Wall Street Opposes Level Playing Field[Fool on the Hill] April 20, 2000

An Investment Opinion

Wall Street Opposes Level Playing Field

By Bill Barker (TMF Max)
April 20, 2000

Last December, I wrote a column in this space about a rule proposed by the Securities and Exchange Commission (SEC) regarding the fair disclosure of information by publicly traded companies to the public. The rule (Proposed Regulation FD) would require, among other things, that companies no longer engage in the practice of discreetly disclosing important information to Wall Street analysts without also giving that information to the public at large. It's a pretty commonsense rule in my opinion, one that many investors might logically assume must already be the law of the land, but unfortunately isn't.

In the article, I encouraged readers to let the SEC know whether they supported the proposed rule, and in response several hundred Fools wrote to the SEC. A couple of reporters have recently contacted me about the story, as it seems that the SEC has received an unprecedented number of public comments about this rule, and that the majority of the comments probably have come from readers of this site.

I'll be upfront. In my December article, I provided a one-sided take reflecting my personal belief that the proposed rule was an outstanding one for individual investors. I predicted in my earlier article that the rule would be strongly opposed by Wall Street, and that none-too-bold prediction now appears to have materialized. In the spirit of equal time and open dialogue, I now reproduce some of the public comments of April 6, 2000, by The Ad Hoc Working Group on Proposed Regulation FD and the Legal and Compliance Division of the Securities Industry Association ("SIA"). Full text is available here. The SIA is the principal lobbying outfit for the full-service brokerages.

(Yikes -- I can't help myself. Here's my biased take -- the SIA argues that individual investors are not intelligent enough to make their own decisions about the value of securities and need Wall Street's analysts to hear and interpret important information first. Through that method, the SIA argues, individual investors are protected from their own ignorance and emotion. The argument reminds me of Jack Nicholson on the witness stand in A Few Good Men -- "The truth? You want the truth? You can't handle the truth!")

Here, verbatim, is the crux of the SIA's filing:

"We believe that communications between [a company] and individual analysts or small groups of analysts contribute to the overall mix of information in the marketplace, greater accuracy of market prices, less volatility and, in general, greater efficiency....

"It hardly needs saying that analysts perform a necessary and very valuable function in the U.S. capital market. They, together with the media, are the principal way in which important financially significant information (including information contained in prospectuses and reports filed with the Commission) effectively reaches most investors and gets reflected in the marketplace. The alternative model of millions of individual investors and potential investors poring over prospectuses and periodic reports is highly theoretical and out of sync with the real world. But it does need to be said that analysts cannot do their work nearly as well as they do now if they are forced to do their work, at least when it comes to interaction with issuers, collectively -- in a pack. Yes, they can elicit some facts, they can eliminate management "spin," they can bring their expertise to the analysis, and they can give the markets rapid guidance as to the significance of new information, thereby mitigating individual knee-jerk reactions to specific information.

"But it is also the few analysts operating independently of, and in competition with, each other that can relentlessly pursue an independent line of inquiry and ferret out negative information that management would rather not disclose or would prefer to disclose at a time of its choosing and with its own spin. They can glean information from changes in the level of confidence (sometimes evidenced in subtle ways such as changes in choice of words or tone of voice) over a series of telephone conversations or face-to-face meetings. They can test their hypotheses by comparing information about different issuers in the same industry or sector. This kind of work results in more continuous disclosure, fewer surprises and less volatility. The marketplace itself provides incentives for such diligence, for it is the analysts who get to the market "firstest" with the "mostest" that under the current system reap the reputational and financial rewards. Leveling the playing field for analysts, as among themselves and vis-a-vis the general public, will undermine the great advantages of the current system.

"The proposal could result in issuers declining to engage in dialogues with individual analysts or small groups of analysts and instead insisting on sessions at regular intervals open to a number of analysts, with listen-only access to the media and the public. These are likely to take on the orchestrated character of a Presidential news conference in which members of the audience are authorized to ask one question, and perhaps a short follow-up question, but not a series of questions in dogged pursuit of the facts. Undoubtedly, the questions from the different participants will not be coordinated or follow in any logical order or comprehensive way. Due to fierce competition among analysts to obtain the best information, they will be reluctant to ask questions in an open session that tip off their competitors as to the direction of their thinking or information that they think would be meaningful. If the questions cannot be asked in private, they may not be asked at all. Is that good for the market?"

A number of thoughts come to my mind as I read these three paragraphs.

1) Is it true that "it hardly needs saying that analysts perform a necessary and valuable function in the U.S. capital markets"? Is it true that to perform that necessary and valuable function they need better information than the participants in the market?

2) Is it true that, the "alternative model of millions of individual investors and potential investors poring over prospectuses and periodic reports is highly theoretical and out of sync with the real world"?

3) Is it true that analysts make the markets less volatile?

4) Is it true that analysts spend much of their time ferreting out negative information about companies?

I have my own thoughts and answers to these questions, but your thoughts are more relevant and need to be read by the SEC. After all, Wall Street is arguing that maintaining the current system is not just in its own interests, but in yours as well. The comment period has been extended to April 28, which is why I'm bringing this up yet again. If you feel this issue is important to you as an individual investor, click on, put "Proposed Regulation FD: File No. S7-31-99" in the comment header, and sign your name and company affiliation (if relevant).

This is a great opportunity to add your voice to the public debate and influence the final decision of the SEC.

Related Links:

  • Fool on the Hill: SEC Levels Playing Field, 12/16/99
  • Comments on Proposed Rule: Selective Disclosure and Insider Trading
  • Comments of Lee Spencer, The Ad Hoc Working Group on Proposed Regulation FD and George A. Schieren, Vice President-Legal, SIA Compliance and Legal Division, Securities Industry Association, April 6, 2000