```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

                 FAIR DISCLOSURE OR FLAWED DISCLOSURE:
                IS REG FD HELPING OR HURTING INVESTORS?

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND 
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 17, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-18

_______________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Printing 
                                 Office
 Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2550
               Mail: Stop SSOP, Washington DC 20402-0001

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSELLA, New York               JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director
            Subcommittee on Capital Markets, Insurance, and 
                    Government Sponsored Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman   PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
CHRISTOPHER COX, California          NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio                KEN BENTSEN, Texas
RON PAUL, Texas                      MAX SANDLIN, Texas
SPENCER BACHUS, Alabama              JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware          DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California          FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma             STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia                    MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina      BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio           GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona             JAY INSLEE, Washington
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
JIM RYUN, Kansas                     CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama                   HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
GARY G. MILLER, California           RONNIE SHOWS, Mississippi
DOUG OSE, California                 JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey            MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 17, 2001.................................................     1
Appendix:
    May 17, 2001.................................................    57

                               WITNESSES
                         Thursday, May 17, 2001

Boyle, H. Perry, Jr., CFA, Deputy Director of Research, Thomas 
  Weisel 
  Partners LLC, San Francisco, CA................................    32
Gardner, Thomas M., Co-founder, The Motley Fool, Inc., 
  Alexandria, VA.................................................    37
Glassman, James K., Resident Fellow, American Enterprise 
  Institute, 
  Washington, DC.................................................    30
Hann, Daniel P., Senior Vice President and General Counsel, 
  Biomet, Inc., Warsaw, IN; on behalf of the Association of 
  Publicly Traded Companies......................................    42
Hunt, Hon. Isaac C., Jr., Commissioner, Securities and Exchange 
  Commission.....................................................     6
Kaswell, Stuart J., Senior Vice President and General Counsel, 
  Securities Industry Association, Washington, DC................    45
Sweeney, Patrick D., General Counsel, Nomura Corporate Research 
  and Asset Management, Inc., New York, NY.......................    40
Unger, Hon. Laura S., Acting Chairman, Securities and Exchange 
  Commission.....................................................     4

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    64
    Crowley, Hon. Joseph.........................................    58
    Kanjorski, Hon. Paul E.......................................    59
    Kelly, Hon. Sue..............................................    61
    LaFalce, Hon. John J.........................................    62
    Boyle, H. Perry, Jr..........................................    93
    Gardner, Thomas M............................................   101
    Glassman, James K............................................    83
    Hann, Daniel P...............................................   131
    Kaswell, Stuart J............................................   141
    Sweeney, Patrick D...........................................   111
    Unger, Hon. Laura S..........................................    66

              Additional Material Submitted for the Record

Carey, Hon. Paul R., Commissioner, Securities and Exchange 
  Commission, prepared statement.................................   156
The Bond Market Association, prepared statement..................   160

 
                 FAIR DISCLOSURE OR FLAWED DISCLOSURE:
                      IS REG FD HELPING OR HURTING
                               INVESTORS?

                              ----------                              

                         THURSDAY, MAY 17, 2001

             U.S. House of Representatives,
      Subcommittee on Capital Markets, Securities, 
              and Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:20 a.m. in 
room 2128, Rayburn House Office Building, Hon. Richard H. 
Baker, [chairman of the subcommittee], presiding.
    Present: Chairman Baker; Representatives, Ney, Cox, Weldon, 
Riley, Fossella, Ose, Hart, Kanjorski, Bentsen, J. Maloney of 
Connecticut, Hooley, S. Jones, LaFalce, Capuano, Inslee, Moore, 
Hinojosa, K. Lucas, Shows, Ferguson, Israel and Ross.
    Also present was Mrs. Kelly.
    Chairman Baker. Good morning. I would like to now call the 
hearing of the Capital Markets Subcommittee to order and 
welcome our witnesses, and with brief explanation, explain the 
purpose of this morning's hearing.
    Since 1995 and the advent of online trading, we literally 
have millions of individuals who are now engaging in investment 
activity. I have been not surprised, but confirmed my view of 
this activity as to demographic profiles of those typical 
online investors with average annual incomes of about $60,000 
with net worth less than $50,000.
    So in fact, enormous capital flows are into the markets 
today as a result of the typically described ``mom and pop'' 
investor. To that end, there is then a responsibility of the 
Congress to ensure that the flow of information to those 
individuals is balanced, fair and appropriate to make educated 
investment decisions.
    With the advent of regulation fair disclosure, 
understanding the intent was to provide transparency and 
insight into investment decisions, there was the expectation 
that this would enhance the ability of that small dollar 
investor to be treated in similar fashion to the sophisticated 
Wall Street investor.
    On first review, it would appear that that may not in fact 
have been the result of a well-intentioned regulation. In fact, 
looking at the potential legal liabilities of a CEO or a CFO in 
making judgments particularly with regard to forward-looking 
statements, it may simply just not be worth it. And therefore, 
the decisions have been reached to deprive the markets of 
needed information as opposed to inform the markets.
    It is my view, and I think the view of many Members of the 
subcommittee, that whether you are a $200 investor or a 
$200,000 investor, you should be treated with equal respect and 
regard, but that treating both with no information is not the 
standard by which we conduct a measure of fairness.
    For those reasons, the Committee this morning is looking 
forward to the statements of those who will appear and will 
engage in a review of this matter over the coming months to 
determine what, if any, action the Congress should take with 
regard to ensuring that American investors are given adequate 
information to make appropriate decisions.
    With that statement, I would now recognize Congressman 
LaFalce who is with us. I do not know that the Congressman 
would choose to make an opening statement, but I will talk for 
a minute to make sure that he reflects on that decision 
carefully, and I am sure off the top of his head he will come 
up with an appropriate contribution to the hearing this 
morning.
    With that, Congressman LaFalce, welcome, sir.
    Mr. LaFalce. Thank you very, very much, Mr. Chairman. Maybe 
not the top of the head, but the top of my file. Thanks very 
much. I think this is a very important hearing and I 
congratulate you for having it. I welcome our distinguished 
witnesses today to this public discussion of the Fair 
Disclosure Regulation, or as it has come to be known, 
Regulation FD. I think it is a very important reg.
    Regulation FD was adopted to confront a serious problem. 
Companies making selective and important disclosures of 
material, non-public information to analysts, institutional 
investors, but not to the public at large. This practice 
disadvantaged the small retail investor and other market 
participants who did not have the access or the privileged 
relationships of analysts and powerful institutional investors.
    It undermined the fundamental premise that the market is 
both efficient and fair because of the broad dissemination of 
meaningful information to all investors at the same time.
    The Rule requires that when a senior official of a company 
discloses material non-public information to a shareholder or a 
market professional, then the company must: one, make all 
intentional disclosures public simultaneously; or two, 
promptly, for non-intentional disclosures.
    In my view, FD is an important and needed step to level the 
playing field for investors. And the regulation has gone a long 
way in ending the practice of selective disclosure to industry 
analysts and powerful institutional investors. It is possible 
that FD over time may, in fact, encourage companies to 
communicate directly with their investors in a more fair and 
transparent way.
    In addition, although FD was not precisely designed to do 
so, it may also help ensure that analysts remain a truly 
independent source of information for investors. The regulation 
should encourage analysts who have sometimes inappropriately 
become cheerleaders for the investment banking industry--and 
that is all too often the case--to return to the work of 
objective analysis of company fundamentals and not rely on the 
privileged access that permeated the pre-FD environment.
    At the same time, I am concerned about claims that FD may 
contribute to market volatility and I am interested in hearing 
the panelists' views on this point. The argument, as I 
understand it, is that the market is often surprised by results 
in the absence of analyst guidance ahead of official 
information by companies. One could also argue that the price 
effect of an announcement may simply be compressed into a 
shorter time period rather than the several days typical under 
the old regime of analyst guidance.
    I am also eager to hear not only from the SEC, but our 
other guests as well, about the possible chilling effects that 
FD may have produced. Perhaps the SEC should consider some 
specific guidance on what is material to assist companies in 
their disclosure decisions.
    It will also be important for our companies to understand 
the SEC's enforcement posture as they evaluate their own risk 
profile.
    As we confront claims that the quality of disclosure has 
suffered, we also must consider that this disclosure framework 
is in its infancy, and there is much data yet to be gathered. 
Companies, analysts and investors are clearly adjusting to the 
important changes FD has brought, and in many ways companies 
are learning how to communicate in an unfiltered way with their 
investors, and this will take time.
    Over the coming months we will look to the SEC, the 
securities industry and the investors themselves to guide us on 
the effects of FD. And I believe today's hearing can be an 
important first step in this direction. And I again 
congratulate Chairman Baker and Congressman Kanjorski for 
bringing this very important and distinguished panel together 
as we attempt to do our part in protecting investors and in 
enhancing the efficient operation of U.S. capital markets. I 
thank you.
    [The prepared statement of Hon. John J. LaFalce can be 
found on page 62 in the appendix.]
    Chairman Baker. Thank you, Mr. LaFalce.
    Mr. Kanjorski, did you have an opening statement?
    Mr. Kanjorski. Mr. Chairman, I am going to put most of my 
opening statement in the record. I, however, have just two 
areas I wanted to talk about here. From my perspective, 
individual investors on Main Street should have access to the 
same information as the pros on Wall Street. The preponderance 
of the preliminary evidence also indicates that the SEC's 
regulations tangible and intangible benefits are increasingly 
outweighing its costs.
    It is, however, also too early to know for certain how the 
Fair Disclosure Rule is working. With time and experience, I 
expect that the industry's concerns about Reg FD will likely 
fade as the marketplace becomes more comfortable with the 
enforcement of the standard.
    In the meantime, we should work in Congress to closely 
monitor the SEC's actions to implement the Rule and 
appropriately refine its enforcement approach.
    I am going to insert the rest of my statement into the 
record, Mr. Chairman. I just want to congratulate you for this 
hearing. I think it is very appropriate at this time.
    [The prepared statement of Hon. Paul Kanjorski can be found 
on page 59 in the appendix.]
    Chairman Baker. Thank you very much, Mr. Kanjorski.
    Does any other Member have an opening statement he would 
like to read? If not, I would like to proceed now to our first 
panel and welcome this morning the Acting Chair of the SEC, 
Laura Unger, for her comments. Thank you very much for your 
appearance and participation.

 STATEMENT OF HON. LAURA S. UNGER, ACTING CHAIRMAN, SECURITIES 
                    AND EXCHANGE COMMISSION

    Ms. Unger. Thank you, Chairman Baker, Ranking Member 
Kanjorski and other Members of the subcommittee. I appreciate 
the opportunity to testify before you today on behalf of the 
Securities and Exchange Commission regarding Regulation Fair 
Disclosure, which we call Reg FD.
    Reg FD represents a sea change in the way----
    Chairman Baker. Ms. Unger, I am sorry to interrupt. If you 
could pull that mike just a bit closer, we could hear better.
    Ms. Unger. Oh, sure.
    Chairman Baker. Thank you.
    Ms. Unger. How is that? OK. Reg FD represents a sea change 
in the way issuers communicate with investors and the 
marketplace. It is a very timely topic, so we commend the 
subcommittee for holding today's hearing.
    Commissioner Paul Carey could not be here today, but he has 
submitted a written statement for the record. And Chairman 
Baker, I was wondering if you could include that in today's 
proceeding?
    Chairman Baker. Without objection.
    [The prepared statement of Paul R. Carey can be found on 
page 156 in the appendix.]
    Ms. Unger. Thank you. Well, even though Commissioner Carey 
is not here, the subcommittee still gets a quorum of the 
Commission, as I am joined here today by my colleague, 
Commissioner Isaac Hunt.
    Issuers selectively disclosing material non-public 
information to analysts and analysts' clients trading on that 
information undermine investor confidence in the fairness and 
integrity of our markets. Reasonable people may differ as to 
whether Regulation FD is the best cure, but no one disputes 
that the problem of selective disclosure is a serious one.
    I dissented from the Commission's vote to adopt Regulation 
FD because of the breadth of the Rule. My dissent was not meant 
to minimize the problem of selective disclosure, but I was 
concerned that, in an attempt to eradicate actual trading by 
clients of analysts following a selective disclosure, Reg FD 
burdened the vast majority of issuers who are good corporate 
citizens with new disclosure requirements.
    Regulation FD embraces a broad parity of information theory 
by prohibiting issuers from disclosing material non-public 
information to analysts, absent a confidentiality agreement, 
without disclosing it simultaneously to the rest of the world.
    I was not convinced that adopting a communication rule was 
the best way to cure a trading problem. I was also concerned 
about the quantity and quality of information in a post-FD 
world. Now that the Rule has been adopted, the Commission will 
enforce Regulation FD the same way we would enforce any other 
rule or regulation. But during the Commission's meeting to 
adopt Regulation FD, I did pledge to monitor the Rule's impact 
on information flow. And last month I convened a roundtable in 
New York to discuss with the issuers, the media, analysts and 
investors how the Rule is working. And your staff actually was 
able to attend, Mr. Chairman.
    I do plan to issue a report on the roundtable in the near 
future. And the report will include the following five 
observations:
    Number one is the time factor. The consensus was pretty 
clear that it is too soon to assess the overall effectiveness 
of Reg FD.
    Number two is the quantity and quality of information. 
There is no question that Reg FD has increased the quantity of 
information provided by issuers, but the impact on the quality 
of information is a lot less clear. Some participants were 
concerned that the Rule had led to a decline in the quality of 
information provided, and we were told that some of the issuers 
use the Rule as a shield to limit information flow.
    Other issuers who are concerned about their top officials 
making on-the-spot determinations of materiality that could be 
second-guessed later have retreated to scripted conference 
calls and other types of presentations.
    The third observation would be the need for more guidance. 
Many issuers at the roundtable were confused about how to deal 
with questions of materiality under FD and expressed concern 
that the Commission may be overzealous in its enforcement of 
Reg FD. They called for additional guidance from the Commission 
on how the Rule will be interpreted and enforced.
    I think it is fair to say at this point that our 
enforcement efforts will be focused on clear-cut violations.
    Number four would be the need for more information 
dissemination tools. Participants stated that the rules of the 
self-regulatory organizations, especially the NYSE and NASD, 
that require the dissemination of a press release, limit the 
methods of dissemination otherwise allowed by Regulation FD. 
And they urge the Commission to explore with the SROs other 
means of achieving this dissemination and expanding the tools 
available to meet the requirements of Regulation FD.
    Number five, the regulation cannot be tied to current 
market volatility. At this point it is impossible to draw any 
direct correlation between Regulation FD and the recent 
volatility in the securities markets.
    It was clear from the roundtable discussion that we 
probably need more time to assess the overall effectiveness of 
Reg FD and whether any improvements or adjustments to the Rule 
are appropriate.
    Although ``FD'' stands for Fair Disclosure, and the title 
of today's hearing plays on that with whether it stands for 
``Flawed Disclosure.'' I think that maybe at this time we would 
say that ``Few Days'' have passed and that we need ``Further 
Discourse'' to figure out exactly where we need to go with this 
rule.
    In this regard, I can assure you that the Commission will 
consider the issues raised at the roundtable and at this 
hearing today in deciding what needs to be done with the rule.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Laura S. Unger can be found 
on page 66 in the appendix.]
    Chairman Baker. Thank you very much, Ms. Unger.
    I welcome now Mr. Isaac Hunt, who is a Commissioner of the 
SEC, and we certainly appreciate your willingness to appear 
here today, sir. Welcome.

STATEMENT OF HON. ISAAC C. HUNT, JR., COMMISSIONER, SECURITIES 
                    AND EXCHANGE COMMISSION

    Mr. Hunt. Thank you, Mr. Chairman.
    Chairman Baker. And if you would pull that mike close. It 
is not very sensitive. Thank you.
    Mr. Hunt. Ranking Member Kanjorski and other Members of the 
subcommittee, I am pleased to join my Chairwoman and to have 
this opportunity to testify before this subcommittee regarding 
the Securities and Exchange Commission's Regulation Fair 
Disclosure.
    Regulation FD was designed to eliminate selective 
disclosure of material non-public information. While the goal 
of Regulation FD to eliminate selective disclosure is almost 
universally supported, the method employed by the Rule has been 
controversial from the very beginning.
    While the general public strongly supported the proposed 
regulation, corporations and Wall Street saw an overbroad 
regulation that would have imposed significant cost. I myself 
expressed grave reservations regarding the initial proposal. I 
believed that Regulation FD as it was initially proposed was 
overbroad.
    More importantly, however, I believed it violated one of 
the basic tenets of securities regulation that President 
Franklin D. Roosevelt first expressed in his letter to Congress 
urging the Federal regulation of securities. Quote: ``The 
purpose of this legislation is to protect the public with the 
least possible interference to honest business.''
    Regulation FD as originally proposed would have interfered 
with every communication by a public company where material 
information was provided. It would have caused companies to 
publicly disclose simultaneously any material non-public 
information provided to suppliers, customers, and, yes, even 
the Government. It would have applied to material non-public 
disclosures made by any and every employee in a public company. 
It would have inappropriately interfered in the public offering 
process where companies seek to raise needed capital.
    In short, I believe Regulation FD as originally proposed 
would have interfered too much with honest business.
    The proposals, however, brought thoughtful public comments 
that helped the Commission and its staff to significantly 
narrow the effects of Regulation FD. Accordingly, I believe 
that Regulation FD as revised and adopted appropriately 
targeted the selective disclosures that we thought presented a 
problem to the integrity of our securities markets.
    Specifically, we were trying to stop disclosure of material 
non-public information by issuers or their representatives to 
favored analysts or other market professionals who in turn 
often passed this information on to their favored clients. 
Those favored clients might then use such information to obtain 
a trading advantage in the securities markets.
    While I believe that Regulation FD as revised enhances the 
integrity of our markets, which is why I voted in favor of its 
adoption, I remain concerned about any unintended consequences, 
specifically the chilling of communications.
    At the Commission meeting adopting Regulation FD, I 
requested that the Commission's Office of the Chief Economist 
undertake a study to examine the effects of Regulation FD.
    The study should seek to determine whether Regulation FD is 
accomplishing its stated goal and whether there have been any 
unforeseen consequences such as a chilling of communications or 
increased market volatility.
    I have been advised that any study would need somewhere 
between a year and two years worth of data in order to properly 
evaluate the effects of Regulation FD.
    I have asked and I am hopeful that the Commission will 
publish in the very near future the intended methodologies of 
the study so that we can obtain thoughtful public comment and 
make any necessary revisions.
    Since the adoption of Regulation FD, there have been a few 
surveys published regarding its effects. These surveys have 
shown both positive changes and negative changes in behavior of 
public companies. Some companies appear to have increased the 
amount of information they provide to the market, including 
most notably forward-looking information, while others appear 
to have reduced the amount of information they provide to the 
market.
    In my opinion, all of these surveys have some shortcomings. 
