Study: "No Evidence" Supporting Reg. FD Complaints

Researchers at Purdue and USC are preparing to publish a study that flies in the face of fair disclosure's conflicted critics. Real investor advocates accept neither the premise that individuals, properly educated, cannot interpret corporate information as well as -- or better than -- investment professionals, nor the notion that the fair, simultaneous release of important corporate information to ALL owners of a particular business does not serve the greater good.

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By Dave Marino-Nachison (TMF Braden)
July 25, 2001

A new academic study throws mud at the notion that Regulation Fair Disclosure -- the new Securities and Exchange Commission (SEC) regulation that requires corporations to release important information to all investors simultaneously -- has resulted in increased stock market volatility and decreased flow of information to investors, Dow Jones Newswires reported yesterday.

Besides finding fault with the aforementioned arguments, according to a story by Phyllis Plitch, a study jointly run by the business schools at Purdue and USC (and currently under peer review) also concluded that there has been "no significant deterioration" in Wall Street analyst forecasts since "Reg. FD" was set in place last October. "We find no evidence to support the dire predictions that have been coming from Wall Street during the past year," USC professor K.R. Subramanyam said in a news release.

That conclusion contrasts sharply with the assertions of many in the securities industry who have, even since before the rule's adoption, consistently claimed such a policy would cause companies to release less information less frequently for fear of falling afoul of the rule, as well as confuse individual investors who might misinterpret information not filtered by professionals.

The self-interest inherent in such statements, seemingly little more than scare tactics, is so obvious as to be embarrassing. Wall Street, broadly speaking, has long styled itself the "mouthpiece of the gods," a crucial middleman between the bewildering world of investing and a consumer public. But "to claim... that individual investors need interpreters," Motley Fool co-founder Tom Gardner said before Congress in May, "takes us back to the Middle Ages when the common man was forced to rely on the priestly class to interpret the Bible for him."

Given that several corporate executives have come out in support of the rule -- which makes sense, since better-informed investors make for better business owners -- it's especially discouraging to hear such comments from a so-called service industry. (An SEC review has reached conclusions similar to the business schools', while other studies and anecdotal evidence seem to indicate that the quality of information has actually improved.)

No matter. Real investor advocates accept neither the premise that individuals, properly educated, cannot interpret corporate information as well as -- or better than -- investment professionals, nor the notion that the fair, simultaneous release of important corporate information to ALL owners of a particular business does not serve the greater good. (The importance of being "properly educated" cannot be overstated. Stock investing is not for beginners, who should visit our 13 Steps to Investing Foolishly before getting started.)

Former SEC Chairman Arthur Levitt said in a November interview: "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. The risk of having the analysts out there receiving information from companies that wish to gain favor with them and gain some advantage... is something that I think does an enormous disservice to our markets and what Regulation FD was devised to counteract."

Now, however, the ball has bounced from Levitt's court to that of Harvey Pitt, President Bush's nominee to take over for Acting Chairman Laura Unger. Pitt has said he will review the rule.

In the meantime, Dow Jones quotes a Securities Industry Association economist who said the study's findings seem to "run counter to what the conventional wisdom is." But while he is no doubt right to say that further study is the order of the day, he might want to consider better clarifying whose conventions it is he's referring to.

Dave Marino-Nachison has heard -- it's in the stars -- that next July we collide with Mars. His stock holdings can be viewed online, as can The Motley Fool's disclosure policy.

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