The Securities and Exchange Commission (SEC) has recently issued a new mandate for public companies that prohibits the selective disclosure of potentially market-moving company information to analysts and others before releasing that information to the public. The ruling, titled Regulation FD (for Fair Disclosure) was passed on August 10, and took effect October 23. (The full text of the final rule is at http://www.sec.gov/rules/final/33-7881.htm.) It specifies that companies must disclose important company information publicly and simultaneously. If information is disclosed unintentionally to analysts or investors, then the company must disclose this information to the public within 24 hours.
The regulation is designed to eliminate the potential for profiting on stock price movement by institutional investors and analysts with advance access to company information, as well as prevent preferential inclusion for analysts who might provide favorable reports. In response, companies have reportedly already begun making policy changes regarding the release of market-sensitive company information. The mandate has the potential to affect investors at all levels, financial analysts, researchers, the media, and information providers.
The rule states that, in addition to filing Form 8-K (a report of "unscheduled material events" or corporate changes) with the SEC, other acceptable methods of public disclosure include press releases distributed through a widely circulated news or wire service, or announcements made through press conferences or conference calls that interested members of the public may attend or listen to either in person, by telephone, or by other electronic transmission (including use of the Internet). The public must be given adequate notice of the conference or call and the means for accessing it.
Small investors should welcome the leveling of the playing field. As a reporter covering company news, I've been frustrated when I'm excluded from a conference call between key company executives and special analysts and investors only. Already, PR Newswire and Business Wire have seen an increase in the amount of press releases distributed. A number of media reporting on the SEC requirement commented that now financial analysts will have to rely on their own research and data analysis, rather than their inside connections with corporate executives. And, financial journalists could take on a more important role in analyzing and interpreting corporate announcements.
Bloomberg responded to Regulation FD by introducing the Investor Relations Channel, a communications tool that allows direct distribution of information to the institutional and retail community on the Bloomberg Professional service and Bloomberg.com.
"The Investor Relations Channel will provide a means to assist companies in meeting their responsibilities under the new Regulation FD. It will allow companies to disclose information to the public and to leverage the unsurpassed content that Bloomberg already provides," said Emilia Fazzalari, manager of new-business development for Transaction Data Services. "This will be a one-stop shop for investors, analysts, or anyone seeking information on a company."
Last month's NewsLink Spotlight article covered a number of Web-based products from EDGAR Online, Inc., a leading provider of information from SEC-derived data (http://www.edgar-online.com). A week before the FD ruling took effect, the company announced the launch of a new Web site, FD Express (http://www.fd-express.com), which provides real-time listings of the Form 8-K and Form 425 filings made to the SEC.
"Savvy market players and investors will be looking at the surge of new disclosure filings made as a result of the new Fair Disclosure rule. EDGAR Online is making all these filings available in one place: FD Express," said Jay Sears, senior vice president for EDGAR Online, Inc. The volume of 8-K filings (disclosures of unscheduled material events) is expected to double over the next 12 months due to the new Fair Disclosure rule. "Form 8-Ks are the anti-press release, now more than ever," said Sears.
The new FD Express Web site also provides an analysis of the new Fair Disclosure rule by the law firm Morrison & Foerster LLP and a selection of comment letters submitted to the SEC on the rule—which numbered a record-breaking 6,000-plus. The regulation was hotly debated by many and, not surprisingly, challenged by the National Investor Relations Institute (NIRI), a professional association of corporate officers and investor relations consultants (http://www.niri.org).
At a recent panel discussion hosted by NIRI's Boston chapter, Rick Martin, director of research for Tucker Anthony Capital Markets in Boston, said he believes that the new rule could create a kind of insiders' "black market"—with information as the principal commodity. Instead of relying on the company's public pronouncements, Martin said some securities analysts and professional investors may come to rely on each other for vital details about a company's expected future results. "There will be situations where information will be whispered among the sell-side and buy-side as a way to get around these regulations," Martin said.
According to a press release, Martin and other panelists said that the quality of securities analysis had deteriorated in recent years, as more and more analysts relied upon information supplied directly by the companies they followed—particularly in the area of earnings guidance—instead of depending on original research. Since more provocative, original research increases the potential for divergent views on a company's potential, panelists suggested that Regulation FD also would cause far more price volatility for some stocks. In fact, a reporter for CNET predicted that "market volatility is about to go from bad to ugly."
It looks to me like a time of opportunity for information providers, like EDGAR Online, Bloomberg, and others, and for analysts and researchers who know how to locate and interpret key corporate data.