Aug. 10, 2000, was a red-letter day for Fools. That's when the Securities & Exchange Commission (SEC) voted in favor of the rule known as Regulation Fair Disclosure, or Reg FD.
Reg FD blocked corporate managers from sharing material information only with select Wall Street analysts; they were now required to share it publicly. This was a huge victory for individual investors, and The Motley Fool and its community helped ensure its success.
Making history
In 2000, The Motley Fool followed the issue extensively. Bill Barker called on our Fool community to submit comments to the Securities & Exchange Commission (SEC). He noted that Wall Street, in the form of the Security Industry Association (SIA), strongly opposed the idea of a level playing field, in which individual investors and analysts all get the same information.
Former SEC Chairman Arthur Levitt chronicled the history of Reg FD -- and the Motley Fool's involvement -- in his 2002 book, Take on the Street: What Wall Street and Corporate America Don't Want You to Know.
According to Levitt, the SIA "claims to represent individual investors," but "often, the SIA's interests deviate from those of individual investors. Regulation Fair Disclosure is one example... I believe the SIA was trying to protect the lucrative franchise Wall Street had on market-moving data that its members used to their advantage, to the detriment of small investors."
Enter the Fool. As Levitt recounts:
Something unusual happened in the summer of 2000 ... thousands of individual investors flooded the SEC with emails and letters in support of [Regulation Fair Disclosure]. It was an outpouring of support from ordinary people the likes of which the agency had never seen before. The letters weren't exactly spontaneous. The Motley Fool, the Internet-based, pro-investor advisory service, used its website to promote the benefits of Reg FD, and urged its followers to write to the SEC in support.
This outpouring of individual investor sentiment was instrumental in getting the ruling passed. Levitt writes, "For the first time in my memory, small investors played a role in getting a rule adopted that benefited them, over the protests of Wall Street's biggest players."
Adding injury to insult
A decade ago, Regulation Fair Disclosure opponents insulted individual investors, implying that unlike Wall Street analysts, we couldn't handle the truth about public companies. Later studies refuted that notion. And as Tom Gardner told Congress back then, "to claim... that individual investors need interpreters 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."
Ironically, the Internet bubble's demise proved analysts very human and fallible indeed. Many of them based their analysis more on their investment banks' relationships with publicly traded companies -- and their big paychecks -- than on telling the unvarnished truth for investors' sake.
Witness the historic falls from grace of former Wall Street star analysts like Henry Blodget and Jack Grubman. Allegedly, such analysts publicly talked up Internet-bubble poster children like Infospace (Nasdaq: INSP), Worldcom, and Internet Capital Group (Nasdaq: ICGE), even while they sometimes privately questioned those stocks' worth. That disconnect sums up a lot of what was going wrong in those decadent days. Since the scandal that toppled him, Blodget has undergone a transformation, creating The Business Insider sites, and often bucking Wall Street's conventional wisdom in his own writings.
Meanwhile, Wall Street has remained very untrustworthy, and arguably not too bright. Investment bankers continue to command crazy salaries at places like Goldman Sachs (NYSE: GS) and Bank of America's (NYSE: BAC) Merrill Lynch, even as investors and taxpayers continue to foot the bill for those megabanks' recent brush with disaster.
Regulation Fair Disclosure opponents sought to protect analysts, putting them on pedestals as "the smartest guys in the room." We suspect they've been proved wrong.
A decade later
To be fair, we individual investors sometimes indulge in our own forms of blindness, despite (or because of) information at hand. Some of us care more than others about a company's true long-term prospects, or whether our love for a given stock outweighs sheer common sense. We occasionally panic in the face of bad news, even if we know we shouldn't. After all, we're only human. But we can all benefit from helping one another to address such issues together.
When everyone has access to the same information; when everyone weighs a motley range of disparate views and opinions on that data; when everyone opens their minds and learns together -- well, that's what being a Fool is all about. And that's why Regulation Fair Disclosure was so important. Happy 10-year anniversary, Reg FD.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
