TCS Daily

Disclosure Reg Cuts All Investors Out Of The Loop

By James K. Glassman - October 30, 2000 12:00 AM

It's rare that I disagree with Arthur Levitt, Jr., the chairman of the Securities and Exchange Commission. He has been a strong advocate on behalf of consumers during his nearly eight years heading the top investment regulatory agency. (Also, parenthetically, Levitt and I were business partners from 1987 to 1993, when he was chairman and I was editor and president of Roll Call, the twice-weekly newspaper that covers Congress.)

But I can't go along with his latest idea - rules that prohibit senior executives of corporations from giving information to investment analysts without giving it to the public at large. Over the years, it is true, a cozy relationship has developed between firms and professionals who cover them. Still, that relationship has generally worked to the benefit of shareholders since it allows companies to disseminate slowly warnings that bad news may be on the way - rather than having it come out in a shocking fashion when quarterly earnings are released.

Already, the predictable result of the new SEC disclosure rule - called Reg FD -- has been for many companies simply to stop talking to analysts altogether. On Monday, for example, the day FD offically went into effect, The Wall Street Journal ran an article about Matthew Berler, a Morgan Stanley Dean Witter analyst, who tried to ask a Georgia-Pacific executive for the usual guidance with Berler's spreadsheets, which cover 887 financial factors regarding the company. This time, though, no help from Georgia-Pacific, which is worried about violating Reg FD. As a result, says Berler, "there's a greater chance of error." A similar story appeared the same day in The Washington Post. This time, the chief financial officer of TeleCommunication Systems, Inc., on advice of his lawyer, coud not answer the questions of an influential Wall Street tech analyst.

What is Reg FD giving investors? Less information, not more. As a result, the market is displaying more volatility, not less - since firms, even though they know what is happening in their own businesses, can't tell anyone until after the end of each quarter. In an op-ed piece in The New York Times, Daniel Gross, author of "Bull Run" and a supporter of the new SEC rules, admitted the obvious: Reg FD "will surely bring greater volatility."

Frankly, we have enough volatility. Another word for "risk," volatility is the bane of every investor's existence. Higher volatility ultimately means lower stock prices.

Gross argues that, despite higher volatility, the rule is a good one since "analysts seeking an edge will actually have to do some reporting and make gutsy calls." Well, we can't argue with that. Many analysts are, indeed, lazy - or, worse, they are merely shills for the companies they cover or patsies for their own firms, which often sell their investment banking services, at a nice profit, to the same companies their analysts praise.

But Reg FD hardly helps solve the coziness problem - and it creates a worse one. An analyst may gain a slight edge if a company leaks her some information, but that information quickly gets circulated in this Internet age, and, within a very short time, it is available to all investors. In fact, rather than passing rules that make firms disclose less, the SEC should be urging them to disclose more - to generate competition for disclosure. For example, why doesn't Levitt state in a speech something like this:

"The SEC requires every firm to release profit and loss figures on a quarterly basis. But I would like to see those numbers released more frequently - not by law, of course, but in practice. Companies that disclose more will be rewarded in the marketplace. Once a firm begins issuing P-and-L statements monthly, others will follow. Soon, we will see weekly, even daily, disclosures. Why not? The data are there, in this Internet age. In fact, the abundance of information will swamp analysts. They will be forced actually to analyze, and their inside information will become far less important. They will render Reg FD irrelevant."

For now, however, Reg FD is an anachronism - a 19th Century regulation or a 21st Century stock market.

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