Commentary: This "Full Disclosure" Rule Could Mean More Secrets

The Securities & Exchange Commission's new rule on disclosing corporate information may be having an effect opposite to the one the agency intended. It is designed to give small and large investors alike equal access to market-sensitive information. Instead, it is cutting down on the amount of information received by anyone.

Even though Regulation Fair Disclosure, or FD, doesn't click in until Oct. 23, it is already having this perverse effect. Companies feel the rule isn't clear about what the SEC considers "material" information. So they're opting to err on the side of silence, giving little or no information rather than risk accusations that they are being selective, which could set up a slew of lawsuits. "It's just been devilish trying to get traditional levels of access" since the rule was approved Aug. 10, says Sean Ryan, a bank analyst at Banc of America Securities.

EXTRA CAUTION. Worse could be in store. Ryan predicts the rule will create a "black market" for information. Analysts with good connections at a company will still get extra data, he says, but they won't be able to include it in reports. Instead, they'll call favored investors to let them in on the news, he contends.

Certainly, companies already are avoiding on-the-record sessions that might divulge market-moving information. Credit Suisse First Boston bank analyst Michael Mayo says he had a conference call scheduled on Aug. 23 with US Bancorp executives and 100 of CSFB's clients. US Bancorp cancelled the call, Mayo says, because its president unexpectedly quit the day before, and the bank was loath to answer questions about his departure or the bank's future strategic direction to a select group. "In looking to reduce abuses related to short-term news," says Mayo, "the regulation hurts our ability to find out about the strategic direction of firms."

Corporate executives say they sympathize with analysts but argue that the new rule's requirement that all analysts and investors be given equal access would be too time-consuming. "It's almost impossible for a small investor to understand [immediately] something as large and complex as Wells Fargo," says Wells Fargo & Co. CEO Richard M. Kovacevich. He used to hold quarterly Q&A sessions with analysts. Partly because of the anticipated ruling, he decided earlier this year to scrap them and just issue a press release with the earnings statement.

No doubt, the SEC had the noblest of intentions in drawing up the new rule. But some revision is in order. On Sept. 21, the National Investor Relations Institute (NIRI) sensibly suggested that the SEC should put off applying the rule until Dec. 29. The Oct. 23 date that the rule is due to take effect is smack in the middle of the third-quarter earnings season. Companies reporting profits after Oct. 23 will have to meet tougher standards than those reporting earlier.

By following NIRI's suggestion, the SEC would have two more months to issue clarifications and define what it deems "material." SEC spokesman Chris Ullman says that NIRI's request is "being considered," and that the regulator will be issuing a list of answers to frequently asked questions "shortly."

Recent events show just how vital it is for the SEC to clarify what's legal and what's not. On Sept. 22, Conseco Inc., a troubled Carmel (Ind.) insurer, met with a handpicked group of investors, analysts, and reporters to explain a restructuring of its debt. For everyone else, it put out a press release giving only skeletal details of the meeting. Uninvited investors and news organizations complained bitterly. Conseco says it did nothing wrong. Both sides of the dispute say that the SEC's new rule backs up their claims.

If the rule isn't clarified, it's sure to drive information flows underground. In that case, the cure will be worse than the disease.

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