FOOL ON THE HILL
An Investment Opinion
SEC Levels Playing Field Bill Barker (TMF Max)
December 16, 1999
Another welcome nail in the coffin of full-service brokerages began to be hammered yesterday as the Securities and Exchange Commission (SEC) announced that it is considering new rules to combat selective disclosure of information by public companies. In the words of the SEC, "The Commission has become increasingly concerned about the growing incidence of 'selective disclosure' of material corporate information. In many reported incidents, companies selectively disclosed important information -- such as upcoming earnings figures -- in conference calls or meetings that are open only to selected securities analysts and/or institutional investors, and which exclude members of the public and the media."
Fools have been agitating for a while that the system under which companies disclose information important to the individual investor be improved, and this SEC regulation is a good start. Proposed Regulation FD (Fair Disclosure) would require that:
(1) whenever an issuer intentionally discloses material information, it does so through public disclosure, not through selective disclosure; and
(2) whenever an issuer learns that it has made a non-intentional material selective disclosure, the issuer make prompt public disclosure of that information.
Under the proposal, a company could make the public disclosure through one of several methods: (1) filing the information with the SEC; (2) issuing a press release; or (3) providing public access (for example, by phone access or over the Internet) to the conference call or meeting.
The SEC is proposing a leveling of the playing field, something that, if properly implemented, could profoundly undermine the role that Wall Street has cut out for itself as information middleman between companies and their owners. While SEC Chairman Arthur Levitt points out that the rules do not require companies to make their conference calls open, he strongly urges that companies do so anyway; actually, what Levitt says on the issue is that "the basic principle of fairness deserves no less."
Judging by the response so far, one might say that the basic principle of fairness doesn't necessarily play a major role on Wall Street. The prospect of a change in the rules has Wall Street's analysts more than a little bit worried -- and we can expect them to spend big and lobby hard for the SEC to forego implementing the rule. A clue to the likely lobbying strategy comes from the public pronouncement of Stuart J. Kaswell, general counsel of the Securities Industry Association, the principal lobbying organization for brokers. Mr. Kaswell, no doubt deeply concerned about the efficiency of the markets, declares that these rules could have a "chilling" effect on companies: "We are concerned the proposal will end up restricting the flow of information rather than encouraging it by imposing detailed rules on companies, investors and analysts."
Well, I tend to doubt that Mr. Kaswell's true concerns are anything of the kind. The more accurate concern is that the analysts and brokers of Wall Street have a really good deal at the moment, and might soon lose it. Given a level playing field, analysts are going to have to learn how to earn their keep by creating some sort of value from their analyses, rather than just being the people who get to hear first what's going on with companies. Currently the major role that analysts seem to fill is in accepting explicit guidance from a company about what its quarterly earnings are going to be, whispering that information to institutional clients first, and then slapping either a "buy" or "strong buy" label and some "price target" on that information when they get a chance later to type it up.
Michael Lewis, author of Liar's Poker, put the matter succinctly several months ago when he wrote about selective disclosure being the financial scandal of the 1990s. "Wall Street analysts are hungrier than ever for information not generally available to the public. Without it they have nothing to offer to the large sophisticated investors from whom their brokers are trying to pluck commission dollars. So badly do the Wall Street analysts require inside information these days that they will shape their opinion to maximize the likelihood of being included in these closed-door meetings with the company CFO. They won't be crass about it; indeed they must preserve at least the appearance of independence, lest their advice lose all credibility with investors. But they will almost certainly refrain from criticizing the company that feeds them exclusive information too pointedly, to prevent being cut off from the information, and the other various goodies a fast-growing company can bestow on a Wall Street firm (fees!)."
As Lewis notes, and as SEC Chairman Levitt appears to agree, the current system is not only bad for individual investors, but it is bad for the markets as a whole. The ability of companies to selectively disclose material information to some sources and to receive good coverage as a result makes for a mockery of free flow of ideas and information. This is something that Wall Street is going to fight hard to preserve -- though there is something you can do about that.
We are now in a 90-day period during which the SEC is seeking public comment on the proposed rules. This is an opportunity for all of the public (including you, Fool) to make your thoughts, whatever they may be, known. Just click on firstname.lastname@example.org and let the SEC know how you stand on the proposed rule. A "Right on, SEC!" or "Way to go, Levitt!" might suffice if that's all you're interested in typing, though something a bit more eloquent will probably carry more weight. Just remember to indicate on the subject line that you are commenting on "Proposed Regulation FD" and include your name and professional affiliation (if relevant) somewhere in the body of the message.