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April 30, 2001

SEC Disclosure Rule Is Under Fire: Regulation FD Is Confusing, Critics Charge at Roundtable

By Gregory Bresiger

It's probably in second place on traders' wish list - modifying or revoking what they see as the bothersome and the needless disclosure regulation that recently became effective. The Securities and Exchange Commission may or may not be in the wishgranting mood.

Acting SEC Chairwoman Laura Unger, the only commissioner to vote against Regulation FD, held a public roundtable on the controversial rule in New York City as Traders Magazine was going to press.

"At the time we adopted Regulation FD, the Commission made a commitment to monitor closely the rule's impact on information flow," Unger said.

Selective Disclosure

Reg FD forbids selective disclosure of material information to analysts and institutions without making the same data available to the public simultaneously. Depending on who one asks, Reg FD has either inhibited analysts ability to advise clients - or cleaned up the market place and given retail investors a better chance to be fully informed.

An SEC spokesman said the roundtable was initiated by Unger and is part of a process by which the commission occasionally solicits opinions on new regulations.

The SEC received an earful from corporate officials at the roundtable. Many of them said the intent of the law is good but its application is unclear.

"What is the definition of material? The standards of the law are uncertain," said John Huber, a corporate securities attorney with Latham & Watkins as well as a former SEC staff official.

"The regulators didn't give direction on the issue and I believe there has been a decrease in the quantity and quality of information," said Bina Thompson, vice president of investor relations for Colgate-Palmolive Co. "People are being muzzled in a sense."

"We frankly think that FD just adds another layer of bureaucracy to the market," said Lee Korins, president of the Security Traders Association, in an interview.

But Korins claims it is also adding volatility to the market because professionals disclose less information than before because they are fearful of triggering an FD violation. For instance, Michael Blumstein, a managing director in financial services at Morgan Stanley who recently debated the issue of Reg FD at a public meeting, adds that analysts are now, "reluctant to do investor conferences or do one-on-one interviews." He said that the law is unclear on what happens to a company that happens to come across material non-public information. Companies are disclosing less because of FD reg fears, he added.

Still, Harvey Goldschmid, a Columbia University law professor who helped the SEC write the rule, said FD is working out well and that it was necessary.

"The problem was with a CEO or a CFO walking into a room - knowing sales are down, knowing revenues are down, knowing the stock is going to tank next week - and simply providing the hard material to a favored analyst. Then it was used by the analyst and his large [brokerage] firm for their customers," Professor Goldschmid said. "That, no matter how you think about it, was an evil."

He adds that, if the SEC hadn't passed the new rule, the courts would have imposed something similar. Goldschmid's sentiments are supported by the Consumer Federation of America. The CFA has contended that the Bush administration is trying to sabotage the implementation of FD.

SEC Decision

What the SEC will do is unclear because there are so many questions about the commission itself. Besides the chairman's post, two other commissioner seats are open.

The trading industry is hoping all three appointments - which will be made by the first Republican administration in eight years - will make life easier for its members.

And the first thing on the wish list of traders? Reducing Section 31(a) fees. Legislation to accomplish that has been sailing through Congress, but all of a sudden there may be some questions about it [see separate story].