Although they do not provide us with any definitive judgments 
on the effects of the Regulation, they do provide the 
Commission with certain red flags indicating possible problems 
with the Regulation.
    It is now, I believe, incumbent upon us to explore and 
monitor these areas. We need to evaluate the landscape to see 
if these problems are anomalies related to the limited 
timeframe that Regulation FD has been in effect or if these 
problems are widespread and long-term. I believe the Commission 
has begun this process with our recent roundtable on Regulation 
FD mentioned by Chairman Unger.
    On the issue of enforcement, I have publicly stated that 
the Commission is not looking for a test case. This regulation 
was not adopted to provide our Division of Enforcement with 
another tool. In fact, I am hopeful that in time Regulation FD 
will be associated more with our Division of Corporation 
Finance and Disclosure Practices than with our Division of 
Enforcement.
    I believe that it will take companies some time to fully 
adjust to this rule. After all, this rule intends to change 
what has been standard practice for over 60 years. Thus, there 
is an education process that must take place before we rush to 
judgment.
    Therefore, at this time, I personally would not support an 
enforcement action in a case that I did not find to be 
egregious.
    Let me emphasize that, as you may know, to date the 
Commission has not brought a single enforcement case under 
Regulation FD. This does not mean, however, that our Division 
of Enforcement will not ask questions when it becomes aware of 
facts that suggest that the Regulation has been violated.
    I am aware that some have suggested that the mere asking of 
questions by our Division of Enforcement has in some cases 
caused companies to stop releasing information out of fear of 
violating Regulation FD.
    I do not make light of these concerns, but in my opinion, 
just as it is incumbent upon us to monitor the negative effects 
of the rule, we cannot and must not ignore abuses and 
violations of Regulation FD. Otherwise I believe we risk 
alleviating the negative consequences of the regulation only at 
the cost of eliminating our desired goal.
    I would, however, like the Commission to consider all of 
its alternatives when it finds cases where the rule has been 
clearly violated. In order for the rule to have a prophylactic 
effect, I do not believe every case requires us to seek 
penalties.
    In conclusion, Mr. Chairman, I believe Regulation FD is an 
important and appropriate rule for maintaining the integrity of 
our markets, but it must be monitored carefully to ensure that 
it does not result in less information being disclosed.
    It is my current opinion that it is just too early to come 
to any final judgment on the rule. Companies are still becoming 
familiar with it, and as they become more accustomed to its 
application, I am hopeful that more, not less, information will 
be disclosed.
    I should note that specific guidance on any particular fact 
pattern can be obtained any day by calling our Division of 
Corporation Finance. Additionally, frequently asked questions 
and significant telephone interpretations of the rule can be 
obtained on our website 24 hours a day, 7 days a week.
    Thank you again, Chairman Baker and Ranking Member 
Kanjorski for permitting me to testify before you today.
    Chairman Baker. Thank you very much, sir, for your 
statement.
    Chairman Unger, in trying to get my understanding around 
this issue, it appears that timing of the flow of information 
is extraordinarily important. Someone telling me today that 
Edsel would go out of business is probably not financially 
significant. But someone telling me that Corporation X had 
secured a patent and that the medication would fix a 
significant problem in society today and nobody else knows it 
except me and the corporation would probably be a pretty 
valuable thing.
    So the delivery and timing of information to all parties is 
the goal. But when I look at Reg FD--and I understand both of 
you have testified that no action is warranted today until we 
have better understandings of its impact--but if you look at 
the construction of it, we prohibit executive-level individuals 
from communicating preferentially with the market participants. 
It does not prohibit mid-management. It does not eliminate the 
natural ability of markets to engage in exchange of whisper 
numbers.
    So rather than the CEO, who has a broad view of the 
condition of the company talking informally with the analyst 
who is going to be coming up with the consensus earnings 
projection for the next report, we now have the necessity to 
abide by the law to go to mid-management, who may have a 
narrower view of corporate performance, and therefore perhaps 
give less reliable information to the analysts which they 
manage.
    And I say that with some degree of certainty that 
corporation management and analysts tend to talk to one 
another, because the corporation does not want to have an 
earnings expectation that is too high, therefore underperform.
    And I have been somewhat amazed. In the dot.com arena, a 
corporation that loses 6 cents as opposed to the consensus of 8 
cents has a run-up in value, while a brick-and-mortar 
corporation, who earns 9 cents instead of 10 cents, has a 
runoff of market cap. It just makes no sense at all.
    So to make a fair disclosure about what goes on in business 
practice, we do have corporate executives who share information 
in advance with the analysts who are trying to come up with a 
consensus estimate which needs to be a penny or two below the 
whisper number so that they can then exceed market expectations 
and see investors flock to this unexpected great news. How are 
you going to stop that? And does not Reg FD, based on those 
observations, simply complicate the ability for that mom-and-
pop investor we talked about, 800,000 trades a day, the huge 
run-up in mutual fund investment, IRAs? You name the investment 
strategy.
    It is individual Americans, working families, that are 
responsible for the enormous capital flows into the market. And 
it is very difficult to look at the way the system works today 
and feel like they are being treated on anywhere near an equal 
footing with the professional analyst. Make me feel better, 
please.
    Ms. Unger. I am not sure you are making me feel better. I 
think Reg FD preserved the ability of analysts to have 
conversations with mid-level management in order to preserve 
the mosaic theory, which means that you can communicate pieces 
of information and transmit pieces of information, none of 
which is material in and of itself, but taken as a whole would 
lead to a material piece of information or conclusion.
    Chairman Baker. But the problem with that point, something 
becomes material when a person trades on the basis of that 
information. So at the time of its release, it might not be in 
the executive's mind material.
    Ms. Unger. That is right.
    Chairman Baker. But to the recipient, it becomes material.
    Ms. Unger. In theory, it enables the analyst to collect the 
information and have these communications. And I believe the 
thinking would be that the analyst would not have the same 
level of faith or confidence in a mid-level management 
projection as they would in a CEO's projection. So it would 
really only be a piece of the due diligence the analyst was 
conducting with him.
    Chairman Baker. But that in large measure is a result of 
whether you lose money or make money. If you lose money, you 
talk to your lawyer. It becomes material and you sue him. If 
you make money, you are very happy and you go about your 
business.
    Ms. Unger. Well, this is part of the problem with Reg FD. 
If Reg FD was originally articulated to get to the problem of 
an unfair trading advantage, that is a very different problem 
than a communication issue. And as you know, the Supreme Court 
has rejected parity of information and has acknowledged that 
the corporate management and analysts community have, I 
believe, walked on the tightrope, or something along those 
lines, for a number of years, and the value of that 
relationship.
    When you get to limiting the communications of company 
management with the investment community, I think you do run 
into certain risks that the information collected by the 
analyst, or gathered by the analyst in the analyst's research 
of the company and its earnings or whatever information the 
analyst is collecting, might not be as precise as the 
information the analyst was receiving before.
    That is the tradeoff of Regulation FD. It requires the 
analyst to consult several sources in determining an earnings 
projection, for example, as opposed to just getting it from the 
mouth of management. And I do not know whether we know at this 
point whether that is good or bad. Obviously you have heard 
many different views about that.
    Chairman Baker. Thank you. I have exhausted my time. 
Hopefully we will come back for another round.
    Mr. Kanjorski.
    Mr. Kanjorski. Following up on what Mr. Baker said, it 
seems that apparently we have identified some sort of a 
problem, which the regulation was put together for the purpose 
of solving. Does the regulation as it is structured end up not 
directing itself at the problem and do we have a solution that 
is much broader than was necessary? Apparently, all publicly 
traded companies must deal with FD regulations. Is that 
correct?
    Ms. Unger. Yes.
    Mr. Kanjorski. And so even small companies on the over-the-
counter market have the same costs of going through the process 
of making sure that the information is out there. Was it 
intended by the Commission that there was a problem with larger 
companies or with smaller or mid-size companies? What 
information was getting out there that appeared to be unfair?
    Ms. Unger. The problem as it was originally articulated was 
that there was trading activity before or around the time of 
analyst calls that revealed information about earnings and 
earnings projections. That indicated to our former Chairman and 
others that there was material information being conveyed 
during these calls that was causing the analyst to either trade 
on that information or pass that information onto his favorite 
clients who then traded on that information in advance of the 
marketplace having that information.
    The reason the SEC could not bring a case for insider 
trading under those circumstances, which you would think would 
be the logical next step, is because in 1983, the Supreme Court 
said there is no duty owed by an analyst to the issuer because 
there is no relationship of trust and confidence between the 
issuer and the analyst. The analyst, in theory, works for the 
retail investors to whom they disseminate that information.
    Therefore, without a duty, there can be no breach of that 
duty. Additionally, the insider who provided the information to 
the analyst did not breach his or her duty to the company 
because he did not receive a benefit for providing the 
information to the analyst. And without a breach of that duty, 
there can be no passing of inside information and no violation 
of Section 10(b) and Rule 10(b)(5). Is that more than you 
wanted to know?
    Mr. Kanjorski. Not really more than I wanted to know, but I 
can see your problem in how to cure it. I am just wondering 
whether----
    Ms. Unger. We had two choices basically. One was to read a 
duty into that relationship, or two, to prohibit the 
communication of the information. Rather than read a duty into 
the relationship and lay the predicate for a 10(b) violation, 
we prohibited the communication. Therefore, the issuer cannot 
transmit material non-public information to the analyst without 
transmitting it to the rest of the world simultaneously or 
within 24 hours afterwards if the disclosure is inadvertent.
    Mr. Kanjorski. Why can that not be accomplished by just 
requiring the firms, when they talk to analysts, to talk 
publicly?
    Ms. Unger. Well, I think that was the tried. And in fact, 
that was part of the reason for my dissent. Why regulate 
communication when, in fact, the internet is making it very 
feasible for companies to make this information publicly 
available. Before, you did not have the possibility of 
webcasting your analyst calls. Companies can now provide a lot 
more access than they could have in the past and at a 
reasonable cost.
    Mr. Kanjorski. How large of a problem did the former 
chairman think this was? Was it 50 percent of the transactions 
that had insider information? Was it 5 percent? Was it 1 
percent?
    Ms. Unger. You know, I do not know the percentage. Do you 
know that, Commissioner Hunt?
    Mr. Hunt. No. I do not think we know how to quantify that, 
Mr. Kanjorski. I think many of us thought that there was a 
perception in the market that there was trading on selectively 
disclosed information by market participants who had access to 
that information. And the purpose of the regulation was to, 
insofar as possible, create a level playing field for those who 
had access to such information and those who did not.
    It can never be a totally level playing field, and we know 
that. But it was an attempt to level it as much as we could.
    Mr. Kanjorski. I come down on the side that every investor 
is entitled to the same information, although I think the 
difficulty is in how you accomplish that objective. I tend to 
agree with you, Ms. Unger, that with the internet today, it 
should be relatively easy to provide investors access to 
information without a lot of expense. Thus, the person that 
really is a Main Street investor could acquire important 
information as soon as an analyst does.
    But on the other hand, I weigh it against the burden, 
particularly on smaller capitalized companies, to police this 
regulation internally. Smaller companies may ultimately be put 
upon, either by disclosures that were not intended by the 
leadership of the company but occurred by people who are less 
faithful or did not carry on their fiduciary relationship to 
the company and talked to outsiders. They could later be 
charged with some violation.
    Moreover, it would be horribly expensive. I mean, an SEC 
suit against General Motors for insider trading is a flick in 
legal expenses. But, to a relatively small startup company, it 
could be disastrous and put them out of business.
    Ms. Unger. I just want to clarify two points. One is that 
Reg FD only applies to the highest level of management. So, in 
the scenario that the Chairman was laying out, again, you could 
talk to middle management in collecting the information, but 
the company would not be on the hook for any disclosure made by 
that middle management unless senior level officials were 
deliberately conveying information through middle management in 
an effort to circumvent Reg FD.
    And also, Reg FD is a disclosure requirement. So there is 
no basis for 10(b) action or an insider trading action. And 
there is no private right of action for an FD violation.
    So in that regard, while the threat of litigation is still 
something substantial to most companies, it is not as 
substantial perhaps as a private class action case involving a 
10(b) violation.
    Mr. Kanjorski. But, even a lawsuit by the SEC for 
enforcement to a relatively undercapitalized company could 
break it.
    Ms. Unger. Absolutely. We have heard a lot about that. That 
is right.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Kanjorski.
    Mr. Cox.
    Mr. Cox. Thank you. And thank you both for being here with 
us this morning. Chairman Unger, is the post-Dirks concern 
trading or inefficient dissemination of information?
    Ms. Unger. I think the concern was first expressed as 
trading. But as the alternatives to how to cure that problem, 
or perhaps lack of authority, emerged, it became a 
communication issue. The former chairman chose to address this 
issue through disclosure requirements as opposed to, again, 
reading a duty or a judiciary relationship between the issuer 
and the analyst.
    Mr. Cox. So as you look at this today, do you think that if 
the regulation were withdrawn altogether, if you can imagine it 
were just gone, that the lion's share of the problems that 
would be created in that vacuum would be people acquiring 
information selectively and then trading on it or disseminating 
it in a way that was uneven?
    Ms. Unger. I think there is nothing wrong with everybody 
having equal access to information if it is feasible. But the 
Supreme Court has never said that there is an absolute right to 
a parity of information. And it is, in fact, unreasonable to 
expect that everybody would have equal information.
    Mr. Cox. Yes. I am just trying to discern what the greatest 
concern is about. Is it about people acquiring information?
    Ms. Unger. I think that is what it has evolved into.
    Mr. Cox. About people acquiring information and then doing 
what with it? Trading on it?
    Ms. Unger. The problem is, it is not something--it was not 
my concern, so I am having a hard time answering you only 
because I am trying to read someone else's mind who is not here 
at the table. But my observations are that it started out being 
a problem with respect to trading and a lot of trading activity 
around the time of the analyst's earnings call with the 
company.
    And rather than bring a case and test whether we had the 
authority to say, ``OK, that information was disclosed for 
improper purposes, which would take you perhaps into an insider 
trading violation . . . .'' As I know, you know the case law 
very well, and rather than make that test case, the idea was to 
maybe cast a wider net and say, ``OK, those communications are 
improper.'' Nevermind the duty. We do not even have to look to 
the duty, because we are going to say that you just cannot make 
that information available on a limited basis. You have to 
disclose it to everyone simultaneously.
    Mr. Cox. I probably should not ask such a distinguished 
witness when I could ask my staff and probably get the answer. 
But I am just going to display my ignorance. Has there been any 
private litigation since the adoption of the regulation based 
upon violation of the Reg?
    Ms. Unger. No. As I mentioned to the Ranking Member, there 
is no private right of action under FD, because it is a 
disclosure obligation. And in fact, we made very clear, I 
think, in the release that it would not be the basis for a 
10(b) violation to avoid the specter of litigation.
    Mr. Cox. I did hear that exchange, but in my view there is 
a constitutional right to file bad lawsuits.
    Ms. Unger. Right. We have talked about that.
    Mr. Cox. And so oftentimes people style--they do their best 
to try and at least rely upon something such as this in 
constructing a cause of action that they are entitled to bring, 
for example, under 10(b)(5) or in some other way. To your 
knowledge, has that ever occurred?
    Ms. Unger. To the best of my knowledge that has not 
occurred, nor has the Commission brought an action, which you 
probably heard also. We have about a half a dozen 
investigations at this time, but we have not brought a case.
    Mr. Cox. And so from the standpoint of the issuers, do you 
believe that the entirety of their concern is Commission 
action?
    Ms. Unger. I think there is a lot going on. I think the 
issuers or the companies are trying to do the right thing in 
terms of following the rule. Nobody wants to be the first Reg 
FD case. I think these are all good corporate citizens that we 
are talking about when I am saying ``nobody'' and talking about 
companies in general. Nobody wants to have a case brought by 
the Commission saying, ``Well, you committed a securities law 
violation here; you did not follow the regulatory requirements 
of Reg FD. ``They do not want to be the first one. So people 
are reticent to make disclosures beyond what has been scripted 
or what has been specifically said or outlined that they can 
say.
    So I do think that is having a negative impact on the 
information flow.
    Mr. Cox. Well, my time has expired, but I would invite Mr. 
Hunt to reply to any of these questions that arouse your 
interest.
    Mr. Hunt. Well, thank you, Mr. Cox. I think that my 
concern--and I was in favor of the regulation and worked hard 
to narrow it so that it was more reasonable. My concern was the 
disclosure matter that when people got selectively disclosed 
information, particularly people in the analyst profession, it 
would be passed on to their favorite clients.
    Their clients would trade on that information ahead of the 
general marketplace knowing about that information, and that 
was a clear perception in many people's minds that that gave 
the people who had close relationships with these analysts who 
had close relationships with the issuers a clear trading 
advantage over the average investor in the marketplace today, 
you know, the individual investor who has come in the market in 
such great numbers in the last decade or so.
    So I thought the rule was a rule to, insofar as possible, 
level the playing field vis-a-vis the information available to 
the general investing public.
    I also want to emphasize that Regulation FD does not 
prohibit one-on-one conversations between analysts and the 
chief executive of a company so long as no material 
nondisclosed information is not revealed in those discussions. 
And so when we talk about the mosaic, we assume that analysts 
usually have more information, more background about the 
industries and the companies they follow.
    There is nothing in Regulation FD that prevents that 
analyst or small group of analysts from having a discussion 
with a chief executive of a registrant to fill in background 
material which may be more useful, is probably more useful to 
the analyst because of his knowledge and sophistication, than 
it would be to the general member of the investing public.
    The important thing we were trying to do was to make sure 
that material information was disclosed to everybody at the 
same time.
    Chairman Baker. You have expired your time, Mr. Cox. I 
guess I would surmise this. That the goal is to provide 
information. The next level may be to sue if you do not 
understand it. And that would be even a more difficult 
standard, I think, to meet.
    Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman. I was listening to 
the pager. And I appreciate the opportunity to ask a question.
    Ms. Unger, I am new to this process, and I was not here 
when the Reg FD was passed. But reading the materials and 
listening to your comments and answers to the questions of our 
leaders, I am going to ask you, it seems that when analysts are 
looking at a corporation and judging their estimates, financial 
statements and so forth, they have software that they can use 
to plug all that information and make a comparison of their 
financial statements and disclosures.
    And so they still have an advantage of being able to call 
mid-management and asking them for additional information. So 
it seems like the Regulation FD was one that has been in place 
a short time, not long enough for us to want to do away with 
it.
    Is it true that in spite of having it in the last 12 
months, we have had cases where large corporations have wanted 
to buy another large corporation and that the information that 
top management gave besides the financial disclosures were 
possibly in question, and that is why the purchase of that 
other company didn't take place? And then when the announcement 
was made that this giant was buying another large company was 
not going to through, then the smaller of the two companies 
sued the large one because their stock went down.
