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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