Taking Sides – Regulation FD: Tinker with it, but don’t toss it in the trash

With a change of administrations and the arrival soon of a new Securities and Exchange Commission chairman, the long knives are being drawn for some of the regulations enacted under Arthur Levitt, the activist former chairman.

The Securities Industry Association and other industry lobbying groups have drawn a particularly big bull’s-eye on Regulation Fair Disclosure, or Reg FD as it’s known for short. But axing that measure would be a big mistake.

The controversial provision requires publicly traded corporations to broadly release any information that could have a material effect on their stock prices. Specifically, it was designed to end the age-old practice of selectively leaking material information to favored analysts ahead of the market.

At the time it was being considered, no other proposed regulation in the SEC’s history had generated as much public comment. More than 6,500 letters flooded the agency in favor of the measure, the vast majority from individual investors.

That was six months ago. Since then, a lot has changed in Washington: The Bush administration took office with a decided bent against red tape, the SEC has a likely new chairman in Washington lawyer Harvey L. Pitt, and control of the Senate has shifted to the Democrats.

But what hasn’t changed is the fundamental evolution of investing. Today, more than ever, investing is Everyman’s domain. The democratization of the stock market has been an energizing force in the U.S. economy, and the financial services industry has benefited tremendously from the change.

At a recent congressional hearing, however, lobbyists for the SIA bemoaned the brave new world under Reg FD. They claim corporations are releasing less information, and it is poorer in quality. They also claim the measure is adding to market volatility.

Maybe so, but it’s still puzzling to see the SIA trying to turn back the hands of time to a day when the stock market was an insider’s game played by a closed circle of good ol’ boys who tightly controlled the action. Those days, of course, have gone the way of fixed commissions.

In many ways, the financial services industry has become a much more rough-and-tumble business, which may unnerve many old-timers. But that’s what competition is all about.

It may have had a coarsening effect on what was once a gentleman’s game, but the industry, investors and the economy are far better off. Discount brokers, online trading, the Internet, self-directed pension plans, exchange-traded funds and a host of other innovations never would have evolved under the old way of doing business.

The cost of trading is far lower, commissions are giving way to fee-based business, and the markets are far more efficient. In that light, it’s ludicrous to believe that insiders should be allowed to continue to get first crack at materially important information.

Perhaps the only surprise is the fact that the government had to initiate the change. You’d think the industry would want a level playing field to protect the integrity of the game.

But upon reflection, it’s no surprise at all, given the advantage that insiders gain from monopolizing exclusive information in a free market.

Information is power, and market-moving information is all-powerful. Making it available to everyone is the safest and fairest way to deal with it. Anything less invites sour grapes, conflicts of interest or worse – corruption.

Whatever Reg FD’s failings, it’s a step in the right direction. Fine-tune it, but don’t discard it.