    And I don't want to disclose names, but it's in the food 
industry. And the question that I ask you is, it still happens 
in spite of Regulation FD. They talked to the highest of 
management, and it still happens that the information 
supposedly is not reliable. So would it be your opinion that 
maybe we should keep this Regulation FD for a longer period to 
let it be tested?
    Ms. Unger. It has only been 6 months since the rule has 
been implemented. I do think that was one of the findings from 
the roundtable, whether people liked Reg FD or didn't like FD, 
was that more time is needed to really assess the impact of FD 
on the quality of information. And, perhaps it was possible for 
the Commission to have more of an exchange with the corporate 
community and provide more guidance informally in order to 
perhaps educate people better on how to comply with the rule 
and that maybe this is just a period of adjustment.
    Mr. Hinojosa. Mr. Hunt, you said that when you first saw it 
implemented and enacted that you felt comfortable, and now that 
you're having second thoughts. Based on my comments, would you 
disagree with me?
    Mr. Hunt. No, sir, I don't think I quite said that. I said 
when we first proposed it I expressed concern because I thought 
as originally proposed it was overbroad. I think people in the 
building on the staff and at the Commission level worked very 
hard to narrow it, and by the time we adopted it, I thought it 
was an appropriate disclosure rule that precisely got at the 
selective disclosure we were concerned about and did not impair 
the ability of management of a company to communicate with 
others such as clients or suppliers or even the Government.
    We were trying to prevent the selective disclosure of 
information that we thought could affect the marketplace 
because it was going to analysts and then going from analysts 
to their favorite investment customers. And that's all the rule 
does now is limit that information from the issuer to 
investment advisors, broker/dealers and analysts who might use 
that information either to trade or to allow their customers to 
trade ahead of the market knowing that important material 
information.
    Chairman Baker. Mr. Hinojosa, your time has expired, sir.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Baker. If I may, I'd like to recognize Ms. Hart 
perhaps for a round of questions. Ms. Hart, did you have a 
question?
    Ms. Hart. No.
    Chairman Baker. Dr. Weldon. It would be my intent for your 
series of questions to be the last before we briefly recess for 
the vote. We have about 9 minutes or so remaining on the vote.
    Dr. Weldon. Thank you, Mr. Chairman. I will not consume 9 
minutes, I assure you. I just have a quick question.
    I apologize for missing your testimony, both the witnesses. 
And I don't know if you covered this in your testimony. I was 
wondering about a cost benefit perspective of the rule in light 
of the widespread criticism that the rule led to higher 
volatility in the market and lower quality of information to 
investors. What is your opinion about the cost benefit?
    As I see this, this is--if you listen to both sides on the 
issue, the impression that you get is that there's some good 
and bad. And maybe you can't answer my question. Maybe it's too 
complicated. But take a stab at it, please.
    Mr. Hunt. Do you want to do it? Or do you want me to do it? 
Either one.
    Ms. Unger. All right. We'll both speak on this one. I think 
the cost benefit analysis at the time the rule was adopted 
couldn't possibly have predicted the market volatility that 
we're seeing independent from Reg FD. And I don't think anyone 
in this room would attribute the current market conditions 
solely to Reg FD.
    So I think it makes it a lot harder to determine what if 
any contribution FD has had to volatility in a particular 
stock. Rather than having earnings management or a sort of a 
gradual introduction of information into the marketplace, 
perhaps some people are seeing more abrupt earnings 
announcements and failure to meet earnings projections, and 
that could have some impact on a particular company's stock 
volatility.
    But as far as the rule overall and the impact on the 
market, as Commissioner Hunt said earlier, it would take 1 to 2 
years to study that impact. This is not to say that we are not 
going to go ahead and do it, but it will be a little bit of 
time before we really know the answer to that question.
    Mr. Hunt. Mr. Congressman, I think that as Ranking Member 
Kanjorski mentioned in his queries to Chairman Unger, one of 
the things we are monitoring very closely on a cost benefit 
analysis is the effect of this rule on smaller issuers.
    When we had our roundtable in New York late last month, one 
of the comments we received from several large issuers was that 
complying with this rule is no problem to us. We have the 
resources, we have the staff, we have the experience to make 
sure that we have no selective disclosure. But we, they said, 
are concerned that this rule may have unintended adverse 
consequences on smaller issuers who do not have already in 
place the resources and the staff to monitor very well the 
disclosures that their management make to the analyst world.
    So that is one of the effects of the rule that we are 
trying to watch very carefully.
    In terms of volatility, I agree with Chairwoman Unger that 
given at the time we promulgated this rule and what was 
happening in the market at this time, I don't think there's 
anybody in this room who could say to what extent Regulation FD 
had, or didn't have, an effect on the existing volatility in 
the market.
    Dr. Weldon. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Dr. Weldon.
    At this time, we would recess for the vote on the floor. 
Members have expressed an interest in returning and asking 
additional questions. So with your continuing patience, we will 
resume our panel in just a moment. Thank you.
    Ms. Unger. Thank you.
    [Recess.]
    Chairman Baker. I would like to reconvene the hearing of 
the Capital Markets Subcommittee and again welcome Ms. Kelly, 
who is not a Member of the Committee, to our hearing today and 
recognize her at this time for her questions.
    Ms. Kelly. Thank you very much, Mr. Chairman.
    One of the criticisms of the rule that's been raised about 
the rule is about its materiality, that its materiality 
standard is amorphous. It's subject to sort of an after-the-
fact evaluation. And I'm wondering if the Commission shouldn't 
address this problem.
    I mean, why not formulate a bright line rule between the 
material and non-material information in some other way, some 
way that is perhaps more workable?
    Ms. Unger. Well, Congresswoman, you know that materiality 
is a concept that is well understood, maybe not well understood 
in this particular context, but in the Federal securities laws. 
It has been around for a number of years.
    I think the biggest challenge about materiality in the 
context of Reg FD is again that you are talking about 
communications. Normally when we're talking about materiality, 
it's in the context of a document. It is fairly easy to sit 
down and examine whether something is material or not, rather 
than to have a conversation and then think, ``Oh my gosh, did I 
just say something material? Do I have to disclose that?'' 
Which is why I think we're hearing a lot of anecdotal evidence 
that people are sticking to scripts or to predetermined pieces 
of information in terms of what they will disclose.
    In this area, one thing that I think may have sort of 
confused the issue a little bit for some people is that Reg FD 
included in reference to materiality a SAB, SAB 99, which is a 
Staff Accounting Bulletin on materiality. And that's fairly new 
to some people. So that could be part of the confusion.
    We could, however, consider adopting more guidance in terms 
of examples of types of information that maybe we wouldn't 
consider material. And that's something I think we'll consider 
in reviewing what was discussed at the roundtable in April 
where we can provide more guidance on materiality.
    I don't think you want a specific definition that applies 
only to Regulation FD, however. Because there are many contexts 
in the Federal securities laws where materiality is an issue.
    Ms. Kelly. The reason that I'm here is in my capacity as 
the Chairwoman of the Oversight Committee. So I'm going to ask 
another question. In adopting the release, the Commission cited 
its Staff Accounting Bulletin 99, which arguably casts a wider 
net than the established Supreme Court cases over the scope of 
the materiality.
    But given that the SAB 99 suggests that the materiality may 
be judged by subsequent stock price movements, does the SEC 
intend to apply hindsight to issuers' materiality?
    Ms. Unger. Well, the SAB 99 I did just point out to you is 
a reason that people might have a little bit less certainty as 
to what materiality means in this context.
    And there has been a Second Circuit decision that has said 
that SAB 99 and its interpretations are consistent with 
existing interpretations of materiality. And the case--I 
actually have it here--is Ganino v. Citizens Utility Company. 
And so that has spoken to whether the SAB 99 is consistent with 
previous Supreme Court interpretations of what materiality 
means.
    As I think Commissioner Hunt and I have both indicated 
today, we don't intend to try to make an example of someone who 
makes an inadvertent disclosure or a good faith mistake in 
terms of complying with Regulation FD. So no, I think the 
answer to your question is no.
    Ms. Kelly. Good. Thank you. I'm wondering about what the 
SEC is going to view as ``intentional'' statements of material 
information. For example, if a corporate CEO is in the midst of 
a discussion with analysts and knows that the response to a 
question is material, does the CEO refuse to answer the 
question? I have some problems with the fact that I think there 
needs to be some more bright lines drawn, some more 
information. I think people are confused about this.
    You know, if you get involved in the heat of a discussion 
and you're the CEO and you respond and you've got material 
information that you respond with because you're involved in 
this discussion and you feel that it's important to say 
whatever you're saying, would the SEC prosecute the CEO for a 
violation?
    Ms. Unger. I think the rule as drafted--and Commissioner 
Hunt might have something to add to this--is more geared toward 
intentionally making a statement. You know, perhaps picking up 
the phone and calling an analyst and intentionally disclosing 
something that is material and non-public and not 
simultaneously disclosing it to others.
    If something comes up in a conversation and a CEO answers 
it and then realizes, ``Ooh, that might have been material,'' 
there is a period of time where that CEO can disclose that 
information and not be in violation of the rule. So, again, 
that is a way to cure that type of inadvertent dissemination of 
information.
    Ms. Kelly. I understand that that is a 24-hour window only. 
I'm wondering if that is enough time. I realize I'm out of 
time. But I would perhaps like to talk with you a little bit 
more about that. Maybe we could talk----
    Ms. Unger. I think we hadn't heard so much that it was the 
time that was the issue, but really, the reluctance to engage 
in the dialogue. And we heard some anecdotes at the roundtable, 
and there was a subsequent mirror roundtable where people were 
just saying see my earnings guidance. So they weren't answering 
at all. And do you lose something when that happens? I think 
probably you do.
    Ms. Kelly. Thank you very much, Mr. Chairman.
    Chairman Baker. Thank you, Ms. Kelly.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman. Let me start out by 
saying, first of all, this is a very interesting topic and 
hearing. I have to say I am a little disappointed that we don't 
have Mr. Levitt here since he was the originator of this rule, 
and if for no other reason, to get some of the institutional 
history and what his intent was behind this.
    And given that I don't think Mr. Levitt--I never really put 
Mr. Levitt on the consumer side of the camp. And while he 
wasn't a securities lawyer, he certainly was a practitioner and 
I think had a pretty good understanding of the securities 
markets.
    But that being said, I do think we would benefit from his 
input. That being said, I think that our colleague, Mr. Cox, 
started to hit on what the issues are here. And I'm not sure we 
have determined whether the issue is the efficient 
dissemination of information or its effect on trading. And, Ms. 
Unger, you point out that the marketplace has changed, that 
there's greater access to information or the ability to 
disseminate information is much easier today than maybe it 
was--or certainly than it was 10 years ago or 20 years ago.
    I would add to that that I think the investor community, 
the investor class has expanded dramatically in the last 10 
years. And that the role of the securities analyst has changed 
somewhat. The securities analysts are not the primary 
disseminator of market information that they once were, given 
those other changes.
    And I think that's good. But at the same time, something 
like Reg FD it would seem to me that it was designed to not 
give one sector of the investor class, if you will, the benefit 
to information that the other sector might not get. And it does 
seem to me that public companies do talk to investors and do 
want to give them information, certainly not for illicit 
purposes and certainly not for insider trading purposes, but 
rather to try and tell their side of the story so that that 
when the analyst turns around and puts out their report that 
the market will react somewhat positively to either an upside 
or a downside potential.
    And so, you know, I think you could look at Reg FD and say 
that was the direction that it was going in.
    Now I think there is another problem that exists as well, 
and I think this is where Mr. Cox was going, and that is on 
this vacuum. There is a vacuum as information becomes more 
readily available, as the investor class grows, and as the use 
of analysts is somewhat devalued, you have a gap between 10Q's 
and the information that's available and a gap between offering 
documents in 10Q's and who is able to get that information.
    And I am curious whether you think--I haven't read your 
statement. I guess what you're saying is it's too early to tell 
what the impact of FD is going to be. And you had your 
roundtable and there was a difference of opinion with respect 
to that.
    But I'm curious whether or not the SEC is looking at Reg FD 
and the broader implications of the changes in the marketplace 
to where we might be moving away from or beyond quarterly 
dissemination of material information to even more frequent 
required dissemination of material information. Now I don't 
know that you can go to instantaneous at this point in time. 
But, you know, maybe in 100 years or 50 years or 25 years, you 
might do that.
    But is the Office of Economic Analysis or is the SEC 
looking at this? And do you think that's where we're headed?
    Ms. Unger. I actually have thought about that particular 
issue. In the era of the internet when everything is 
instantaneous, what's the point of having annual reports that 
have a 90-day lag time in information? By the time that 
information is publicly filed, it's pretty much already out in 
the marketplace in some other form or another. And what meaning 
does that have?
    And I have talked to the accounting industry about this 
issue and the notion of having real-time information available 
about companies and whether anyone's given thought to that. And 
in fact the accounting industry has. And the way they approach 
it is by reviewing a company's internal controls and validating 
that measure of a company. That way, when that company makes 
some type of disclosure, there will be a rating attributed to 
their internal controls and management and the credibility of 
the information then generally disseminated by that management.
    That's probably a long way away. Maybe not so long. But 
certainly it's not going to happen in the next year or so. And 
in the meantime, I think what we're trying to do is figure out 
how we can best use the power of the internet to fulfill the 
mandate of the SEC, which is full disclosure and now fair 
disclosure, and how we can make that information meaningful.
    And the tricky part is, when you have the opportunity to 
promulgate a rule like Regulation FD, well, what do you do in 
terms of providing the ability for companies to disseminate the 
information? Right now we say it has to be done through a press 
release, but you can then point investors to the internet in 
terms of where they will find the information being disclosed.
    So we have many challenges involving instantaneous 
information and the dissemination of information and how 
investors fit into the internet age. And I guess Reg FD is just 
one of the first steps. Have I answered your question?
    Mr. Bentsen. Well, no, no. I was going beyond it. I was 
just making a comment on FD. I do have some more questions, but 
I'll wait til another round. So, thank you.
    Chairman Baker. Mr. Ferguson. No questions?
    Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chair, and thank you for being 
here to talk about this issue. One of the things you've talked 
about in your testimony is, it's too soon to tell. At least 
that's the reoccurring theme that I've heard, it's too soon to 
tell. Can you give me some inclination as to when would be 
another appropriate time to have a hearing on this and look at 
some additional information that we will gather over the next 3 
months, 6 months? What kind of timeframe are we talking about?
    Ms. Unger. I'm not sure what Commissioner Hunt's views are, 
but I would think this is something that we should continue to 
monitor on an ongoing basis. We absolutely could not have 
gathered any meaningful information before the 6-month period, 
which is when we had the roundtable in New York. And then we 
had our first set of 10Ks since then, well, since the rule was 
promulgated.
    As we continue to look at the information that's being 
provided and seek the input of the industry, the issuers, the 
analysts and the investors, we can pinpoint what if anything we 
can do to improve the rule on an ongoing basis.
    Ms. Hooley. Well, I think like most rules we enact, no 
matter what agency or legislation we pass, there's always a 
shakedown period and a time to look at what have we done right, 
what have we done wrong, and how do we bring some kind of 
balance to this whole situation. So I will be anxious not only 
to finish this hearing but have another round in another 6 
months. Thank you for your testimony.
    Ms. Unger. Thank you.
    Chairman Baker. Thank you, Ms. Hooley.
    I again want to make another run at trying to understand 
where the intent is with Reg FD. The presumption is information 
ultimately affects valuation. And so that if information is 
provided equally to all, everyone can make judgments about 
value simultaneously. But information only becomes material if 
the disclosure of that information would ultimately affect 
value. So that in order to avoid a potential penalty or inquiry 
from the SEC--even the inquiry is sometimes enough to make a 
corporate executive think twice--the standard now becomes let's 
not say anything even if it could ultimately disclose 
information to the investor community that ultimately would 
affect value, thereby insulating us from action so that the 
safest approach is to say nothing, even if you have knowledge, 
for example, that the large contract that will be the basis on 
which future earnings projections are now based, has just been 
canceled. Because it doesn't go to solvency of the corporation, 
it's just another day at work.
    If you disclosed it, however, it would have the consequence 
of a significant--and let's take it both ways. It could be that 
you haven't announced the new contract that will mean 
significant run-up in price, or you haven't announced the loss 
of the contract which would result in a devaluation, but you're 
doing your job as a CEO if you simply do not disclose the 
material fact based on your concern that the way in which you 
disclose it may lead you to some liability.
    Am I inside the CEO's head with the proper view of the 
world? Is that's what's going on?
    Ms. Unger. Well, I think there are a couple of things going 
on with what you said. One is materiality. What is material 
information? I think you've pinpointed something that everyone 
would say is material. But the definition, the case law 
definition, is what a reasonable investor would want to know.
    When you say that it might affect the valuation, I think 
you're talking about the SAB 99 interpretation. One of the 
considerations is if it would move the price of the stock, 
which you obviously can't really know in advance, I think.
    When you talk about disclosing that information to an 
analyst, you can do it in one of two ways post-Reg FD. You can 
either issue a press release and announce it to the world--you 
know, announce your earnings call and make it available to the 
public, and announce it that way. Or, you can tell the analyst, 
pursuant to a confidentiality agreement where the analyst would 
then not be able to do anything with that information in terms, 
I guess, of putting it into the total mix of information.
    So in that respect, you don't have the time for the analyst 
to take that piece of material information and somehow allow 
management to manage the earnings of the company or to soften 
the blow of the disclosure of that information. You either have 
to disclose it pursuant to a confidentiality agreement, which I 
guess means that it remains non-public, or you have to disclose 
it to the whole public at once. And the question is, well, what 
does that do then to the price of your stock? And is that what 
management wants to do? Do they want to tell everyone at once 
or not? But those are your two options basically.
    Chairman Baker. Mr. Hunt, if you were on the other side of 
the table as a CEO for a corporation sitting in front of your 
Commission, what would you say to the Commission about your 
view of how this should function?
    Mr. Hunt. Given my view of the rule, Mr. Chairman, I think 
that I would say that companies have always been under an 
obligation to disclose either the gain or loss of a company 
that's going to totally change the financial statement for the 
next quarter or half-year or year.
    Chairman Baker. But let's move the bar just a little closer 
in, and instead of something that's a significant financial 
impact, it would enable you--let's take the positive side. It's 
a really good contract. It's going to improve your bottom line. 
It may not double your stock value, but it's going to be an 
improvement. So somebody may want to trade on that information 
and benefit from that 4, 5, 6 percent increase, being quite 
happy with that news. And you don't disclose that.
    I don't know of anything in current law that requires you 
to make that disclosure. And if you choose not to disclose it 
because you're worried about the mechanism by which you make 
that information available impairing someone, is that really 
what we want to be doing?
