.

Interestingly enough, the recent volatility in earnings reports - during the past few weeks - may be explained partly by Reg FD. How? Well, it looks as if companies are already implementing policies to implement the rule.

But according to Ron Gruner, the president of Shareholder.com (which develops corporate communications technologies), the concerns are overblown. To him, the new rules will ultimately result in more information disseminated to the marketplace. "About 20 percent of our clients use webcasting," says Gruner. "By the end of the year, this is expected to soar to 75%."

While I expect there will be short-term volatility from Rule FD, I think this will be temporary. As always, Wall Street will adapt. Analysts will likely be more conservative and whisper numbers will lose their effect. In fact, analysts will need to rely on rigorous analysis, not access to secret meetings. And isn't that what they are supposed to do, anyway?



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