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September 30, 2000

Fear Over Selective Disclosure Rule

By William Hoffman

The law of unintended consequences may soon be operating again as a new rule, designed to force companies to disclose more, could have the opposite effect.

At issue is the SEC's selective disclosure rule, finalized Aug. 15, and taking effect on Oct. 23.

The controversial regulation (also known as "Regulation FD", for "Fair Disclosure") prohibits private communications of information from top-level executives at publicly traded companies to securities professionals and analysts. Rather, all information must be disseminated simultaneously in public forums.

Fear of Litigation

"I think the intention of the new rule is good: to make the playing field more level," said Jim Angel, associate professor of finance at Georgetown University in Washington. "The problem is, with fear of litigation, fear of regulatory sanctions, are companies going to close up even more?"

Chris Ullman, spokesman at the Securities and Exchange Commission, countered: "The whole issue of a chilling effect is a red herring...In many public statements [the SEC has] said that this is absolutely not the purpose of the rule."

But Ullman also acknowledged, "Companies have to file periodic public documents with the Commission. Who they talk with after that is up to them."

The SEC spokesman added that the purpose of the rule "is to level the playing field" and protect the individual investor. "If companies want to disclose information, they can do that - they just have to give it to everyone," he said.

Yet companies are under no obligation to share information, Angel reiterated, beyond what is required by securities law and regulation. "I'm afraid that some companies are going to interpret this as a say-nothing' rule," said Angel, who is completing a one-year visiting academic fellowship at the NASD. "Will the cure will be worse than the disease?"

"It remains to be seen how effectively the SEC can enforce this law," added Richard Roberts, attorney at the Washington law firm, Thelen Reid & Priest. Angel said the SEC "is a lawyer-run shop, and a lot of them don't really understand how markets work."

Positive Outcome

Still, most securities professionals agreed the net effect of Regulation FD will be positive. Investors today are better prepared to understand the technical information that hitherto was the exclusive province of analysts, said Roberts, who is a former SEC commissioner. "Stocks don't just go up," he said. Investors tend to pay more attention to risks than to rewards, "and so I think that has increased the level of sophistication," he said.

"You wonder how it's taken so long to get here," added Alan Davidson, president of the Independent Broker Dealers Association.

Davidson said the new rule should ensure that smaller broker dealers, as well as investors, get access to information formerly reserved for market heavyweights. "That's not analysis, when you get information that other people do not have," Davidson said. "It's analysis when you uncover information that other people are not aware of."