    Mr. Hunt. Well, I think actually there is something in the 
current law. The Supreme Court case that we based most of our 
materiality standard on, in addition to Accounting Bulletin 99, 
which says that if something is material, a reasonable investor 
would want to know it, and it doesn't necessarily have to move 
the market, but it has to be something that would change the 
total mix of information that a reasonable investor would want 
to know.
    Now if the company is putting out a document, a proxy 
statement, a registration statement, a press release in that 
time when the new contract comes in, then you might have to 
make that materiality judgment that it's got to be disclosed in 
one of those documents.
    And I think there's a lot of discussion about Regulation FD 
perhaps chilling the communication--I know you're going to hear 
that from the second panel--chilling communication between the 
issuer and the investment community.
    Our information so far--and it's very preliminary--is that 
some companies are putting out more information, some are 
putting out less. Some are putting out the same. I recognize 
that some people could suddenly hide behind FD and say I'm not 
going to say anything to anybody anymore. But I think we are 
finding that most people are not reacting to this regulation 
that way.
    Chairman Baker. Thank you, sir.
    Mr. Kanjorski.
    Mr. Bentsen, do you want to come back again?
    Mr. Bentsen. Yes. Let me follow up on that, because it also 
brings up another point I wanted to make in my last round.
    First of all, the law requires that public companies have 
to disclose material items quarterly or registration----
    Mr. Hunt. Or even more.
    Mr. Bentsen. Pardon?
    Mr. Hunt. We encourage them to disclose material 
information more often than that. If it happens between 
quarters, then disclose it.
    Mr. Bentsen. But this argument, and Ms. Unger, in your 
testimony you raise this I think as one of the reasons of your 
dissent--that some companies might just choose not to disclose 
anything.
    Now ultimately they're going to have to disclose, though. 
Even if upon the encouragement of the Securities and Exchange 
Commission that they don't want to disclose in an interim 
period, they have to disclose in a registration. They have to 
disclose in an offering document or they have to disclose in a 
10Q or 10K.
    And so it's just a question that they wouldn't disclose 
necessarily in the interim period because they figure they 
might trip over FD in some way and not conducting simultaneous 
disclosure to the public. Is that your concern?
    Ms. Unger. The only thing I would add to the disclosure 
requirements that you just enumerated is the Form 8K which has 
a number of items that do have to be disclosed intraquarter. 
And there's Item 5, which covers certain material events. And, 
without having Regulation SK in front of me, I can't remember 
exactly what they are. And then there's a change in auditors 
and things like that.
    So we've identified some material information that must be 
disclosed intraquarter. But you're right. There's still a whole 
host of information out there that we don't say you have to 
disclose that might not be disclosed as a result of the fear of 
repercussions.
    Mr. Bentsen. But what would be the motivation? I mean, 
first of all, I don't think stock analysts necessarily or 
market analysts necessarily, I mean, they're a conduit of 
information, but they basically are not a conduit from the 
standpoint of Acme Corporation sends them a press release and 
they publish the press release in their report that they send 
to their investors. They are an analyst of information, 
theoretically, and they take that information and make their 
judgment as to what it means.
    But what would be the motivation of someone to only provide 
information to certain parties in an interim period as opposed 
to providing it across the spectrum?
    Ms. Unger. Why would companies do that do you mean?
    Mr. Bentsen. What would be their motivation, yes.
    Ms. Unger. I think the concern was that companies would 
provide the information to curry favor with the analysts so 
that they would receive good coverage in the research reports. 
The articulated problem is that they could give the information 
to the analysts, curry favor in some respects by letting the 
analyst have that information; and the allegations in some 
cases were that the analysts would take--the way they'd curry 
favor is to allow the analyst to have that information and to 
pass it on to the favored clients, who would trade. Not 
necessarily the analyst him or herself, but the clients of the 
firm that the analyst was employed by.
    Mr. Bentsen. And why would we want anybody to do that?
    Ms. Unger. I think everyone in the room would agree that's 
not a good thing. The question is, how do you get at that 
problem? And that's a problem of insider trading, but not the 
type of insider trading to come within the traditional 
articulation of the rule.
    Mr. Bentsen. I'm not a lawyer, but I think what the court 
said, there was no trust, whether legal or illicit----
    Ms. Unger. No duty.
    Mr. Bentsen. ----that would cause some sort of insider 
trading activity. And I don't want to use this term, but I 
guess I can't think of another one. There is the potential for 
manipulation, which we would call ``spin'' in Washington, to 
say that we're going to provide to some analysts that we want 
to curry favor with or we want to make something sound a little 
bit better than it might be, I mean, why not provide it to 
everyone?
    Now I assume that if you were a company that had very good 
news--and companies seem to do this all the time--you'd want to 
put it out to the world because you hope it would pump your 
stock price.
    But I guess, you know, this is maybe the devil's advocate 
to my friend from Louisiana's question. But why would this--I 
mean, if this chill--I don't understand why this would chill 
communications between public companies and analysts who follow 
their stock or follow their companies. And why would we be 
concerned that that might happen when at the same time the law 
is pretty specific that the companies have to provide the vast 
majority of this information?
    Ms. Unger. Well, companies have always been allowed to give 
information previously. You could provide information to the 
analysts, and it wasn't a violation of anything, even if it was 
material non-public information. And frankly, because of the 
case law, that was true even if the analysts passed that 
information onto someone else who traded. Well, people thought 
it certainly presented an appearance problem--that a company 
could pass material non-public information onto an analyst who 
could then pass that information on to clients who trade.
    That's the problem. Not having material non-public 
information. That has never been a violation before. You could 
always possess the information. You could have it and the rule 
was always you had to disclose it or abstain from trading. Now 
we're saying the company can't give you that information unless 
there's a confidentiality agreement or the company discloses 
that information to the investing public.
    Mr. Bentsen. With the Chairman's indulgence.
    Mr. Hunt. Mr. Congressman, if I could add something. In the 
post-promulgation era, I am not concerned about companies 
spreading the word of positive information. They're always 
going to have a reason to do that. I'm concerned about whether 
there would be any chill on giving out negative information. 
Not that you won a big contract, but that you lost a big 
contract.
    Mr. Bentsen. Right.
    Mr. Hunt. And that under FD, the company will decide, I'm 
not going to say anything until I have to in a 10K or something 
like that, but I'm not going to say it right now. They'll 
always find a way to get the positive news out to the 
investment community.
    Mr. Bentsen. And that's a fair point, but it has to be 
clear for the record that there are very limited periods of 
time in which they are shielded from having to disclose that 
information.
    Mr. Hunt. But the market can move instantaneously.
    Mr. Bentsen. I understand that also. But the other thing, 
the point is, you are giving information, again, you're giving 
information to an analyst and the analyst is not, she is not 
just taking that information and reprinting it and putting it 
out under the name of, you know, Bentsen Securities or 
whatever. It is something that they are taking that information 
and they are theoretically putting out their own interpretation 
of that information. They are adding value to that information.
    Mr. Hunt. It depends on who you talk to, Mr. Congressman.
    Mr. Bentsen. I understand. But that's the theory of the 
job. And the question is, so why--I mean, even if you want to 
curry favor with the analyst and give them the information, I 
mean, why wouldn't you do that because you know that they're 
going to--if it's an analyst who happens to like your company, 
then maybe they're going to put something out saying the fact 
that they lost that contract isn't all that bad because of all 
these other things that are going on, and so forth, and so 
forth. And you have to put it out to everybody else.
    I mean, I still don't understand why we would want to 
protect one specific group as a conduit for information, good 
or bad, as opposed to opening it up to everyone else. Because 
that one specific conduit puts their own spin on it 
theoretically.
    Mr. Hunt. Well, I think the theory behind the rule as 
articulated is that there was a perception that the 
information, good or bad, was being given to a small group, 
maybe only one analyst who follows the registrant, the issuer, 
and that that analyst would pass it onto his or her favored 
customers, and those favored customers would be able to 
successfully trade on the basis of that new material 
information before the rest of the market knew it and could 
absorb it and trade on it as well.
    And so the disadvantage we saw in the existing state of the 
law, that there might be a time period between which there 
wasn't any obligation to disclose because it wasn't time for a 
10K or you had so much time before you put it in an 8K. And so 
if it was given to a small number of investors, they would have 
the advantage over the marketplace in their knowledge both of 
the information from the issuer and from the analysis that the 
analyst did before passing it on.
    Mr. Bentsen. And nobody would want that to happen?
    Mr. Hunt. No, I would hope not.
    Mr. Bentsen. But in your opinion, will FD help preclude 
something like that happening?
    Mr. Hunt. We hope FD will preclude some people having an 
information advantage over other people in the market. We know 
I think realistically that you can never completely level the 
playing field. Some people are more sophisticated. Some people 
are more knowledgeable. Some people have more experience in the 
market. So we're never going to be able to level it completely.
    But we hope that this certainly levels it some and helps 
alleviate the appearance of disadvantage that some people have 
vis-a-vis other people in the market.
    Mr. Bentsen. And was there any alternative?
    Chairman Baker. Mr. Bentsen, I'm sorry. Your sophistication 
is taking advantage of the other Members of the subcommittee.
    Mr. Bentsen. I appreciate there are others. Thank you, Mr. 
Chairman.
    Chairman Baker. Thank you, Mr. Bentsen.
    Mr. Ferguson.
    Mr. Ferguson. Thank you, Mr. Chairman. And I thank the 
panel for being here. Very briefly, I was not here the whole 
time. I came in late, so I apologize if this has been covered 
already. But I just had a quick question for the panel. And I 
appreciate your patience with us this morning.
    My question is why does Reg FD not provide safe harbor for 
analysts from ensuing liability or derivative liability? I 
mean, if our goal is transparency, it seems to me that may be 
one course we'd want to look into. Could you maybe just address 
that very briefly for me?
    Ms. Unger. Well, Reg FD is a disclosure requirement, and 
there is no private right of action for a violation of Reg FD. 
Only the Commission could sue. So if we gave a safe harbor from 
suit by the Commission, then nobody could sue.
    So I'm not sure if that's what you're talking about, or are 
you talking about the safe harbor for forward-looking 
projections?
    Mr. Ferguson. It just seems to me if we're trying to 
promote transparency, we should be looking into many avenues to 
see what we can do to promote that. So that's why. I just had a 
question. And again, I apologize I wasn't here the whole time.
    Mr. Hunt. Mr. Congressman, I think that we think that--the 
liability for the analyst is what you asked about--is an 
extended liability. The rule is mostly aimed at the issuers, 
the registrant.
    There is a possibility, a theoretical possibility of 
analyst liability if they aid and abet an issuer, for example, 
in making an unfair disclosure by getting the information and 
then passing it on to their clients when they know it's 
material and otherwise nondisclosed information.
    So there is a possibility of liability under FD for members 
of the analyst community, but it's an extended, it's a 
collateral liability. It's not a direct liability which mostly 
would rest on the shoulders of issuers and their 
representatives.
    Ms. Unger. Right. Because it's the company's obligation to 
make the disclosure.
    Mr. Ferguson. Sure. Thank you. Thanks, Mr. Chairman.
    Chairman Baker. Mr. Ferguson, let me jump in here on this 
point, though. We are now creating with Reg FD a standard. And 
if I take action against an issuer based on what I believe to 
be fraudulent conduct, then I can point to the disparate 
disclosure standards pursuant to Reg FD as a material fact to 
substantiate the fraudulent conduct of the corporation.
    So I'd think, notwithstanding the fact there are or are not 
currently pending issues of litigation, certainly this body of 
law creates something that a creative attorney can pursue in 
evidence of a 10(5)(b) violation.
    You would I think agree with that observation?
    Mr. Hunt. I think creative securities lawyers can always 
find a way to use whatever information they have.
    Chairman Baker. Depending on the charge per hour, I'm sure.
    Mr. Hunt. Yes.
    Ms. Unger. I think we did consider that issue, and there 
was a concern by the Commission that that would be a problem, 
that we would somehow inadvertently create the basis or a new 
basis for a 10(b) claim. In fact, we tried to address that in 
the adopting release. We stated that a violation of FD would 
not be the basis for a 10(b) claim.
    Chairman Baker. And to date, we have no knowledge that that 
in fact has occurred?
    Mr. Hunt. No, sir. But I think we would concede that there 
is certainly a possibility that even though there's no private 
cause of action under Reg FD itself, it is possible to take 
something that was said in the FD context, constructed with 
other things, possibly to make a plausible violation under 
Section 10(b) or Rule 10(b)(5), but not under Regulation FD in 
and of itself.
    Chairman Baker. Understood. It's not an actionable cause on 
its own basis.
    Mr. Hunt. Yes, sir.
    Chairman Baker. Mr. Fossella, did you have a question?
    Mr. Fossella. Thank you, Mr. Chairman. I apologize for 
being late, but I have a hearing across the hall on Commerce. I 
wish I were here for the earlier part of the testimony and 
questioning. So if I ask a question that's been asked already, 
accept my apology.
    It's been said that Regulation FD has done more harm to 
small investors as opposed to prior to Reg FD, because the 
amount of information has actually decreased, and therefore a 
small investor is not as sophisticated as those who perhaps 
could engage or contract with analysts or whatever the case 
might be, are now at a disadvantage prior to the implementation 
of Regulation FD. Do you agree with that?
    Ms. Unger. I think the focus has been on the quality of 
information, whether there is good information being disclosed 
post-FD and that there has been perhaps an increase in the 
number of disclosures made, but not in what those disclosures 
are in terms of the actual information provided.
    And so the question is whether that's good or bad for the 
marketplace is I think what you're asking. And that's something 
that we are monitoring very closely, because obviously that 
would be a very unintended consequence. If the idea was to 
provide more information to the marketplace, then certainly it 
would not be accomplishing that objective if investors were 
receiving less information.
    But I don't know. I don't know that we know other than 
anecdotally exactly what it's done. And there have been a 
number of studies in terms of the quality of information, but I 
think nothing definitive yet.
    Mr. Hunt. Yes, sir. I think that clearly the little 
investor was at a disadvantage, at least a perceived 
disadvantage, in the pre-FD era when sophisticated, large 
institutional investors, for example, could receive information 
from analysts and trade on that information before the rest of 
the market knew about it.
    If the consequence of Reg FD is there's less information 
going out to the general investing public now than was going 
out before, then that's a negative consequence of Regulation 
FD, and we would have to address that.
    As the Chairlady said, of the polls and the surveys that 
have been done so far in this preliminary 6-month stage, some 
indicate that more information is going out because of FD, some 
indicate the same amount of information is going out, and some 
indicate that issuers are giving out less information.
    We're going to have monitor this very closely to see what 
the overall effect of FD is as to the quantity and quality of 
information going to the general investing public.
    Mr. Fossella. So in a yes or no answer, I guess, you have 
not drawn a conclusion.
    Mr. Hunt. No, sir. We have not drawn it. I think companies 
and their counsel are still in the learning curve. How do we 
react to FD, you know? How soon do we get this material 
information out? Do we judge materiality in the same way we 
judge offering documents or the proxy material that the 
companies put out? I think they're in a learning curve. And I'm 
hopeful that the information will get better in both quantity 
and quality as we go down the road.
    Mr. Fossella. Is there a timeframe in mind at which point 
you will say, you know what, we're going to assess and realize 
that perhaps----
    Mr. Hunt. We're trying to assess it all the time. We're 
going to do a study certainly within the next year of the 
effects of this regulation. We promised at the public hearing 
where we promulgated it that we would do a study and study its 
consequences. And, of course, other people whom you will hear 
from today are also monitoring and doing surveys on the effects 
of this regulation.
    Ms. Unger. But what's interesting about FD is that the 
individual investor thinks they love the rule without really 
knowing what impact it's had on the information. So if you were 
to poll individual investors, they would say FD is the best 
thing that ever happened. And the other part of it is, they 
never thought that it was legal to engage in this type of 
information dissemination pre-FD.
    So you have this perception that FD is a panacea to 
individual investors without them really understanding the 
impact it's had on information flow. So I think there would be 
a very strong reaction from the individual investor community 
if we were to do something like repeal FD.
    So at this point I think maybe we're just trying to improve 
the effect of the rule.
    Mr. Fossella. But doesn't the issuer try to do what's right 
regardless of what the investor may or may not feel? I'm just 
trying to get a sense. If those who are correct in saying that 
Reg FD has had a negative impact on small investors, regardless 
of what they may feel if asked a question in a poll, if indeed 
it's wrong or it's been detrimental to the small investor, what 
is the SEC's position and when will it make a decision to 
modify or potentially abolish something like Reg FD?
    Ms. Unger. If I had to answer today whether it's had a 
negative or a positive impact on information flow, I would say 
a negative impact on the quality of information and a positive 
impact on the flow of information generally.
    Mr. Fossella. Like it's raining outside? That's more 
information, but who cares?
    Ms. Unger. Exactly. Exactly. Based on what I've heard and 
what people have said during the various roundtables, that 
would be my conclusion.
    Mr. Hunt. I'm not ready to reach that conclusion yet. I 
think clearly there has been more frequent information. I'm not 
yet ready to make a determination on the quality of information 
vis-a-vis information that was given out pre-Reg FD.
    I mean, one of the contexts to put this in is that there is 
so much more information about the financial world on TV these 
days because of all the business networks that, in some ways, 
the small investors are already inundated with information 
about what's going on in the marketplace. But I just would 
withhold the judgment yet on whether the quality of the 
information has increased or decreased under the FD regime.
    Chairman Baker. Thank you, Mr. Fossella.
    Mr. Fossella. Thank you.
    Chairman Baker. I'd like to recess the hearing briefly for 
the pending vote, but conclude this panel if appropriate. We do 
have a significant participation in the second panel.
    I would express my appreciation to you for your long-
standing participation today. No one would have expected the 
hearing would have gone on quite this long. But in the course 
of the morning, we've had in excess of 22 Members come in and 
express an interest in this matter.
    It also is a beginning for us, not the end. We will 
continue our examination of this and related matters throughout 
the rest of the year and look forward to perhaps when the 
Commission has reached some preliminary findings, revisiting 
the issue.
    I just recently refinanced, and at the closing had 68 pages 
of required information. Just the Fannie and Freddie 
disclosures were 18 pages. And I took the closing agent through 
a very painful exercise of going through every page, a closing 
he will not soon forget.
    But if I had had 88 pages as opposed to 68, it would not 
have improved the quality of either of our lives. So I'm not 
sure that the flow of information is in itself a valuable item. 
It is more important to have a quality instrument. A one-pager 
that told me what I needed to know would probably have been a 
very helpful thing on that morning.
    And my concern is that FD, although well-intended, may be 
turning the firehose on a little heavy and that the quality of 
the useful result is somewhat questionable, at least in my mind 
at the moment.
    But we are not reaching conclusions here today. We are only 
trying to understand, and we appreciate your courtesy in 
participating in the hearing. We'll stand in recess for about 
10 minutes.
    Mr. Hunt. Thank you, Mr. Chairman.
    Ms. Unger. Thank you, Mr. Chairman.
    [Recess.]
