Commentary: Fair Disclosure Is Even Better Than Advertised

By Christopher H. Schmitt

The predictions from the securities industry were dire indeed last August. The Securities & Exchange Commission had just approved a new rule that if companies disclose information important to investors, they must share it with the world and not just a favored few on Wall Street. The industry warned that the rule would have a chilling effect that would actually slow the flow of information to individual investors. Fearful of liability stemming from mishandled disclosures, companies would simply opt to say little.

Well, forget about that. Six months have passed since Regulation FD--for "fair disclosure"--went into effect, and the sky has definitely not fallen. Evidence is accumulating that Reg FD is a smashing success, maybe working even better than supporters had hoped. There could well be room to fine-tune the rule. But it seems clear that Reg FD is quietly achieving the revolution intended by recently departed SEC Chairman Arthur Levitt Jr., whose attack on selective disclosure--he called it a stain on U.S. financial markets--was a key part of his investor-protection efforts.

In a recent survey, the National Investor Relations Institute found that 28% of its member companies are providing more information to analysts and investors than they did before the rule took effect and that an additional 48% have not cut back. A PricewaterhouseCoopers survey of 160 publicly held tech companies has found not only that many are disclosing more information more frequently but that few have incurred significant compliance costs.

Mark Coker, who tracks earnings conference calls for his Web site, likewise points to a dramatic change: Two years ago, more than 75% of companies holding conference calls excluded individual investors; today, virtually all are open to them. He also finds companies saying more on the calls, not less, and he says they're beginning to hold more interim quarterly updates. "I don't think any of us in the industry understood what a dramatic impact Reg FD would have," Coker says.

EASY CHOICE. As impressive as this and other developments may be, Reg FD's real worth may be that it builds an expectation of openness. Companies will have to disclose more if they don't want to suffer at the hands of investors. Robert G. Eccles, senior fellow at PricewaterhouseCoopers, puts it this way: If two companies are performing about equally, but one is more forthcoming, "which one are you going to invest in?"

Faced with evidence of Reg FD's success, critics acknowledge there are more corporate announcements today, and that information is more widely available. But at an SEC hearing in New York on Apr. 24, they complained that the quality of the information is down because companies are reluctant to add extra detail to boilerplate disclosures scripted in advance. It's important to remember, however, that much of this sentiment comes from analysts, who probably suffer the most under Reg FD, with loss of privileged access to company management. Most important, the complaint is bogus: Reg FD doesn't bar releasing extra details, it just says that if information goes out to one, it must go to all.

With the new Bush Administration and its less-is-more approach to regulation, some in the securities industry hoped the SEC would pull back on Reg FD, especially since the agency's current acting chair, Laura S. Unger, voted against Reg FD last year. But that's highly unlikely, considering the growing support for the rule.

Instead, what the SEC should do is consider modest tweaking that would encourage even better disclosure. Laggards who have clammed up rather than risk liability would probably see their comfort zone expand if given more guidance on how to comply. Better guidance on what constitutes "material" information--that is, the kind that if disclosed, must be shared with the world--would also be helpful.

None of this should take away from Reg FD's success so far. And given the market turmoil of recent months, it comes not a moment too soon.

Schmitt covers finance from Washington.

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