Says reg, as intended, restricts selective disclosure

The SEC’s top legal officer is disputing a Securities Industry Association study that claims securities analysts have been getting less information from companies since Regulation Fair Disclosure became effective.

The SIA’s study “contains no data or direct observations concerning market behavior,” Securities and Exchange Commission general counsel David Becker said at a May 30 conference in Washington sponsored by the SIA and the American Enterprise Institute, a free-market advocacy group.

The regulation, which went into effect at the beginning of the year, prohibits companies from disclosing material information to securities analysts unless it is disclosed simultaneously to the public.

The SIA fought the regulation when it was proposed by the SEC, arguing that it would curb how much information companies release and that it would damage the ability of analysts to provide useful analysis to investors.

But the SEC, under its former chairman, Arthur Levitt, went ahead with the regulation after more than 6,000 individual investors flooded the agency with a record number of comments, almost all supporting the proposal.

Individual investors were angered by the perception that securities analysts got company information that they were denied and used it to give an advantage to wealthy customers of the brokerage houses where they worked.

inhibitions

Frank Fernandez, the SIA’s chief economist, presented details from the trade association’s study suggesting that the regulation has had a “chilling effect” on the amount of information released by companies.

According to the research, analysts now have fewer one-on-one conversations with company officials, which makes it more difficult for them to understand assumptions behind economic forecasts and models.

The disadvantage is particularly acute for small and midsize companies, and gives the financial media an advantage over securities analysts, the report states.

However, the media do less analysis than analysts, and a significant number of individual investors rely on analysts and money managers for insights, according to the study. The regulation “disadvantages investors as well,” Mr. Fernandez said.

Mr. Becker noted that the SIA’s study, which has been publicized over the past month, is based on surveys and the subjective observations of analysts who opposed the regulation to begin with.

“How does the SIA know the quantity of information is diminished? Basically it’s because analysts say so,” Mr. Becker said. “Issuers have a markedly different view.”

Studies by Thomson Financial Services, the National Investor Relations Institute and PricewaterhouseCoopers report that most companies are providing at least the same amount of – and in many cases more – material information to the public since the regulation went into effect, he said.

The SIA study cites the high costs associated with releasing more information. Mr. Becker noted that much of the costs cited by the SIA was caused by an increased number of 8K financial reports filed with the SEC, as well as more company-sponsored public webcasts of financial announcements.

In the study, analysts also say the quality of information released has declined.

“There’s no question that Regulation FD was intended to retard the flow of some types of information from issuers to analysts,” Mr. Becker countered.

“That’s the point of the rule. To the extent that analysts are complaining that they no longer have selectively disclosed material – non-public information – that’s OK. That’s what we intended,” he added.

The SIA study also suggests that investors are overloaded with data without context to interpret it.

increased volatility

“I’m just not aware of any support for the proposition that too much information too soon in the marketplace undermines market efficiency,” Mr. Becker said.

“I don’t know what underlies the proposition that investors are going to make bad decisions unless the information they get is coded with the opinions of securities analysts,” he said.

“If analysis has really become indispensable to wise investors, one would expect that investors would figure this out and either wait for the analysts, or they would pay to get it.”

The SIA study states that the regulation has contributed to increased volatility in the markets since the beginning of the year.

But Mr. Becker cited a host of other possibilities, including earnings drops at the end of last year, the disputed presidential election, the implosion of the dot-com market, the explosion in energy prices and the Fed’s repeated lowering of interest rates.

The SEC is currently working on its own study of market volatility following the imposition of Regulation FD.