    Chairman Baker. I'm reasonably confident there will be 
Members returning here in a moment. We probably have another 
hour before we are again interrupted. But I think it 
appropriate to go ahead and get our second panel initiated.
    Few would have predicted we would be starting the second 
panel at 12:35. So I would express my appreciation to each of 
you for your participation, make you aware that your statements 
will be included in the record as received, and would encourage 
you to summarize your views in order to maximize the ability of 
Members to be able to ask questions of the panel.
    Our first witness in this panel is Mr. James Glassman, 
Resident Fellow, American Enterprise Institute, and we welcome 
you, Mr. Glassman. And if we can get you a microphone, I guess 
we'll get you started. And you do need to pull that thing very 
close. It's not all that sensitive. So thank you very much, 
sir.

   STATEMENT OF JAMES K. GLASSMAN, RESIDENT FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Glassman. Thank you, Mr. Chairman. It's an honor to be 
here today to discuss this very important issue.
    While the purpose of Executive Regulation FD was to help 
small investors, it has actually hurt them. Since the 
regulation was enacted, the volatility of markets has 
increased, making them scarier places for the public, and 
increasing the cost of capital for corporations.
    The regulation has certainly led to a lower quality of 
information emanating both from those companies and from the 
analysts who cover them. Warnings abounded before Reg FD was 
approved and even advocates admitted that higher volatility was 
a likely result. For example, in an Op Ed piece in the New York 
Times shortly before the approval of the regulation, Daniel 
Gross, a supporter of the rule, admitted the obvious. 
Regulation FD, quote: ``will surely bring greater volatility.''
    Two surveys have now shown that 90 and 71 percent of 
analysts believe that FD has increased volatility. Obviously, 
we don't know for sure. There are too many other factors 
involved. But it stands to reason that FD has increased 
volatility.
    Did the SEC believe that these adverse consequences were 
simply the price that had to be paid to achieve more important 
objectives? Fairness, through the elimination of special 
advantages enjoyed by analysts and professional investors; and 
objectivity, through the elimination of a system that could 
reward analysts with access if they gave favorable reports. 
That seems likely. My own view, however, is that high 
volatility and degraded information quality have been far too 
high a price for small investors to pay for a particular vision 
of fairness promulgated by regulators.
    And I speak as someone who has devoted much of his 
professional life to educating small investors and advocating 
policies to help them. For nearly 20 years I've been writing 
about finance and economics, while in recent years I have also 
served as a Fellow at the American Enterprise Institute in 
Washington and have run a website, TechCentralStation.com, that 
focuses on the nexus among technology, public policy and 
finance.
    My strong belief is that for most Americans, the stock 
market is the only route to the kind of wealth necessary for a 
comfortable retirement. So understanding the market and 
investing wisely are not a luxury, but a necessity.
    I have generally applauded the work of the SEC during the 
tenure of Chairman Arthur Levitt, Jr. Mr. Levitt was my 
business partner from 1987 to 1993 when we were co-owners of 
Roll Call, the Congressional newspaper that I edited. But at 
times the Commission's appropriate concern has led to 
inappropriate policy, mainly because of a lack of faith in free 
markets and the competitive process. Reg FD is a prime example 
of a top-down regulatory policy that tries to manage an often 
messy process which produces better results for small 
investors.
    Is it fair that corporate executives share information with 
some analysts and not others or with some analysts and not the 
public at large? Well, fairness is in the eye of the beholder. 
The Supreme Court in Dirks says that fair or not, it is indeed 
constitutional.
    Let me ask a different question. Is it fair that elected 
officials, including many Members of Congress here today, and 
certainly even Commissioners of the SEC, share information with 
selected journalists and not with others, or with some 
journalists and not the public at large? That would seem to be 
even less fair than selective sharing by corporate executives 
since public officials by definition serve the public. Yet 
selective sharing by politicians happens every day and 
undoubtedly works not only to promote good policy but also to 
promote the financial well being of journalists and their 
publications.
    Certainly selective sharing of information by politicians 
is a way to put more information and analysis into circulation. 
Without that sharing, the information might not come out at all 
and might not be understood.
    So what is the best way to encourage the dissemination of 
information, financial information? Not Government rules, but 
open competition. Competition driven by consumer choice is the 
key to abundance and variety in the marketplace both of goods 
and services and of ideas.
    Analysts compete. They work to get information about 
corporations because that information, plus subsequent 
judgments that they draw from it, gives them an edge over other 
analysts. As my colleague, Kevin Hassett, an economist at the 
American Enterprise Institute, has written, ``Analysts do this 
hard work because they or their firm's clients will profit if 
they are a little bit smarter than the next guy.''
    It is the potentially asymmetrical nature of the 
distribution of information that triggers the competition from 
which all investors benefit, whether they are clients of the 
analysts with the initial edge or not. If information by law is 
relayed to all analysts and in fact to all citizens at the same 
time and in the same way, then the incentive for hard work by 
analysts declines sharply. Less information comes out, and 
small investors suffer.
    Now while the internet offers the technology to make vast 
amounts of information about companies available to investors, 
the role of analysts remains critical. Raw numbers don't help 
most investors who have a hard time telling an income statement 
from a balance sheet. More than ever they need analysts to 
analyze, to tell them what the numbers mean and to ask 
corporate managers to find out.
    In addition, according to several surveys, Regulation FD 
has led skittish companies simply to disclose less information. 
With information limited by this regulation, investors have 
often been shocked, for example, by quarterly earnings results 
about which they may have learned in a more gradual, less 
abrupt way in the preceding months. These shocks almost 
certainly led to increased volatility and high volatility led 
small investors especially to make poor decisions about the 
stocks they hold and may acquire.
    Also, press releases and earnings announcements present 
information in a less contextual manner in a post-FD world.
    So what should be done about Regulation FD? Don't study it 
for 2 years, as has been just suggested earlier, and in fact, 
don't even fix it, as many issuers and securities industry 
officials have argued. Abolish it.
    Regulation FD is simply the latest manifestation of an 
approach to regulation that is harmful to consumers, because it 
denies them the benefits of free market competition. Just as 
companies compete for the favor of customers they will, given 
the chance, compete for the favor of investment analysts, their 
clients and investors at large. How? In part by trying to gain 
an edge on competitors by offering what analysts and investors 
want most: Information.
    A company that can be relied on for timely, abundant and 
thorough business data placed in a truthful context is a 
company that will attract more capital, all else being equal. 
Investors don't like being kept in the dark. And for that 
reason, 83 percent of companies now conduct conference calls 
and four-fifths of them open those calls to the public. We 
don't need regulators telling companies how to do what is in 
their best interest.
    What Regulation FD reveals, in conclusion, is a misguided, 
often destructive regulatory mentality. The hubristic notion 
that regulators stand between investors and chaos, that is 
simply untrue. Orderly markets in goods and services flourish 
without the heavy hand of regulation about disclosure. Markets 
in financial information, given half a chance, will do the 
same.
    Thank you.
    [The prepared statement of James K. Glassman can be found 
on page 83 in the appendix.]
    Chairman Baker. Thank you, Mr. Glassman.
    Our next witness is Mr. Perry Boyle, Chief Financial 
Officer and Deputy Director of Research for the Thomas Weisel 
Partnership. Mr. Boyle.

   STATEMENT OF H. PERRY BOYLE, JR., CFA, DEPUTY DIRECTOR OF 
             RESEARCH, THOMAS WEISEL PARTNERS, LLC

    Mr. Boyle. Thank you. I appreciate the opportunity to 
convey my views on Reg FD to the subcommittee. My name is Perry 
Boyle. To correct the record, I'm not the Chief Financial 
Officer, but I am a founding partner of Thomas Weisel Partners 
and currently serve as the Deputy Director of Research. I've 
been an equity analyst since the middle of 1992, covering a 
variety of sectors, starting with transportation stocks, 
business services stocks, and most recently, marketing services 
stocks. And I think I'm one of the few analysts that the 
Commission has actually talked to directly on this subject.
    To clarify my general position on Reg FD--and I believe you 
can view me as a typical analyst in this--I support the same 
ends as the Commission on selective disclosure. Good analysts 
do favor a system that provides broad, nondiscriminatory 
dissemination of quality information.
    I also note that from a sell-side position, Reg FD, by 
reducing the flow of quality information, increases the value 
of good analysts in the marketplace, so it would be 
disingenuous of me to rail against the regulation despite how 
strongly I agree with Mr. Glassman in principle.
    However, from a public policy perspective, the regulation 
does have costs that have not been adequately quantified, and 
it's questionable whether the benefits of the regulation merit 
those costs.
    I listened appreciatively to the Commissioners' plans to 
study and measure the costs, but I'm still relatively clueless 
on what they actually plan to study and measure.
    I'd like to address some of the questions posed by the 
Committee in its letter inviting me to testify. First, whether 
there was a need for Regulation Fair Disclosure prior to its 
promulgation. I don't believe there was.
    It's always been my understanding that selective disclosure 
was impermissible prior to Reg FD, and one might interpret FD 
as a rather inarticulate rewrite of previous law that's created 
much confusion and very little clarity. I don't recall reading 
in the popular press a groundswell of public demand for a new 
Fair Disclosure regulation until the SEC raised the issue. The 
U.S. capital markets are globally recognized as the freest and 
fairest in the world. Issuers from around the globe flock to 
our market.
    Indeed, I doubt that the vast majority of America's 90 
million investors even know about the rule or have any 
practical use for it, given that almost all of them depend on 
professionals such as fund managers or stockbrokers to manage 
the bulk of their accounts.
    On the plus side, to the degree that Reg FD has raised 
public confidence in the capital markets, that would be 
laudatory. I've seen no study that supports that conclusion. 
But a reasonable person might presume that that is the case.
    From an analyst's perspective, Reg FD does not change our 
fundamental role, nor does it introduce a new moral or ethical 
duty on selective dissemination. But it does create more 
uncertainty about what the definitions surrounding selective 
dissemination are and how companies and analysts will be 
prosecuted for sharing information. It has injected uncertainty 
in the marketplace with an unreasonable definition of 
materiality and a lack of clarity on how the rule will be 
applied and enforced.
    As a general rule, most of us involved in the capital 
markets believe that regulations that encourage efficient 
markets are good, and regulations that impede market efficiency 
are not good. This is based on our education and experience 
that over time, securities prices reflect all available 
information about that security.
    In that context, the short-term impact of Reg FD in my 
experience has been to reduce the flow of useful information 
from issuers to the investment community. Longer term, as we 
all learn how to live with it, the restrictive impact is likely 
to abate. In the information age, with the plethora of media 
channels, it's hard to keep the lid on interesting news.
    Now that the Commission has dealt with the fair disclosure 
issue, perhaps the next priority should be more on full 
disclosure. In the normal course of filings under SEC 
regulations usually generally accepted accounting principles, 
issuers exclude massive amounts of information that could be 
presumed material in making an informed investment decision 
about a company.
    The simple fact is that investors will always be making 
investment decisions based on a combination of imperfect 
information, varying degrees of analysis, experience, intuition 
and luck. That's what makes a market.
    I think it's instructive to look at who wins and who loses 
under the regulation. Winners include previous SEC 
commissioners for a positive public relations move, lawyers 
engaged by issuers to ensure compliance with the regulation, 
investor relations and public relations personnel who have much 
more work to do, the members of the public who were concerned 
about fairness of information disclosure, the financial media 
who have more press releases to make sound bites of, the 
business wires and webcast service companies, day traders who 
have more press releases to trade off of, market makers, who 
actually benefit from increased volatility, and good analysts, 
who have always cultivated a variety of sources of information 
other than top management of issuers.
    Losers include issuers and their shareholders who have to 
bear the cost of the compliance, investors, who bear the cost 
of increased market volatility, which I do believe can be 
measured, and bad analysts, who merely reported what they heard 
from management.
    Contrary to some of the rhetoric we heard this morning, 
analysts are generally prohibited from short-term trading in 
the stocks that they cover. Trading activity in advance of 
anticipated announcements of earnings, which often you see 
spikes in volume, are people making educated bets, not 
necessarily on inside information held by analysts. And I would 
like to see the SEC's data on their concerns on that.
    My concern is that Reg FD was designed to attack anecdotes 
of insider trading rather than attack a documented problem.
    Also to Commissioner Hunt's concern. We do not dole out 
information to select clients. That is prohibited by any number 
of rules. All our clients get it at the same time. I believe 
the SEC may not have a very rich view of the role of the 
analyst. While I'm certainly not asking for sympathy, there are 
only three things that I know every day when I go to work: 
First, I'm wrong. If I was right all the time, I wouldn't be 
doing sell-side research, I'd be talking to you ship-to-shore.
    Secondly--I'm going to upset somebody today--I'm paid to 
have an opinion. Often that opinion will be contrary to the 
opinion of others, including my clients, which can be upsetting 
to them. If I don't have an opinion, I'm not doing my job.
    And third, I'll be lied to all day by just about everybody 
I talk to, especially the management teams of the companies I 
cover.
    Our job is to anticipate trends and figure out which 
companies will capitalize on those trends to the benefits of 
their shareholders over the long period of time. By reducing 
the information flow available to the analyst community through 
poor definitions of materiality and liability, with few safe 
harbors for the analyst community, the value of the analyst 
community, which the SEC itself recognizes is necessary to the 
preservation of a healthy market, is diminished.
    How are those affected by FD, adjusting to Reg FD regime in 
terms of policies, practices and trends? On the positive side, 
it's created a renewed commitment to what we call primary 
research. That's where we gather input from customers, vendors, 
competitors, employees, and so forth, to create a mosaic of 
information regarding a company's prospects.
    On the negative side, it's increased an adversarial 
relationship between management and analysts. Many issuers now 
believe that they need to protect themselves from analyst 
interactions. Many issuers are not particularly happy that 
analysts are poking more deeply into their relationships with 
customers, suppliers and even their lower-level employees, but 
that's a fact of life they need to learn to live with.
    Not all of those sources, though, can replace the lost 
quality of information that was often available from direct 
interactions with top management, particularly surrounding 
longer-term strategies and estimate guidance.
    In the post-Reg FD world, analyst interaction with top 
management is far more likely to occur in a highly scripted 
manner with management's only discussing information that has 
been scrubbed and sanitized by lawyers and investor relations 
personnel. These interactions lack spontaneity and a depth of 
color that existed pre-Reg FD.
    There have been numerous articles on Reg FD in recent 
media, including a May 11th article on page C-1 of the Wall 
Street Journal talking about the Progressive Company and 
lauding the fact that post-Reg FD, they're now publishing 
operating statistics on a monthly basis instead of only quarter 
end. Well, that's clearly positive.
    But prior to Reg FD, many companies in a variety of 
industries already released monthly operating data, and still 
the data provided by Progressive is historical in nature. They 
still refuse to give forward guidance on how they believe the 
company will perform.
    The same article notes that Gillette announced earlier this 
year that it would no longer provide short-term earnings 
guidance. And a New York Times article last Saturday talked 
about how Wal-Mart will no longer share its detailed sales data 
with third parties.
    The April issue of CFO Magazine has a survey done by 
Thompson Financial. In response to the question, ``What changes 
have you made due to Reg FD?'', 21 percent of respondents said 
they provide more info on earnings and releases. But 21 percent 
also say they no longer give earnings guidance. Thirty-two 
percent say that they have limited the flow of information, and 
22 percent say they are more cautious in discussing earnings 
estimates.
    The key problem with the regulation is the lack of clarity 
on what is material versus what is not. In the absence of that 
clarity and with a new degree of liability, many issuers have 
chosen to take the safe road of reducing the flow of quality 
information. So while the regulation may have had positive 
impact on fairness of information dissemination, it's had a 
negative impact on the fullness of information dissemination.
    I could go through a litany of examples here, but I'm just 
going to pick one. Post-Reg FD, many issuers will refuse to 
comment in any way on an analyst's report prior to publication. 
That's a common but not universal practice for an analyst to 
send a preview copy to an issuer. The intent is not to have the 
issuer rewrite the report but rather to comment on factual 
errors and to rebut any unflattering arguments made by the 
analyst. It's a courtesy.
    On the SEC's website, item number seven on the phone 
supplement page, ``Can an issue ever review and comment on 
analyst's model privately without triggering Reg FD's 
disclosure requirements?'' And I quote, ``Yes. It depends on 
whether in so doing the issuer communicates material non-public 
information.''
    In the interest of time, I'm just going to get to the 
bottom line. ``It would not violate Regulation FD to reveal 
this type of data even if, when added to the analyst's own font 
of knowledge, it is used to construct his or her ultimate 
judgment about the issuer. An issuer may not, however, use the 
discussion of an analyst's model as a vehicle for selectively 
communicating either expressly or in code material non-public 
information.''
    I would posit that it's impossible for an issuer to 
determine what the Commission means by ``seemingly 
inconsequential data'' in that section, and the last two 
sections of that guidance are clearly contradictory. So when in 
doubt, say nothing. So analysts lack the nuance and color they 
may have previously gotten.
    On the issue of volatility, I believe that in addition to 
the cost of compliance, the primary cost of the regulation has 
been increased volatility in the market. I disagree with 
observers who state that that cannot be measured.
    Chairman Baker. Mr. Boyle, if you can, begin to wrap up for 
me, please.
    Mr. Boyle. OK. It can be, if you look at the CBO Volatility 
Index or VIX, it clearly indicates an increase in market 
volatility since the introduction of the prospects of Reg FD 
early last summer.
    I'll skip to how can the regulation be improved, 
materiality and liability.
    Materiality. In general, reducing liability for 
disseminating information should improve the quality of 
information disseminated. Therefore, clarification of the 
definition on materiality would be helpful.
    Also, on enforcement, it's unclear to how the regulation 
will be enforced. While the Commissioners state that they're 
not looking to enforce it, at the same time they have six 
ongoing investigations, and actions do speak louder than words. 
I believe there should be the same kind of safe harbor for 
security analysts as there are for representatives of the media 
under Reg FD. The burden should be on the issuer and not on the 
analyst.
    With that, I'll wrap up. Thanks.
    [The prepared statement of H. Perry Boyle Jr. can be found 
on page 93 in the appendix.]
    Chairman Baker. Thank you, Mr. Boyle.
    Our next witness is Mr. Thomas Gardner, Co-Founder--and I'm 
very careful in making the introduction, Mr. Gardner, to say 
you're Co-Founder of The Motley Fool, making no inference at 
all. Thank you. Welcome.

 STATEMENT OF THOMAS M. GARDNER, CO-FOUNDER, THE MOTLEY FOOL, 
                              INC.

    Mr. Gardner. Thank you. Good morning. It's a pleasure to be 
before the subcommittee to talk about what equal access to 
information means to all investors. My name is Tom Gardner. I'm 
Co-Founder of The Motley Fool, and a fool myself.
