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May 31, 2001

Should FD ReformBe Reformed?

By Gregory Bresiger

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  • Should FD ReformBe Reformed?

Regulation Fair Dis closure (FD) is having a "chilling effect" on Wall Street. It is hurting the quality and quantity of information provided by public companies to analysts.

Those are some of the conclusions of a recently released study by the Securities Industry Association.

The study, which surveyed analysts, said FD's inhibiting effects include a decline in the quantity of information disseminated by public companies, and a reduction in the dialogue between analysts and officials of public companies.

Nevertheless, FD has many defenders on Wall Street and among consumer groups. They argue that - prior to FD - companies leaked information to a favored analyst or two. That was unfair to the investing public and those analysts who were not close to a company. Requiring that material information must be released in a public forum has promoted a fairer market, FD defenders say.

"We think it is working quite well. If anything, I would say it is doing better than we would have expected," said Charles Hill, a director of research at Thomson Financial. "We're publishing a lot more information and are able to give a lot more guidance," according to Glen Meakem, chairman and chief executive officer of Freemarkets, which runs a business-to-business e-market firm in Pittsburgh. FD was vitally needed, said one of its authors.

"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," said Professor Harvey Goldschmid, a Columbia University law professor. "That, no matter how you think about it, was an evil."

Goldschmid noted that those at the end of the information chain were hurt by this system. "It was a stain on the market," Goldschmid said, quoting former SEC Chairman Arthur Levitt, a strong proponent of FD.

Goldschmid said that FD is not designed to have a chilling effect on the flow of information, which he said has increased since the rule went into effect. However, the controversy about whether FD is a success or not, is over the quality, as well as the quantity, of information. Has the information flow improved and have discussions between professionals and analysts been hindered because business leaders are now fearful of triggering regulatory penalties? The SIA survey contended that the answer is yes.

"Survey participants say the regulation has had a chilling effect on the quantity and quality of information released by public companies, and could well be a factor influencing the near-record levels of volatility the market has experienced lately," according to Frank Fernandez, chief economist and senior vice president of research for the SIA. He said 90 percent of analysts surveyed complained that increased emphasis on the release of information directly from the company to the public produces an "announcement effect" as markets react to the news.

But Goldschmid argues that means the role of the analyst is changing. Short-term information is now much more available from many more sources. So an analyst's value is now in seeing long-term trends.