The final countdown to the implementation of a new Securities and Exchange Commission regulation is under way and local attorneys, corporate executives, and financial analysts are scrambling to identify acceptable compliance strategies.
The SEC’s Regulation FD, as in “fair disclosure,” seeks to remove selective disclosure from Wall Street. It focuses specifically on the communication, verbal or material, between senior corporate executives and those employees who have regular contact with financial analysts or major stockholders.
The SEC believes the regulation will allow individual investors the same timely access to pivotal financial information released by publicly traded companies that privileged institutional investors and analysts enjoy.
However, San Diego financial analysts and the attorneys who represent the public companies here are adamant in their belief that the regulation will slow to a crawl the dissemination of corporate information and as a result negatively impact the market.
Rule Goes Into Effect In October
Regulation FD goes into effect Oct. 23. Penalties for violating the new regulation include civil injunctions and fines.
“We want to comply,” said John Spelich, director of corporate communications for Gateway, Inc. The computer firm is the largest public company in terms of 1999 revenue headquartered in San Diego, according to the San Diego Business Journal Book of Lists. “So our over-arching concern is to make sure we continue to do what we think is right and what is within the requirements of the new rule.”
But, Spelich admitted the firm had not yet decided on a corporate communications strategy or “one we’re willing to discuss publicly.”
Additionally, he does not believe the new regulation will have much of an effect on his firm because Gateway is a “stickler” for making meaningful corporate information public.
The Callaway Golf Co. will begin Web-casting earnings calls for the first time and investor relations director Krista Mallory said her press releases would be a little longer than before.
Investor Relations Group Forms Position
The San Diego chapter of the National Investor Relations Institute has yet to establish a chapter position on the regulation, but acknowledges “this doesn’t affect the good companies,” said Cheryl Monblatt Allen, communications director for the chapter.
The local NIRI chapter members will meet Wednesday in La Jolla to determine a position.
In the event a company believes it has selectively disclosed material information, such as quarterly and annual earnings reports and new products, the firm has 24 hours to make it public knowledge.
But the very mention of “materiality” has attorneys here scratching their heads.
Like a lot of law firms representing public companies, Brobeck, Phleger & Harrison LLP issued a newsletter recently warning clients of Regulation FD. The partnership represents 25 San Diego public companies, said Bill Sullivan, the firm’s local securities litigation attorney.
In the newsletter, the law firm said the “primary problem with the rule is that it does not provide a practical definition of ‘materiality.'”
Investors, Firms May Value Data Differently
Moreover, the firm said it was a “vague standard that requires predicting the reaction of shareholders and which invites judgments in hindsight based on what investors actually treat as important” even if the company spokesperson didn’t think so at the time of disclosure.
As a result, lawyers such as Sullivan are pushing their clients to implement a corporate communications policy and reminding employees not to comment on expected earnings until a press release is issued.
“The idea there is that you have a targeted and focused group of people who communicate,” he said. “That way you know who’s commenting and whose conduct you have to work with.”
Such policies are recommended when the SEC enforcement division is on alert, Sullivan said.
“I think there’ll be a few enforcement actions brought by the SEC against companies and officers just to make their point,” he said.
Bud Leedom, publisher of the San Diego Stock Report and a financial analyst with First Security Van Casper, said if that’s the way the SEC approaches it, Regulation FD is “really going to make it tough for everyone out there.”
Some Companies React Prematurely
Leedom said he’s had discussions with several public companies and many are operating as if the regulation went into effect “today.”
Those companies are not releasing any information and the reaction by the stock market will be the true impact of the regulation, he said.
“If the market doesn’t have anything to go on, in terms of guidance from the companies, then there is going to be much more volatile reactions to certain news or earnings than we’ve seen in the past,” Leedom said.
However, the regulation is not the end of the world or so unheard of, said Donn Vickrey, an accounting professor at USD. Currently on leave, Vickrey develops quantitative investment models for institutional investors for Camel Back Research Alliance in Scottsdale, Ariz.
“It basically says if you’re going to release any information, you have to release it to everyone,” he said. “You can’t just give it selectively to a few people. It’s not unlike the insider trading regulation.”
Rule Expected To Be Fully Enforced
And like the insider trading regulation, Vickrey believes the SEC will fully enforce this regulation right from the start. Although that doesn’t mean they’ll let up at any time thereafter, it could mean a more level investment field.
“I think overall, despite the fact that it might be a little difficult to implement initially, it will be a good change for the marketplace,” he said.
Vickrey said the SEC is not done and analysts should expect more activity by the federal body on behalf of the individual investor.
“The SEC is looking at providing a ratings system for brokers to rate their execution” , the price investors are charged to buy or sell stock, he said. “They’re working on it right now. They floated some of the preliminary ideas out recently and it wouldn’t surprise me if it went into effect in 2001.”