    The Motley Fool is a multimedia personal finance company 
headquartered across the river in Old Town, Alexandria, 
Virginia. Our business was founded upon and is driven by the 
belief that average people can and do benefit from taking a 
more active interest in the management of their money.
    However, before individuals take control over these 
matters, they need education, they need information, they need 
an opportunity for dialogue, and they need an open platform for 
their questions and for answers. And that's where we come in. 
We teach people the fundamentals of long-term financial 
management. We help them find the resources they need to 
budget, save and invest, and we provide a forum for a thriving 
online community. Our services today reach more than 20 million 
investors each month.
    I am not here, however, as a business owner. I'm here 
because The Motley Fool represents a vibrant, powerful 
community of individual investors who go to work, who earn 
money, and who make decisions about the financial path that 
their lives will take.
    Over the past 8 years we've heard from them again and again 
about the importance of access to simple information, whether 
that's information about Einstein's miracle of compounding 
growth, information about the real after-fee and after-tax 
returns of managed mutual funds, information about any public 
company's quarterly earning result, and for investors, access 
to information means that in a public market this information 
must be available to all investors at the same time.
    Every day, millions of investors put their money in the 
stock market and become part-owners of companies and businesses 
that they believe in. Over the last 100 years, the stock market 
has been the best place for long-term investment, returning 
average annual returns of around 11 percent, returns that have 
allowed us to put downpayments on homes, to pay for our kids' 
educations, to retire comfortably. And along the way, this 
public market has financed some pretty impressive businesses 
and led to the creation of products that have changed our 
lives.
    A company like Johnson & Johnson improves the lives of 
millions of people each year and has done so for more than 100 
years, due in large part to its access to capital in the public 
markets.
    The problem, however, is that selective disclosure is 
threatening the public market system in the U.S. and has been 
for years. Through selective disclosure, professional investors 
on Wall Street have increasingly tried to turn the public 
markets into private markets of information that benefit 
themselves and their firms. The net result of this is that 
smaller investors reduce their investments. Thinking that the 
game is rigged, they pull back or simply move into index funds 
and pay fees to mutual fund managers because they feel they 
have no other option.
    They recognize that selective disclosure leads to 
investing, if it is investing, that is not based on analysis, 
that is not based on hard work and intelligence, but instead on 
who you know or how much money you have to invest--the very 
things that compel public companies and have in the past to 
privately, illegally share privileged information with select 
investors and analysts.
    If we were establishing a capital market system today from 
scratch, I think we'd all agree that we'd want to make sure 
that the soccer mom who's putting $100 a month into a divided 
reinvestment plan for her child's college education would have 
access to the same information at the same time as the fund 
manager wearing a nice suit, carrying a bottle of Mylanta, the 
guy who has to decide or the gal who has to decide where to put 
his or her million dollars of the fund. I can't imagine wanting 
any sort of other public market in a free country.
    Selective disclosure, a common practice on Wall Street for 
years, is a direct violation of the spirit and the law of our 
public markets, and it undermines equal access. It's a 
violation that should be of the highest concern to those who 
oversee the market, the SEC and the U.S. Congress.
    In creating the SEC, Congress mandated that the SEC protect 
investors. Under this mandate, the SEC is obliged to protect 
all investors--tech investors in Silicon Valley, long-term 
investors in Omaha, Nebraska, the small business owner that 
invests from Port Allen, Louisiana, as well as investors on 
Wall Street. Any SEC action that contravenes this duty would 
naturally force us to ask why American citizens would pay tax 
money to fund a regulatory agency that might not protect those 
citizens' best interests.
    Let's talk specifically about Regulation FD. Regulation FD 
dramatically changed the financial landscape by making 
information available to all investors simultaneously. Those 
who oppose Regulation FD are not fighting it based on its 
fairness. Regulation FD is not Regulation Full Disclosure, it 
is Regulation Fair Disclosure. The criticisms do not come from 
those who think it is unfair. That's precisely the problem. It 
is fair. It promotes fairness. And thus it undermines Wall 
Street's unfair advantage. And that unfairness is an enormous 
commercial advantage to the big investment firms on Wall 
Street, which I have to say--and controversy is part of the 
game--the SIA and other organizations are funded to protect 
that commercial interest.
    Let's consider some of the arguments specifically noting, 
as I believe it was noted yesterday, that many of the 
complaints are supported by studies carried out by those who 
object to Regulation Full Disclosure.
    First, as an individual investor, I am taken aback by the 
implication that I'm not smart enough to flesh out the 
information; that I need someone else's help. To claim or even 
imply that individual investors need interpreters takes us back 
to the Middle Ages, back before we had printing presses, when 
common folks were forced to rely on experts and aristocrats to 
interpret texts like the Bible for them. They were not 
permitted for a number of years after the printing press even 
to have a Bible on their bedside table or any other textbook.
    Similarly, the internet now allows individual investors to 
access, analyze and act on financial information. I certainly 
don't see a need for a professional investors to earn an 
illegal information advantage in order to then translate that 
information on delay for the rest of the marketplace.
    Second, the evidence indicates that this claim of analyst 
objectivity simply isn't true. We know that analysts are not 
objective sources for individual investors. They work for 
commercial firms that broadly seek underwriting deals with 
public companies, and that renders them very subjective players 
in the context of the public markets. That's the main reason 
that Forbes Magazine, in an article earlier this year, reported 
that only 1 percent of all analysts' recommendations from sell-
side analysts last year were sell recommendations.
    While we're talking about analysts, I'd like to know 
exactly what an analyst is and why I, as an individual 
investor, can't call myself one. Who determines which analysts 
without Regulation FD get to sit on illegally exclusive 
quarterly conference calls? Who determines which analysts get 
to gain access to private, illegal closed-door meetings with 
company executives? Who determines which analysts get unlawful 
earnings guidance from CFOs directly before the general public 
hears of them? I would like to know that, because if the SEC is 
not going to enforce Regulation FD or is going to repeal it, I 
can tell you that I and tens of millions of other American 
investors would officially like to sign up to become analysts.
    If we don't have Regulation FD, we should eliminate all 
insider trading laws. We should pursue a perfectly free 
competitive market and have no insider trading laws whatsoever 
and allow me, along with everyone else, to try and play golf 
with company insiders so that we can get information and trade 
in advance of the rest of the marketplace.
    What about the claim of stock market volatility? Opponents 
of Regulation FD will argue that it has increased stock market 
volatility. I don't think that there's any clear evidence that 
this exists. If a company, however, releases bad news 
simultaneously to everyone--and I suggest in this example, 
let's really look at the volatility studies before we just 
accept them.
    If a company releases bad news simultaneously to everyone 
and its stock falls from $30 a share to $25 a share, is this 
any more volatile than if the company selectively releases 
information to professionals on Wall Street, the stock falls 
from $30 to $27, then the information gets released to the 
general public, who sells it down to $25. If we're going to 
accept volatility studies, we have to keep our eyes focused on 
the time periods that are being studied.
    Finally, opponents of full disclosure will also argue that 
Regulation FD has somehow stifled corporate disclosure. Let's 
be clear. It has chilled the distribution of illegal 
communication of privileged information in a public market. 
Last week's Wall Street Journal reported that Progressive 
Insurance plans to distribute information monthly. 
Progressive's CFO saw Regulation FD as an opportunity for us to 
open up more to investors.
    But even if Regulation FD stifles the flow of information, 
would we want more information in a public market if that 
information were protected for a privileged group of Wall 
Street investors? In a free country, which sort of public 
market would operate more effectively, one with less 
information delivered fairly, or one with more information 
delivered illegally?
    Regulation FD is Regulation Fair Disclosure not Full 
Disclosure. The aim is fairness of distribution of information, 
not the quality or the quantity of that information.
    I'd like to close by praising the SEC for having brought 
this issue and created policy on it. I'd like to praise the 
subcommittee for having conversations about it. And I call on 
Congress and the SEC to enforce Regulation Full Disclosure or 
to strike it from the record. Let's not do either/or. Let's 
either enforce it or let's eliminate it so that every investor 
knows what sort of marketplace we operate in.
    I'll close with SEC Chairman Arthur Levitt's quotation 
which explains why he believes that preserving the public 
nature of our markets is extremely important to the integrity, 
confidence and efficiency of those markets. Chairman Levitt 
said: ``Simply put, the practices of selective disclosure defy 
the principles of integrity and fairness. We teach our children 
that a person gets ahead through hard work and diligence, that 
through equal opportunity, everyone has a chance to succeed. 
America's marketplace should be no exception to that principle. 
Instead, it should serve as its beacon.''
    I couldn't agree with Chairman Levitt any more, nor could I 
agree any more with Warren Buffet. And I guess I will close 
with Warren Buffet's quote about Regulation Full Disclosure: 
``The fact that this reform came about because of coercion 
rather than conscience should be a matter of shame for CEOs and 
their investor relations departments.'' It's good to see that 
the greatest investor in American history is a supporter of 
fair disclosure.
    Thank you for having me today.
    [The prepared statement of Thomas M. Gardner can be found 
on page 101 in the appendix.]
    Chairman Baker. Thank you, sir.
    Our next witness is Mr. Patrick Sweeney, General Counsel of 
Nomura Corporate Research and Asset Management. Welcome, Mr. 
Sweeney.

   STATEMENT OF PATRICK D. SWEENEY, GENERAL COUNSEL, NOMURA 
         CORPORATE RESEARCH AND ASSET MANAGEMENT, INC.

    Mr. Sweeney. Good afternoon, Chairman Baker, Ranking Member 
Kanjorski and Members of the subcommittee.
    Chairman Baker. And if you would pull that a little bit 
closer, we can hear you better.
    Mr. Sweeney. My name is Pat Sweeney. I am the General 
Counsel of Nomura Corporate Research and Asset Management, 
which is more commonly known as NCRAM. NCRAM is a registered 
investment adviser and a member of the Investment Company 
Institute.
    NCRAM's clients are mutual funds organized and sold to 
retail investors in the United States and other major capital 
markets. While mutual funds themselves are correctly viewed as 
institutional investors, they are typically offered to the 
public retail investor markets and draw capital investments 
from millions of retail investors.
    Like many other buy-side investment managers, NCRAM employs 
its own team of research analysts to support all investment 
decisions made on behalf of its advisory clients. NCRAM 
continually engages in a fundamental analysis of the business 
and financial risk of each corporate issuer in which it has 
invested or proposes to invest.
    As part of this fundamental analysis, NCRAM evaluates the 
issuer's management experience, market position, cost 
structure, historical track record and cashflow generating 
ability.
    This process involves not only a review of the company's 
published financial information, but also incorporates one-on-
one visits with company management, discussions with industry 
analysts, visits to company facilities and consultation with 
third-party experts as appropriate.
    The protocols of investor relations communications between 
corporate issuers and buy-side investment managers have been 
carefully structured over the years to limit communications to 
nonmaterial information which can be used by buy-side analysts 
to structure proprietary investment models for corporate 
issuers. This practice is consistent with the long-recognized 
mosaic theory which enables an investment manager to develop 
and implement independent investment decisions based upon its 
analysis of discrete, nonmaterial pieces of information 
provided by the corporate issuer.
    The ability of NCRAM and of many other buy-side investment 
managers to conduct fundamental investment analysis is a key 
variable in the quality of investment services provided to 
retail investors in mutual fund advisory accounts. Fundamental 
analysis on behalf of mutual funds provides a significant 
investment benefit which most retail investors would be unable 
to achieve with their own resources.
    And it's from these perspectives that I'm pleased to have 
the opportunity today to make the following comments on Reg FD. 
First, a widespread, ongoing practice of selective disclosure 
of material information by corporate issuers would in fact 
erode public confidence in the fairness of the securities 
markets and should be corrected by an appropriate regulatory 
response.
    Second, the broad scope of Reg FD is premised upon the 
existence of widespread and abusive selective disclosure of 
material information by corporate issuers.
    Third, in assessing whether Reg FD appropriately responds 
to the problem of abusive selective disclosure, consideration 
should be given to the potentially adverse impact of the 
regulation upon the fundamental analysis conducted by buy-side 
investment managers.
    Fourth, by persistently linking the rationale and 
methodology of Reg FD to insider trading concepts, the 
Commission appears to have provoked a conservative and overly 
cautious response on the part of corporate issuers to 
regulatory compliance.
    Fifth, Reg FD has already affected the quantity and 
timeliness of information provided by corporate issuers, and 
the adverse impact of the regulation on the fundamental 
analysis process may progressively worsen as analytical 
investment models become outdated.
    Sixth, the negative impact of Reg FD on market transparency 
is most apparent in the case of financially stressed or 
distressed corporate issuers which frequently cite Reg FD 
restrictions in refusing to respond to demands for 
accountability by investment managers.
    I'd like to close my statement today with two 
recommendations. First, Reg FD should be re-evaluated 
generally, taking into account whatever empirical data may be 
obtained in determining the scope of the selective disclosure 
problem, as well as the potential detrimental impact of the 
regulation on the buy-side fundamental analysis process and 
other legitimate market processes.
    And second, public disclosure requirements imposed on 
corporate issuers by Reg FD should be based upon the objective, 
itemized reporting methodology of Section 13 of the Securities 
and Exchange Act, rather than upon subjective and ambiguous 
determinations of materiality similar to those employed in 
determining liability for insider trading under Rule 10(b)(5).
    NCRAM has appreciated this opportunity to testify before 
the subcommittee.
    [The prepared statement of Patrick D. Sweeney can be found 
on page 111 in the appendix.]
    Chairman Baker. Thank you very much, Mr. Sweeney.
    Our next participant is Mr. Daniel Hann, Senior Vice 
President and General Counsel, Biomet. Welcome, sir.

STATEMENT OF DANIEL P. HANN, SENIOR VICE PRESIDENT AND GENERAL 
COUNSEL, BIOMET, INC., WARSAW, IN; ON BEHALF OF THE ASSOCIATION 
                  OF PUBLICLY TRADED COMPANIES

    Mr. Hann. Thank you. Good afternoon, Chairman Baker, 
Ranking Member Kanjorski, and Members of the subcommittee. 
Thank you for the opportunity to testify today on behalf of 
hundreds of mid-cap and small-cap companies that make up the 
Association of Publicly Traded Companies. I am Daniel Hann, 
Senior Vice President and General Counsel of Biomet.
    Biomet is in the business of manufacturing and marketing 
medical devices used primarily by orthopedic surgeons and is 
headquartered in the industrial heartland of northern Indiana. 
Biomet has been a member of APTC for many years, and our 
President and CEO, Dr. Dane Miller, who was recently recognized 
as one of the top five CEOs in the country for delivering 
shareholder value, serves on the board of APTC.
    The APTC's position on the specific issues before the 
subcommittee is guided by a belief that issuers, investors and 
all market participants benefit from governmental policies that 
are designed to maximize the flow of quality information to the 
capital markets.
    Last month I had the opportunity to participate in the Reg 
FD roundtable held by the Commission in New York City. The APTC 
applauds the efforts of Acting Chairman Unger and the other 
Commissioners to understand the full impact of Reg FD and their 
willingness to provide guidance to market participants.
    As a general matter, the Association views Reg FD as 
reflecting two policy choices made by the Commission. First, 
the decision not to create a private right of action was a 
crucial and essential policy choice for Reg FD, and we commend 
the Commission for this wise decision.
    Second, the Commission decided that the benefits of a more 
level playing field for information outweighed the possible 
cost of restricting selective disclosure as it can be argued 
that any restrictions on the quantity and quality of 
information could negatively impact the efficiency of the stock 
markets.
    Insofar as Reg FD has some positive aspects for issuers 
that may offset the additional burden of compliance, we as 
issuers remain relatively neutral. For investors, however, 
especially long-term buy-and-hold investors, Reg FD is a mixed 
bag.
    With my remaining time, I will briefly focus on four of the 
questions posed for today's hearing in Chairman Baker's 
invitation letter.
    First, what impact has Reg FD had on the quantity and 
quality of information? The overall quantity of information has 
not changed according to two recent surveys. We believe this is 
probably true because companies are issuing more press releases 
as a shield against the risk that a non-public disclosure could 
prove in hindsight to have been material.
    However, we believe that the quality of information has 
been adversely affected by the requirement for public 
disclosure of all material information. Such a requirement 
encourages issuers to limit disclosures to more general 
information that is less likely to become the basis of a 
private securities class action lawsuit if the company stock 
hits a downdraft.
    While we are unaware of any effort to measure it, we 
suspect that the quality of information going to the markets 
has suffered. I will offer a suggestion later as to how this 
may be mitigated.
    A second question posed by the subcommittee is what 
particular benefits or problems result from Reg FD? The real 
benefit of Reg FD inures to the benefit of people like me--
namely, lawyers. We now have a rule to reference when we 
caution others to avoid certain means of communication in 
disclosing certain types of information. We, the lawyers, are 
now more important and more necessary than ever in publicly 
traded companies.
    Seriously, the primary problem is one of uncertainty. No 
company wants to serve as the enforcement test case for Reg FD. 
While we appreciate the recent statements from the Commission 
that it will not prosecute good faith mistakes, the vagueness 
of the materiality standard calls for caution. There is a 
natural inclination to err on the side of caution pending some 
clarification as to where the Commission will draw the line on 
materiality.
    A third question I would like to address is whether there 
are any specific ways to improve Reg FD. We believe it can be 
improved and offer two suggestions. Our first proposal focuses 
on the problem that the legal definition of ``materiality'' is 
vague and fact-specific. Because materiality is the basis for 
enforcement, companies are generally responding by providing 
less information in non-public communications and providing 
more information of a general nature in a more structured 
public format.
    The decline in more specific information probably harms the 
overall quality of information in the market. The flow of 
information to the markets might well continue abated despite 
the new risk of enforcement if the rule were made clear and the 
risks were more well-defined.
    Our second recommendation is that the Commission can 
promote the flow of information by supporting the statutory 
safe harbor for forward-looking statements or by promulgating a 
broader and deeper safe harbor under the authority granted in 
the Private Securities Litigation Reform Act of 1995.
    Companies are now very cautious about making the types of 
specific forward-looking statements that will be most useful 
for individual investors. Currently, companies that wish to 
communicate their expectations about their futures must do so 
very carefully. Despite reform litigation, private securities 
class action lawsuits are still quite common.
    In addition, the safe harbor for forward-looking statements 
is still a work in progress by the Federal courts. The 
commission could be a positive force for improving the quality 
of forward-looking disclosures if it supported a more expansive 
interpretation of the safe harbor and acted as a friend of the 
court.
    The commission could also use its statutory authority to 
create a safe harbor that is clear enough that both issuers and 
investors can make good use of information.
    A final question today deals with how companies are 
adjusting to Reg FD. Please make no mistake about it, Reg FD 
has significantly changed the way issuers deal with the 
investment community. In my experience, issuers have made a 
bona fide attempt to comply with the new rule. In recent 
months, issuers have worked very hard to implement new policies 
and procedures and have taken steps to educate directors, 
officers and employees as to their respective obligations and 
duties under the rule.
