SEC Chairman Stands Behind Full Disclosure

In an interview with The Motley Fool, SEC Chairman Arthur Levitt rubbishes the notion that investors need analyst interpreters to understand corporate news and information.

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By Motley Fool Staff
November 2, 2000

Regulation FD, which requires companies to disclose important information to individuals at the same time they notify institutional investors, is a little more than a week old. The regulation, which the commission instituted with the express support of thousands of individual investors in the face of stiff resistance from the securities industry, has only begun to take hold but its effects have already been felt. Bill Barker (TMF Max) spoke with SEC Chairman Arthur Levitt about this issue earlier in the week.

The first portion of Barker's interview with Levitt, published separately in today's StockTalk feature, discusses auditor independence, the SEC's new cause celebre.

Regulation FD... has been implemented now for, I think, it started a week ago today. What, if anything, do you see in the disclosures that are being made by companies that have been affected by the rules so far?

Levitt: Well you know, it's early to tell, but there's certainly been enough comment to the commission and to me personally by corporate executives who were uncertain how this rule would play out. Many of the best executives that I know -- people like Warren Buffet and Bill George of Medtronic (NYSE: MDT) have commented to me personally that this rule is enormously important and is a great protection for America's individual investors that it really does balance the playing field.

I have very little patience for those that argue that somehow or other this will chill information -- that the analysts of America will be muzzled. In order to believe that, you have to assume that America's investors are not terribly bright, are not able to make use of the enormous amount of information that comes to them today and that they need some interpreter of that information to make it relevant to them.

I simply don't accept that. I think investors receive more and better information today than ever before and I think they are fully capable of assessing that information and making investment judgments, and the risk of having the analysts out there receiving information from companies that wish to gain favor with them and gain some advantage, and that they are preferred clients, mostly institutional, would get those breaks ahead of the individual, is something that I think does an enormous disservice to our markets and what Regulation FD was devised to counteract.

TMF: Having read the arguments put forward by the Securities Industry Association [the lobbyists for Wall Street's analysts], I would say that they really discredited themselves and embarrassed themselves by offering the argument that individual investors are too emotional and too ill-informed to handle the truth, essentially.

Levitt: I would reject that totally and if there ever was an incident of self-interest speaking without regard to the public interest, that position certainly personified that.

TMF: Just anecdotally, it seems to me that on some of the earnings reports that have come out recently there has been greater detail, especially regarding forward looking numbers like projected revenues and projected earnings for the quarter ahead and the year ahead. I'm not sure if any data is being accumulated by the SEC, but it looks to me right now, like the kinds of things that were being leaked out surreptitiously to analysts are making their way very directly into both conference calls and earnings reports.

Levitt: What I think is rather interesting about all this, is that the practices that executives are talking to us about not being able to do any longer, are practices they never should have been doing in the first place, and I think that this rule and the suggestion of this rule has already impacted corporate behavior, and I think it's impacted it in a way that really is enormously beneficial to investors and I have to say the support of The Motley Fool was very heartening to us having experienced the kind of organized criticisms we endured from the industry and from parts of corporate America that felt that their practices had to change so dramatically.

TMF: Well, I know that I received, I don't know, probably hundreds of e-mails in response to the things that I wrote on it and they were universally in support of the SEC's position. I don't know yet if the accounting auditor independence issue has grabbed the attention of the individual investor the way that the Fair Disclosure rule did. If you were trying to, as a last word, give context again to the importance of the auditor independence issue, what would you say about it?

Levitt: Well, I regard it as a critical issue in terms of America's individual investors and the confidence that they have in the numbers that fuel our market, and I would be heartened to experience the kind of e-mail flood, which I hope would go to our legislatures as well as to ourselves in supporting this proposal.

I think it's critical to investors and I hope that I've been able to dramatize it's importance in a way that investors would understand. And one thing I might suggest here is that in the past two weeks, both my dentist and my barber have commented to me without being asked, "Boy, do we have to worry about our accountants today in this environment." When dentists and barbers begin to talk about accountants and accounting practices, it certainly captured the heart of this country in ways that I think we cannot fail to respond to.

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Respond to this interview on our Eyes on the Wise discussion board.

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