Commentary: Give "Fair Disclosure" Time To Work

Investors will eventually learn not to panic at a little bad news. In fact, candor will empower them

With some stocks recently losing over one-third of their market value in the wake of lowered earnings reports, there's an easy target for fretful analysts. It's Regulation fd, the "fair disclosure" rule that outgoing Securities & Exchange Chief Arthur Levitt Jr. championed for much of last year. "The quality of information is poorer and it's coming out slower--and that is going to make the market react more," argues Stuart J. Kaswell, general counsel of the Securities Industry Assn., the brokerage industry's trade group.

Indeed, the regulation, meant to encourage broader openness by corporate managers, is being attacked for forcing companies to muzzle themselves. Critics say managements are delaying or withholding market-sensitive information they once readily shared with Wall Street and big stockholders. Moreover, they're confusing the markets by packaging all the good and bad news at once in conference calls or in periodic releases. And they're denying analysts private guidance once freely given on their quarterly earnings estimates, leading to lots of missed earnings targets. The result: Investors, feeling blindsided, dump disappointing stocks.

But the critics are missing the point. Levitt's rule is designed to kill the longstanding Wall Street practice of analysts and influential stockholders getting an inside edge ahead of other investors and being able to recommend buys or sells based on it. Now, everyone gets the same information simultaneously.

NO HEAD START. Admittedly, there are short-term consequences. Since Reg FD was enacted, stocks have been apt to plunge as everyone grapples with troubling news at the same time. Consider the recent earnings warnings by SBC Communications, Microsoft, and Gateway. Hefty chunks of their market values vaporized in the wake of bad news. In pre-fd days, such slides may have been more gradual, as those in the know quietly sold before the news got out. "In the old regime, certain investors and brokerage houses would be able to get out of the stock at better prices, and the rest of the investing public would get robbed," argues Russell J. Lundholm, an accounting professor at the University of Michigan's business school.

Contrary to what critics allege, though, many companies are actually chattier than ever. Most now Webcast quarterly conference calls previously open only to analysts. Kmart Corp. even lets investors call in weekly for taped sales updates. More important, the number of companies issuing preannouncements of positive or negative news in anticipation of their regular quarterly results is up some 80% over 1999's closing quarter, according to First Call/Thomson Financial. "We are talking about a movement toward the totally transparent corporation," says Mark Coker, president of, which posts corporate conference call schedules on the Net.

To be sure, real transparency is a ways off. Critics are right that the information needs to be richer. Intermittent Webcasts, warnings, and quarterly calls aren't enough. More communications, more often must become the norm. And much of the current "lumpiness" of news releases--with data coming out sporadically instead of in a daily dribble to the Street's grapevine--is part of an inevitable rough period as companies learn to be more forthcoming.

COP OUT. For their part, investors and analysts have to learn to put the rush of data into perspective, too. For instance, instead of focusing on quarterly-earnings estimates as their main performance guide, investors must learn to pay attention to many more indicators of a company's performance. And since analysts won't be spoon-fed guidance on earnings in private sessions anymore, they'll need to independently collect and analyze data.

Levitt's rule is hardly flawless. Some managers are using it to avoid unpleasant discussions with reporters, who are explicitly exempt from Reg FD's prohibitions. Companies such as Bank One Corp., for instance, are dodging questions about nonperforming loans by saying they would have to rush out press releases to talk about such news. But more companies are learning a newfound candor that will ultimately serve them and their investors best. Wall Street will just have to catch up.

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