    One consequence of the new rule is that issuer press 
releases, as we have heard today, tend to be longer and more 
detailed. Unfortunately, this may make it difficult for the 
average investor now to separate the wheat from the chaff.
    In closing, the APTC believes that with the Commission's 
continued openness to change and the adoption of the APTC's 
proposed solutions, there is opportunity to substantially 
improve Reg FD.
    Once again, I would like to thank you for the opportunity 
to appear before this subcommittee and share the views of the 
APTC on Reg FD. Thank you.
    [The prepared statement of Daniel P. Hann can be found on 
page 131 in the appendix.]
    Chairman Baker. Thank you very much, Mr. Hann.
    Our final witness today is Mr. Stuart Kaswell, Senior Vice 
President and General Counsel for the Securities Industry 
Association. Welcome, Mr. Kaswell.

   STATEMENT OF STUART J. KASWELL, SENIOR VICE PRESIDENT AND 
        GENERAL COUNSEL, SECURITIES INDUSTRY ASSOCIATION

    Mr. Kaswell. Thank you, Mr. Chairman. Chairman Baker, Mr. 
Kanjorski and Members of the subcommittee. My name is Stuart 
Kaswell and I am General Counsel of the Securities Industry 
Association.
    With me today is my colleague, Frank Fernandez, SIA's Chief 
Economist and Director of Research. SIA's nearly 700 member 
firms are active in all U.S. and foreign markets and account 
for the overwhelming majority of all securities-related 
business in North America. About 50 million Americans hold 
accounts with our firms. SIA commends the subcommittee for 
holding this hearing. I deeply appreciate the opportunity to 
testify.
    SIA strongly believes that vibrant securities markets 
require a vigorous flow of information from issuers to the 
marketplace. We think there is a broad consensus on that simple 
but important point. The only debate has been over the best 
means for encouraging that flow of information. Investors and 
issuers as well as the economy as a whole will suffer if 
issuers face obstacles in disclosing information.
    Regulation FD is a bold experiment in which the SEC has 
tried to ensure that information flows to the markets on a 
broad basis. SIA was a critic of the rule. Our principal 
concern then as now is that the rule would reduce the quality 
and quantity of information flowing to the markets.
    Now that we have had a short period of experience with the 
rule, we think it is entirely appropriate for this subcommittee 
to consider whether the rule has had the desired effect.
    After the adoption of Regulation FD, SIA undertook a study 
of the effect of the rule. We interviewed 30 buy- and sell-side 
analysts, interviewed 25 general counsels of issuers, conducted 
a random telephone survey of 505 individual investors, and 
conducted a survey of 94 SIA member firms. Although 6 months is 
not a lot of time, the results are revealing. We are releasing 
a copy of that study to the subcommittee today.
    SIA's study shows the following. The good news is that 
Regulation FD has produced a benefit of accelerating the 
healthy trend toward communicating material information to the 
public and securities professionals simultaneously. It may also 
have enhanced the public's perception of the fairness of our 
markets.
    We should note, however, that only 14 percent of investors 
surveyed seek the information that issuers communicate directly 
to the public.
    Unfortunately, there is also some bad news. The vast 
majority of analysts feel that the quality of information put 
out by companies is inferior to the information that reached 
the market before Regulation FD was adopted. Regulation FD is 
costing much more to implement than the SEC predicted. These 
costs include recurring expenses and are not just transitional 
costs.
    Ninety percent of the analysts surveyed believe that 
Regulation FD contributions to stock price volatility. However, 
SIA cannot quantify the impact that FD has had on volatility.
    In light of these results, SIA wants to work with all 
interested parties to ensure that the goals of Regulation FD 
may be more fully realized with fewer side effects.
    Let me be clear. We do not seek repeal of Regulation FD. 
SIA would like to offer ideas that will help ensure a vigorous 
flow of information from issuers to the markets.
    We have two primary suggestions that we believe would be 
helpful. First, we suggest developing a more concise definition 
of ``materiality'' for Regulation FD. The current amorphous 
definition leaves issuers in a quandary as to whether many 
facts are material or nonmaterial. A clearer definition under 
this rule would ease those concerns and encourage more 
disclosure.
    Second, we suggest that persons receiving information 
should not be subject to derivative liability. A senior member 
of the SEC staff has said it is OK to be persistent and dogged. 
It is not OK to be abusive and threatening. The problem is that 
analysts who seek to probe for information should not be 
subject to an after-the-fact assessment of whether he or she 
has crossed the line from persistent to abusive. It is the 
analyst's job to gather information on behalf of investors. But 
Regulation FD makes it risky to ask penetrating questions. We 
do not think that the risk of derivative liability serves 
investors. Indeed, we think it is counterproductive.
    Our written statement expands on these ideas and offers 
some others as well. SIA appreciates the opportunity to share 
the results of its study and to offer suggestions for improving 
Regulation FD.
    SIA hopes it can make a positive contribution to this 
debate and can help ensure that American investors receive the 
information they need to make good investment decisions, 
whether they rely on professional analysts or do their own 
research.
    Thank you very much.
    [The prepared statement of Stuart J. Kaswell can be found 
on page 141 in the appendix.]
    Chairman Baker. Thank you, Mr. Kaswell.
    For the purposes of a complete record, I have been asked to 
include a statement provided by the Bond Market Association 
which will be included as a part of the official record.
    [The information referred to can be found on page 160 in 
the appendix.]
    Chairman Baker. Mr. Sweeney, help me understand a 
practicality. NCRAM used to do certain things pre-Reg FD that 
it now does not do. Give me an example of what you would advise 
corporate management to steer clear of that previously would 
have been behavior that was not subject to concern.
    Mr. Sweeney. Well, Chairman Baker, it is very difficult to 
give corporate issuers advice in the context of the current 
rule because of the uncertainties as to what they can and 
cannot tell us in the traditional one-on-one interviews.
    Those uncertainties to a large extent were compounded by 
some fairly aggressive language in the SEC's adopting release 
in which the SEC specifically, and I would say went out of 
their way, to warn corporate issuers about speaking with 
securities analysts seeking guidance concerning earnings 
forecasts.
    The SEC stated that whenever an issuer official engages in 
a private discussion with an analyst who is seeking guidance 
about earnings estimates, he or she takes on a high degree of 
risk under Regulation FD. With that type of interpretation of 
the regulation, one can understand how most corporate issuers 
and their counsel would be extremely conservative about giving 
any information to a buy-side analyst that the analyst could 
then apply to his own earnings model.
    And what has in fact happened is that although one-on-one 
calls and group investor calls continue, less information is 
provided on those calls. Corporate issuers have traditionally 
assisted buy-side analysts in the construction of investment 
models for the issuers by providing historic building block 
components of revenue, expense and margin data, none of which 
would be considered material non-public information at the time 
the issuer shared it, because it would be historic.
    In our experience, a significant number of corporate 
issuers have either discontinued or curtailed this practice.
    Chairman Baker. Of revenue expenditure and market data? Is 
that which is now being withheld? That is what I am trying to 
get to. What is it that executives are being counseled to be 
very careful in exercising disclosure that previously would not 
have been?
    Mr. Sweeney. Typically, a buy-side analyst looking at a 
corporate issuer would construct his own investment model for 
that issuer on a going-forward basis from many sources--from 
his analysis of the industry, from macro research input that he 
might get from the sell-side, but also very critically, in one-
on-one discussions and group investor calls with the issuer. 
Now what the analyst would like to obtain on those calls is not 
a flat statement or a flat wink in the eye about what the next 
earnings results are going to be.
    What they are expecting to obtain are, for example, segment 
information from different segments of the company's business; 
information pertaining to revenues or expense trends in various 
segments, many times simply on a historic basis, referring, for 
example, to financial statements that have already been filed 
with the public on a Form 10K; trying to break them down into 
greater detail so that for the future, the buy-side analyst can 
construct his own model to project how this issuer is going to 
perform in the future. That kind of data is now being withheld.
    Chairman Baker. Wouldn't there be some concern from your 
perspective when you counsel the CEO to be careful with regard 
to X, Y and Z and it perhaps has been disclosed in pre-FD era, 
there may be an attachment of liability for your refusal to 
disclose it now because you are trying to avert contravention 
of Reg FD, and it is something that the investor could allege 
at a later time, had they known, they would have made different 
judgments about the advisability of the investment?
    I mean, no matter which way you go here, isn't there some 
attachment of liability?
    Mr. Sweeney. Well, there is certainly a lot of concern 
about liability.
    Chairman Baker. And let's talk about some other company. I 
certainly wouldn't----
    Mr. Sweeney. There is certainly a lot of concern about 
liability that is untested at this point. But when you see 
statements like the one that I cited in the adopting release, 
it certainly heightens the concerns of corporate issuers and 
their counsel.
    I do not advise issuers. I am on the buy-side asking for 
the information.
    Chairman Baker. I get the sense people in the market are 
sort of waiting for the first victim to be selected to find out 
just how bad this really is or how good it could be. If 
materiality is clarified, if the manner in which notice is 
established as being the way to insulate yourself, perhaps 
industry executives could find a way to live with FD. But it is 
the uncertainty of knowing how the rules will be interpreted at 
the moment that appears to be creating the biggest problem. Is 
that fair?
    Mr. Sweeney. That is true, Mr. Chairman. And I would also 
revert back to a comment you made earlier today with 
Commissioner Unger in your comparison of some earnings releases 
that caused stock prices to go up and some earnings releases 
that caused stock prices to go down. Of course, what you left 
out is that some earnings releases don't affect stock prices at 
all. And the fact of the matter is, stock price movements in 
our complex capital markets tend to be the result of many 
different factors. And it is somewhat difficult to deal with a 
materiality standard that has been directly tied to the 
accounting bulletin release that referred to the impact on 
trading prices. That is, in particular, a very troubling aspect 
of the interpretation to date.
    Chairman Baker. Yes. The only certainty in the market is if 
I own it, it's going to go down.
    Mr. Kanjorski.
    Mr. Kanjorski. No, I do not agree. It is if I own it, it 
goes down.
    Boy, the six of you have really confused the heck out of 
me. I was trying to keep score. The only thing I have to ask my 
friend Mr. Glassman is why do you disagree with your former 
partner so much? He obviously put this rule together.
    Mr. Glassman. Well, he didn't ask me before, you know. I 
agree with him on many things, and I think he did an excellent 
job as Chairman, and I think his focus on small investors, 
educating investors having town meetings and so forth, was 
excellent. I just think this is a misguided attempt to do 
something which is admirable but really which is causing much 
more harm than good.
    Mr. Kanjorski. Do you get the sense--all six of you, 
whoever wants to pick up on this point--that somebody felt that 
there was insider trading and tried to fix it, and this 
regulation is the result? And when I ask, was there that much 
insider trading that it was a big problem? Was this too much of 
a fix?
    Mr. Kaswell. Mr. Kanjorski, I would argue that Regulation 
FD is not supposed to be an insider trading remedy. We felt 
that the SEC had plenty of authority to proceed on the case of 
Rule 10(b)(5) to go against insider trading. We don't think 
there is a lot of insider trading out there. But we want the 
SEC to prosecute those cases vigorously. We argue they had 
authority.
    Regulation FD tries to turn the securities laws into a 
parity of information standard, because the SEC couldn't 
proceed on an anti-fraud theory.
    Mr. Kanjorski. But wouldn't the prior testimony of the 
Commissioners that they had a perceived insider trading problem 
suggest this rule was one of the solutions? Yes?
    Mr. Boyle. I agree with what you are saying, Congressman. 
If insider trading is the aim, Reg FD is not the weapon to 
address that. And I haven't seen any studies through this 
process on how big a problem insider trading was to warrant 
this kind of an issue. And I would say that that the 
regulations prior to Reg FD were very adequate to address that.
    Mr. Kanjorski. You know, it puts me in a quandary. And, I 
am not the only one. You are not going to find many politicians 
up here that aren't going to take a position that we want as 
much information as possible provided to the public and the 
best-educated investors. But, I tend to agree with whomever 
made the statement that a lot of this information really isn't 
usable and that we probably have a pretty strong free flow of 
information occurring through the old practices. Moreover, the 
only reason you would go to this absolute fairness provision is 
if you felt there was insider trading. But that may not be 
correct. I appreciate Mr. Gardner's position that you feel this 
is the best thing since sliced cheese, I assume.
    But I am in a quandary that we don't understand enough. We 
have such a diverse recommendation here from the six witnesses. 
For instance, Mr. Glassman said not to study it, but just to do 
away with it. I am not sure we are even in a position to make 
that conclusion at this time. I appreciate all the testimony, 
and it clearly sets forth to me that this subcommittee probably 
has to do a lot more study, Mr. Glassman, before we could 
decide to do away with it. But, it may eventually warrant that 
result.
    I am just a little sensitive to the new, inventive smaller 
companies that are coming along. I am worried about the 
terrible burden we may be putting on them and the cost of 
getting involved in these sorts of things. It is so nice to 
have regulations. It is so nice to appear to have absolute 
fairness. But sometimes economic fairness isn't there because 
of size, experience and the ability to direct the assets in one 
way or another.
    Can somebody make a compelling argument of something really 
good and important that has come out of the regulation that 
should automatically keep us on it? OK, Mr. Gardner.
    Mr. Gardner. Well, I think part of the challenge for the 
Commission is to hear from individuals. Because the broadest 
constituency in our public market is the individual investor, 
whether that is the person in investor club, investment club, 
somebody managing their own money.
    I mean, we have a tremendous collection of bright people 
out there, and I think, unfortunately, the knee-jerk assumption 
is that the individual investor is somehow ignorant or can't do 
this themselves or shouldn't be given the same information, 
because they will misunderstand that information.
    What I think is most laudatory that has come out of 
Regulation FD is the recognition that there was unfair 
disclosure of information. And I believe we are in an 
adjustment period today where there is less information and 
lower quality information but that over time companies will 
learn what they can deliver and when they can deliver it.
    I simply resubmit that what has really been chilled here is 
the selective disclosure of information that should be illegal 
in a public market. We have chilled the distribution of 
information from a corporate executive to curry favor of an 
analyst to distribute that information to his clients 
simultaneously within their firm but not to anyone else.
    Mr. Kanjorski. Mr. Boyle does not look like that kind of 
guy.
    Mr. Boyle. I wish corporate managements were trying to 
curry my favor. And I use The Motley Fool site. I think it is a 
fantastic site. But as the Chairman said earlier, the average 
investor in the market is $60,000 and only $50,000 of net 
worth. And you really have to question whether we should be 
encouraging people to speculate in the market based on those 
kind of financial standards. And I know you would argue with 
that.
    Second, the sad fact is that most individual investors when 
trading individual stocks rely on the media for information 
with very little analysis. And so when you replace the role of 
an analyst with the role of a talking head who is chosen more 
for ratings potential than in-depth analysis, you have to 
question that economic impact on the market and whether the 
public wins in that situation.
    Mr. Kanjorski. Do I hear the call letters ``CNBC'' with 
your comments?
    Mr. Boyle. Well, and then selective dissemination. I would 
love to hear more from Mr. Gardner on what his analysis of the 
issue and problem was other than a perception issue, because my 
experience is that it was the exception rather than the rule 
and that most analysts are deathly afraid of receiving 
selective information because they don't want to have the 
liability for it.
    Mr. Gardner. I would just say that there are so many pieces 
of evidence pre-Reg FD where you had quarterly conference calls 
that were exclusive to a privileged group of Wall Street 
analysts and you would see that stock move in after-hours 
trading. You would have a quarterly conference call at 5:00 
p.m. There would be only 10 analysts allowed on the call, no 
individual investors allowed on the call, and you would see the 
stock go up 20 percent or down 20 percent before the market 
even opened the next day. I don't understand how that could 
happen unless there was some series of investors operating in 
the after-hours market that simply did not have access to that 
but were speculating that that information might have happened 
on the call.
    I think it is pretty clear that the people who were on the 
call were in some ways participating directly or indirectly, 
and I think it is far more indirect participation, in the 
movement of that stock in after-hours.
    I mean, the simplest way to look at this that I see is, we 
may only have one smart individual investor out there. Maybe 
the rest of them are idiots. All these people out there that 
are trying to buy stocks are foolish with a small ``f''. They 
are relying on the media. They are making all of the old 
mistakes and they are losing fortunes in front of our eyes.
    But if there is one investor out there, a single individual 
investor that is bright enough, that has the resources, that it 
is important enough to her to be following an individual 
company that she is a part-owner of, I believe the law of the 
public market should protect that investor's right to get 
information at the same time as any big Wall Street firm would 
get it.
    Chairman Baker. Thank you, Mr. Kanjorski.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Mr. Glassman, in your testimony you talk about a free 
market--that FD takes us away from a free market approach for 
analysts. But on the other hand, isn't there some form of 
arbitrage that occurs among analysts, that some analysts are 
privy to information and other analysts are not? That there is 
an inefficiency in the marketplace? That an analyst at Solomon 
Smith Barney may have an in to certain information because of a 
relationship that an analyst at Merrill may not?
    I am not sure that that is completely a free market. And I 
am not sure that analysts are in part reporters, I guess. But 
they are also in part editorialists. Because they are providing 
an analytical viewpoint on data that is available.
    Second of all, I am surprised that full disclosure is now 
somehow perceived as disruptive to the market. That full 
disclosure of information is somehow bad for the marketplace 
when I would think you would want in a free and open and 
competitive marketplace for investors to have as much data as 
available. What investors do with it and whether they make 
money or lose money is their problem. But generally, in a free 
market system, I would think you would want everybody to have 
access to the same tools.
    Mr. Glassman. I think that what you want in a free market 
system is as much information as possible. And in fact, the 
journalistic model is a good one. I mean, if the only way the 
journalist had to get information was the dissemination of 
press releases, then I don't think that Americans would know as 
much as they know today because we have a vigorously 
competitive press, which uses all sorts of means to find things 
out.
    Mr. Bentsen. But if I could interrupt you for a second. And 
I have to move through here quickly. But we also know in the 
press world, and I will use a political analogy, that in some 
cases, some will give information to the New York Times as 
opposed to the Wall Street Journal because they think that they 
can control the story better through the New York Times than 
they can if they delivered it to everybody in the Wall Street 
Journal and the LA Times and everybody else who was dealing 
with that.
    Mr. Glassman. That is exactly right. But that means that 
there is more information out there. Once the information gets 
out, and it might not have gotten out at all if it had not been 
for the selective dissemination of the information, then more 
journalists get onto it, there is more discussion about it. And 
that is actually a very good analogy with what is going on 
here.
    It may well be that there is something that is select. I do 
not believe it should be illegal. But certainly the notion that 
some analyst gets an edge on another analyst I don't think is 
bad for the total amount of information that people are gong to 
get through a system like that. That is what I am saying.
    But that is almost an extreme case. Let me just give you 
one example, because I think we are----
    Mr. Bentsen. If you could hold up for a second, because I 
want to follow up on that point.
