Don't Roll Back Fair Disclosure

Transparency, the free flow of information, and a level playing field are the key components of efficient capital markets and capitalism itself, which is why the U.S. preaches their virtues around the world. But not, perhaps, on Wall Street. Last year, the Securities & Exchange Commission passed Regulation Fair Disclosure, barring companies from selectively disclosing key information to an inside crowd of analysts and big investors. Now companies must share news that is material to their performance and profits with all investors at the same time. Sounds decent, democratic, and dogmatically capitalistic, right? Not according to Wall Street, which is lobbying Congress and the new head of the SEC, Harvey L. Pitt, to reverse course. We hope they refuse.

In the past, CEOs, analysts, brokers, and money managers could shape the market to their advantage. They went to invitation-only conferences or took closed conference calls and heard exclusive financial details of what was coming up. It's no accident that stock prices often soared after such meetings, leaving small investors wondering what they had missed.

Then there was the "whispering" game. Companies leaked inside information to analysts as to what earnings they expected in the quarter, usually guiding expectations low. Analysts, allowed to buy shares for their own account based on this information, went on TV to spread the news. Companies then invariably beat the whisper numbers, sending stock prices soaring. With Reg FD, whispers are mostly gone.

True, other games are being played. Companies are now "preannouncing," lowballing earnings, only to "surprise" investors with an extra penny or two in earnings per share for the quarter. But with Reg FD, at least they must preannounce publicly, without whispering inside information to a select few. Progress of a sort. Maybe enough progress to explain the surprising decline in market volatility since Reg FD went into effect.

Wall Street does have one legitimate complaint about Reg FD: CEOs and analysts don't know exactly what is material and must be disclosed. The SEC should issue guidelines as to what is "material" and what is not. What it should not do is kill Reg FD, restrict the free flow of financial information, and hurt small investors.

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