After Regulation FD: Talking to Your Constituents

Will the new SEC regulation on fair disclosure change the way companies announce material information to the marketplace? In August the SEC issued new regulation FD, which will redefine how companies and their senior executives interact with analysts and the public in disclosing material information. The regulation (Fair Disclosure, one of three new rules set forth in SEC release "Selective Disclosure and Insider Trading" nos. 33-7881 and 34-43154) took effect in October despite pleas from several industry groups to delay its implementation. Coming to terms with regulation FD and how it will affect a company's relationship with its analysts has become a priority for CFOs and corporate spokespeople. Because this regulation affects how companies communicate with market professionals and the investing public, it is important for CPAs to know the rule's components and implications. REGULATION FD's IMPACT One of the reasons behind the SEC's adoption of regulation FD was the cozy relationship that some analysts shared with corporate management in order to deliver accurate earnings forecasts. The SEC was aware of the cat-and-mouse games that some corporate executives played with analysts as the latter looked at a company's performance based on earnings reports. The commission expressed concern that investors were at a disadvantage if they lacked direct access to analysts' conference calls and corporate officers. With regulation FD, the commission is attempting to level the informational playing field by barring companies from releasing market-sensitive information to Wall Street insiders before announcing the news to the general public. Basically, corporations whose senior executives provide market-moving information to a few professionals must make the news public at the same time for intentional disclosures, or promptly for unintentional disclosures. The regulation is designed to address the problem of selective disclosure made to those who might buy or sell the stock based on the information or advise others to do so. (See "Highlights," JofA, Oct.00, page 8 and the SEC Web site, www.sec.gov.) Will regulation FD really address the risks of leaks? W. David Malone, CFA with FinArc, LLC, an investment management firm in Newton, Massachusetts, thinks not. In his view the high-risk areas of leaks do not spring from company discussions of earnings with their analysts but rather involve insider trading violations which are addressed by other federal securities laws. He believes that "increased scrutiny of what companies can or cannot communicate will decrease the amount of information provided to the public and analysts alike. Security prices will be driven lower because of higher volatility of expected earnings as the question and answer sessions in conference calls will be abbreviated and provide less insight of future expectations. Over the next year company communication will be worse than before regulation FD, as this regulation effectively handcuffs public companies in disseminating future earnings information to the public and to analysts. Nothing will be disclosed (by corporate executives) unless the lawyers review it. " WHAT TO DO? It will be interesting to see if predictions of "chilling the information flow" become a consequence of the regulation, or if the controversial rule actually scores a victory for the small investor. So what are regulation FD's implications for analyst conference calls? At this stage companies are wary of discussing the new rule and are in a period of adjustment as they try to sort out the best approach to take. Learn the facts. CPA Vernon Brannon, CFO of HLM Design, Inc. in Charlotte, North Carolina, a company that provides architectural, engineering and planning services, says the first step is to learn how to handle regulation FD's requirements. Company employees received training about the regulation from attorneys from the SEC and private practice on the regulation's practical applications. …