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April 30, 2003

Survival After the Reg FD Earthquake: Three Years Later, Pros Learn How to Cope

By Nina Mehta

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  • Survival After the Reg FD Earthquake: Three Years Later, Pros Learn How to Cope
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The end of the world never came.

But financial professionals were predicting dire consequences almost three years ago when a controversial new rule went into effect.

Now Regulation Fair Disclosure (Reg FD), which was enacted into law in October 2000, has achieved many of its goals. Reg FD banned public companies from making selective and unfair disclosures of material nonpublic information to securities analysts, favored investors and other market pros.

Material information now is simultaneously disclosed to all investors. In a record comment period, 6,000 letters were received by the Securities and Exchange Commission.

Much of the controversy has been forgotten. Nevertheless, some critics still claim that Reg FD reduces the flow of available information. That means analysts have a more difficult job. These critics also contend that stocks are now more volatile during earnings periods and major announcements.

But there is little doubt that Reg FD leveled the playing field, according to some observers. "There are not as many whisper numbers and rumors going round as there were before," said Kit Case, associate research director at Southwest Securities, a part of SWS Group, in Dallas.

The hostility also waned because many pros learned to survive with Reg FD. "The SEC staff is used to dealing with the-end-of-Western-civilization kind of comments and, lo and behold, traders will tell you it will put them out of business," said Sam Scott Miller, a securities industry attorney at Orrick Herrington & Sutcliffe LLP in New York.

Another reason the regulation was taken in stride: It wasn't too drastic a step for sophisticated, responsible firms. Lee Pickard, a partner in the securities law firm Pickard & Djinis in Washington, D.C., says Reg FD was not a radical step. "It's not a quantum jump from where we were and not a new codification of law, it's been a very successful remedial step," said Pickard, a former director of the SEC's Division of Market Regulation. But, he notes, Reg FD put the kibosh on companies currying favor with research analysts. Many of these analysts, working with institutions, had received peferential access.

Overall, Reg FD has standardized the way companies deal with sellside analysts. Its mandates have been imported into the policies of most public companies. Earnings releases and other major announcements are now typically webcast live. Bankers no longer sit through an issuer's analyst meetings. If material information is inadvertently disclosed, companies are usually prompt about issuing a press release, or filing a Form 8-K with the SEC.

Still, Reg FD is subject to varying interpretations. As a result, it has had unintended consequences, according to Artie Pacheco, senior managing director in the equities division at Bear Stearns. Senior management is providing less industry and company-specific color', he says. "It has made it more difficult for analysts to do their job, to process information and to provide it to clients," he added.

Others concur. But in the current climate of corporate scandals there's little sympathy for sellside analysts who must work harder. Channel checks and other third-party checks on the companies covered by analysts have always been mandatory. In addition, there are enormous amounts of public information available in annual and quarterly reports, SEC filings and in the financial media.