    Mr. Glassman. Sure.
    Mr. Bentsen. I understand the presumption that you are 
making, and there is nothing wrong with that presumption, 
assuming that it turns out that way. But let me ask Mr. Boyle 
or Mr. Sweeney, you all prepare analyst reports on corporations 
that you are following. Maybe Mr. Sweeney in funds, you are 
doing it differently. Those reports, when you issue a report 
that says Acme Corp. has lost a big contract and you now have a 
sell recommendation on it, generally will be picked up in the 
financial press over time, assuming because you are a watched 
analyst, let's say.
    But do you all, when you publish that report, who do you 
distribute that report to? Do you distribute it to your 
clients, or do you put it out available to anybody who wants 
it? Who gets that report first?
    Mr. Boyle. We write our research for our clients. The way 
it is distributed is that we have agreements with wire services 
such as First Call, Multex and others that whenever we make a 
material change, which is typically to find there is a change 
in estimates or a change in recommendation or a change in price 
target on a stock, we will issue what is called a first call 
note that goes to those wire services.
    Most institutional investors are subscribers of those 
services. We also as a matter of practice--and I believe it is 
the practice of most investment banks--disseminate the research 
at that same time to many--it is literally at a push of a 
button. It goes to all our targeted services. It goes out to 
our clients, it goes out to these services, and in many cases, 
it goes to the media as well. We distribute our research to 
multiple layers in the media: Bloomberg, Wall Street Journal, 
New York Times, some websites. There are actually some website 
aggregators that we provide information to.
    And I think if you just went to cbsmarketwatch.com before 
the open of the market, you would see a whole raft. Morgan 
Stanley changing estimates on this, Thomas Weisel Partners 
downgrading that. It gets to the market pretty darn fast.
    Mr. Bentsen. But it is a discretionary action on the part 
of the analyst or the firm that the analyst is employed by?
    Mr. Boyle. It is a discretion--to provide it to the mass 
media is a discretionary item, yes.
    Mr. Bentsen. Mr. Sweeney.
    Mr. Sweeney. Yes. If I may respond to that. This highlights 
one of the major differences between buy-side and sell-side 
analysts. Buy-side analysts do not issue reports. Buy-side 
analysts take in information from the company in these one-on-
one meetings. They take in information from many sources, 
analyze it for purposes of refining their investment models for 
a corporate issuer, and then making an investment decision for 
their managed accounts, their accounts being the mutual funds 
that the soccer moms and other retail investors invest in.
    So it is a very different dynamic on the receiving end with 
the buy-side investor.
    Mr. Boyle. I had one important qualification to what I just 
said. I'm cheating. I'm reading Tom's notes as he's writing 
them. We are prohibited from trading for our own account before 
the notes go out, OK?
    Mr. Bentsen. Right. No, I understand.
    Mr. Boyle. So I just want to make sure that people 
understand that front running is against the law.
    Mr. Bentsen. No, I understand that. I understand that.
    Chairman Baker. If I may, I would like to get Mr. Fossella 
in and try to conclude the hearing before we go for this vote. 
Mr. Fossella.
    Mr. Fossella. Thank you, Mr. Chairman. And I guess we can 
all agree we want to make more Americans investors. The 
question is, how do we do it as it relates to this regulation?
    And one example of how we can draw two different 
conclusions from the same event, two of you, Mr. Gardner and 
Mr. Boyle, reference an article that appeared in the Wall 
Street Journal on May 11th regarding Progressive. Mr. Gardner 
said that Progressive's CFO saw Regulation FD as an opportunity 
for us to open more to investors.
    Mr. Boyle, you sort of said the same thing, but then went 
on to say Progressive will now issue monthly statistics. This 
may force its competitors to do the same. Clearly positive. But 
still the data provided by Progressive is historical. They 
still refuse to give forward guidance on how they believe the 
company will perform. And even prior to Reg FD, Progressive had 
moved toward having quarterly earnings conference calls.
    The article also mentions how Progressive is not giving any 
commentary or analysis on their operating statistics and won't 
report investment incomes and tax rates. And you further go on 
to say how in the New York Times article how Wal-Mart will no 
longer share its detailed sales data with third parties.
    So I guess my question really is, given that, to Mr. 
Gardner, it seems that some folks want to abolish FD. Some feel 
that it has growing pains. Some feel that there is clearly room 
for improvement, like Mr. Boyle cites materiality and perhaps a 
carve-out and a safe harbor for analysts. Do you see any room 
for modifying Reg FD to provide some guidance, for example, on 
issues like materiality?
    Mr. Gardner. I think that there are opportunities to modify 
Reg FD. I don't think now is the time to do so, because I don't 
believe there is enough evidence out there after a 6-month 
period.
    I would say that in the case of Progressive, there are 
going to be a lot of companies that will make a decision about 
whether or not to release forward-looking statements, some of 
them companies that Mr. Buffett supports generally refuse to 
make forward-looking statements because there is a high level 
of speculation there that sometimes doesn't come true, and that 
can come back to bite a company.
    So there are different reasons that Progressive would 
choose to release different pieces of information, but they did 
state clearly that they support Regulation FD, and this is an 
action in support of it, and their belief that they should 
communicate to all investors at the same time.
    So in terms of modifications, I think that there are safe 
harbor opportunities. But I think essentially the one-on-one 
call that a buy-side analyst would have, while generally my 
interests lie with the buy-side analysts. They are doing 
research to try and figure out how well a company is doing.
    But should a buy-side analyst get a timing advantage on the 
answer to their question to another buy-side analyst who may 
have less money, be less consequential to the CEO of that 
company, companies can release this information and answer 
these questions in public conferences and via press releases, 
and I think there will be an opportunity to carve out safe 
harbors within Reg FD to give them that public opportunity to 
have a more thoroughgoing discussion about their prospects.
    Mr. Fossella. Let me throw it out to Mr. Glassman to jump 
in to respond in a way. What if--I think you were saying that 
the companies themselves are going to re-engineer and figure 
out a way to disseminate this information and work within the 
existing Reg FD, subject to maybe a minor modification. What if 
they don't? And what if ultimately the unintended consequence 
is to penalize the person I think you genuinely want to help? 
What if there is no modification? What if everybody sorts of 
sits back and holds back material information because they 
don't have any guidance as to what is material and what isn't? 
And maybe I will just throw it to Mr. Glassman.
    Mr. Glassman. Well, this is already happening. And it's 
interesting that Mr. Gardner should say that in fact we are 
getting less, we appear to be getting less good information.
    Let me just give you another example. And I think this 
might be more to the point. On the very day that Reg FD went 
into effect, the Wall Street Journal ran an article about 
Matthew Burler, a Morgan Stanley Dean Witter analyst, who tried 
to ask a Georgia-Pacific executive for his usual guidance on 
Mr. Burler's spreadsheets, which cover--and I know that Mr. 
Gardner likes to denigrate analysts--but Mr. Burler's 
spreadsheets cover 887 financial factors regarding the company.
    This time, however, he got no help from Georgia-Pacific, 
which was worried about violating Reg FD. As a result, said Mr. 
Burler, there is a greater chance for error. Now I cannot see 
for the life of me how it is beneficial to the average small 
investor who uses The Motley Fool or any other source that 
these corporate executives won't even make a comment on a 
conscientious analyst's spreadsheet of 887 financial factors. 
And that is a real life example. That is actually what really 
does go on with analysts.
    So there is no doubt that we will get a degradation of 
information and the quality of information, and that is the 
reason why I wanted to respond to Congressman Kanjorski. The 
reason I say don't study it, because, you know, we just heard 
the SEC say we ought to study it for 2 years. Well, by then, 
maybe companies won't be able to adapt, as you say, and 
certainly we will have more volatility.
    We already have problems right now. And I think this is not 
a time to wait another 2 years to do something.
    Mr. Fossella. Did you want to add to that at all, Mr. 
Gardner?
    Mr. Gardner. I don't think it is the Government's 
responsibility to protect the quantity or the quality of 
information in the public markets. I think it is the 
Government's responsibility to protect the fairness of the 
marketplace for investors.
     So if it means a temporary reduction in the quantity and 
quality of information as companies determine how they can 
communicate with all of their owners fairly, simultaneously, it 
is a tradeoff that I know millions of individual investors are 
willing to make. And that is in evidence on our site and 
basically in any forum that individual investors----
    Mr. Glassman. Even though, as you know, Tom, it is not just 
a tradeoff. It basically means higher volatility and a 
degradation of information, essentially means that the price of 
stocks will go down as a result. The cost of capital will 
increase. The price of stocks will go down. And frankly, I 
don't think that is a tradeoff that most Americans would want 
to see.
    Mr. Boyle. I would also add that it would be very good for 
the market makers under that rule. More volatility is good for 
market makers, bad for investors. And I was actually a little 
surprised to hear from each according to his abilities to each 
according to his needs logic there.
    Mr. Hann. In that regard, I would add that all the 
regulation in the world will never level the playing field. And 
I think that is a point the Commission alluded to this morning. 
And Chairman Baker, one of your initial questions today was, is 
this really essentially a misplaced insider trading rule?
    This is a disclosure rule, but I think because of the 
perceived shortcomings of the Dirks decision that the 
Commission also addressed this morning, we do have a misguided 
rule, and we have one that is trying to accomplish indirectly 
what it could not do directly, and that is namely, try to push 
analysts on the insider trading issue.
    Mr. Kaswell. As long as we seem to be running down the 
line.
    Chairman Baker. Please, if you'd like.
    Mr. Kaswell. It seems to me, too, that by punishing 
analysts for trying to ask the hard questions, if we are going 
to be in a Regulation FD environment, if an analyst pushes too 
hard and actually succeeds in getting information, not because 
he is trying to encourage the issuer to break the law, but just 
because he is being probing as a good reporter would be 
probing, that is a good thing for investors that the analyst is 
representing. And therefore, the analyst should not be subject 
to a sort of Monday-morning quarterbacking test of whether or 
not he was too aggressive in that setting.
    The other point I would just like to make is putting the 
full burden on particularly small issuers to ensure that the 
information they get out, they have that full responsibility. 
And it isn't, it seems to me that it is easy for a larger 
corporation to ensure their story is being told, but for a 
smaller corporation, that puts a very difficult burden on them 
and perhaps there are other ways to address that by filing a 
procedural AK.
    Chairman Baker. I want to thank all the members of the 
panel for your patience and participation. I think it has been 
a very informative hearing for the Members of the Committee. We 
have had a significant number of Members in and out during the 
course of the day.
    Suffice it to say, I think there are some areas of concern 
that have been raised. This is only our first view of the 
subject. We will take additional action over the coming weeks. 
We would encourage each of you as you have further thoughts or 
inclinations to please forward them for the Committee review.
    I do have concern that the Dirks holding and the fiduciary 
responsibility relationship as the trigger for liability has 
indeed clouded the landscape a bit. And I do think there is 
general agreement by everyone on the Committee, transparency is 
a good thing, flow of information is a good thing.
    But we don't in the pursuit of transparency and flow of 
information want to create a new cause of action that 
apparently is gong to have adverse consequences on the investor 
being appropriately informed.
    So I think we all generally want to pursue the goal. I 
think we need to do a careful analysis of whether this 
mechanism is achieving that end, and are there ways perhaps 
from repeal to modification to taking another look at the whole 
issue of are there advantaged people in the market who are 
trading on information to the distress of the smaller, 
independent investor?
    A very difficult subject. Despite admonitions to move 
today, I suspect we will take a day or two and examine it more 
thoroughly. But I do want to express my appreciation to all of 
you for your participation.
    Our hearing is adjourned.
    [Whereupon, at 2:00 p.m., the hearing was adjourned.]

                            A P P E N D I X

                              May 17, 2001

[GRAPHIC] [TIFF OMITTED] T2723.001

[GRAPHIC] [TIFF OMITTED] T2723.002

[GRAPHIC] [TIFF OMITTED] T2723.003

[GRAPHIC] [TIFF OMITTED] T2723.004

[GRAPHIC] [TIFF OMITTED] T2723.005

[GRAPHIC] [TIFF OMITTED] T2723.006

[GRAPHIC] [TIFF OMITTED] T2723.007

[GRAPHIC] [TIFF OMITTED] T2723.008

[GRAPHIC] [TIFF OMITTED] T2723.009

[GRAPHIC] [TIFF OMITTED] T2723.010

[GRAPHIC] [TIFF OMITTED] T2723.011

[GRAPHIC] [TIFF OMITTED] T2723.012

[GRAPHIC] [TIFF OMITTED] T2723.013

[GRAPHIC] [TIFF OMITTED] T2723.014

[GRAPHIC] [TIFF OMITTED] T2723.015

[GRAPHIC] [TIFF OMITTED] T2723.016

[GRAPHIC] [TIFF OMITTED] T2723.017

[GRAPHIC] [TIFF OMITTED] T2723.018

[GRAPHIC] [TIFF OMITTED] T2723.019

[GRAPHIC] [TIFF OMITTED] T2723.020

[GRAPHIC] [TIFF OMITTED] T2723.021

[GRAPHIC] [TIFF OMITTED] T2723.022

[GRAPHIC] [TIFF OMITTED] T2723.023

[GRAPHIC] [TIFF OMITTED] T2723.024

[GRAPHIC] [TIFF OMITTED] T2723.025

[GRAPHIC] [TIFF OMITTED] T2723.026

[GRAPHIC] [TIFF OMITTED] T2723.027

[GRAPHIC] [TIFF OMITTED] T2723.028

[GRAPHIC] [TIFF OMITTED] T2723.029

[GRAPHIC] [TIFF OMITTED] T2723.030

[GRAPHIC] [TIFF OMITTED] T2723.031

[GRAPHIC] [TIFF OMITTED] T2723.032

[GRAPHIC] [TIFF OMITTED] T2723.033

[GRAPHIC] [TIFF OMITTED] T2723.034

[GRAPHIC] [TIFF OMITTED] T2723.035

[GRAPHIC] [TIFF OMITTED] T2723.036

[GRAPHIC] [TIFF OMITTED] T2723.037

[GRAPHIC] [TIFF OMITTED] T2723.038

[GRAPHIC] [TIFF OMITTED] T2723.039

[GRAPHIC] [TIFF OMITTED] T2723.040

[GRAPHIC] [TIFF OMITTED] T2723.041

[GRAPHIC] [TIFF OMITTED] T2723.042

[GRAPHIC] [TIFF OMITTED] T2723.043

[GRAPHIC] [TIFF OMITTED] T2723.044

[GRAPHIC] [TIFF OMITTED] T2723.045

[GRAPHIC] [TIFF OMITTED] T2723.046

[GRAPHIC] [TIFF OMITTED] T2723.047

[GRAPHIC] [TIFF OMITTED] T2723.048

[GRAPHIC] [TIFF OMITTED] T2723.049

[GRAPHIC] [TIFF OMITTED] T2723.050

[GRAPHIC] [TIFF OMITTED] T2723.051

[GRAPHIC] [TIFF OMITTED] T2723.052

[GRAPHIC] [TIFF OMITTED] T2723.053

[GRAPHIC] [TIFF OMITTED] T2723.054

[GRAPHIC] [TIFF OMITTED] T2723.055

[GRAPHIC] [TIFF OMITTED] T2723.056

[GRAPHIC] [TIFF OMITTED] T2723.057

[GRAPHIC] [TIFF OMITTED] T2723.058

[GRAPHIC] [TIFF OMITTED] T2723.059

[GRAPHIC] [TIFF OMITTED] T2723.060

[GRAPHIC] [TIFF OMITTED] T2723.061

[GRAPHIC] [TIFF OMITTED] T2723.062

[GRAPHIC] [TIFF OMITTED] T2723.063

[GRAPHIC] [TIFF OMITTED] T2723.064

[GRAPHIC] [TIFF OMITTED] T2723.065

[GRAPHIC] [TIFF OMITTED] T2723.066

[GRAPHIC] [TIFF OMITTED] T2723.067

[GRAPHIC] [TIFF OMITTED] T2723.068

[GRAPHIC] [TIFF OMITTED] T2723.069

[GRAPHIC] [TIFF OMITTED] T2723.070

[GRAPHIC] [TIFF OMITTED] T2723.071

[GRAPHIC] [TIFF OMITTED] T2723.072

[GRAPHIC] [TIFF OMITTED] T2723.073

[GRAPHIC] [TIFF OMITTED] T2723.074

[GRAPHIC] [TIFF OMITTED] T2723.075

[GRAPHIC] [TIFF OMITTED] T2723.076

[GRAPHIC] [TIFF OMITTED] T2723.077

[GRAPHIC] [TIFF OMITTED] T2723.078

[GRAPHIC] [TIFF OMITTED] T2723.079

[GRAPHIC] [TIFF OMITTED] T2723.080

[GRAPHIC] [TIFF OMITTED] T2723.081

[GRAPHIC] [TIFF OMITTED] T2723.082

[GRAPHIC] [TIFF OMITTED] T2723.083

[GRAPHIC] [TIFF OMITTED] T2723.084

[GRAPHIC] [TIFF OMITTED] T2723.085

[GRAPHIC] [TIFF OMITTED] T2723.086

[GRAPHIC] [TIFF OMITTED] T2723.087

[GRAPHIC] [TIFF OMITTED] T2723.088

[GRAPHIC] [TIFF OMITTED] T2723.089

[GRAPHIC] [TIFF OMITTED] T2723.090

[GRAPHIC] [TIFF OMITTED] T2723.091

[GRAPHIC] [TIFF OMITTED] T2723.092

[GRAPHIC] [TIFF OMITTED] T2723.093

[GRAPHIC] [TIFF OMITTED] T2723.094

[GRAPHIC] [TIFF OMITTED] T2723.095

[GRAPHIC] [TIFF OMITTED] T2723.096

[GRAPHIC] [TIFF OMITTED] T2723.097

[GRAPHIC] [TIFF OMITTED] T2723.098

[GRAPHIC] [TIFF OMITTED] T2723.099

[GRAPHIC] [TIFF OMITTED] T2723.100

[GRAPHIC] [TIFF OMITTED] T2723.101

[GRAPHIC] [TIFF OMITTED] T2723.102

[GRAPHIC] [TIFF OMITTED] T2723.103

[GRAPHIC] [TIFF OMITTED] T2723.104

[GRAPHIC] [TIFF OMITTED] T2723.105

[GRAPHIC] [TIFF OMITTED] T2723.106

[GRAPHIC] [TIFF OMITTED] T2723.107

[GRAPHIC] [TIFF OMITTED] T2723.108

[GRAPHIC] [TIFF OMITTED] T2723.109


```