The disclosure rule gets mixed reviews from the investment community
They love it, they loathe it, either way they can't stop thinking about it. What multi-faceted beast incites such sentiment from analysts and portfolio managers? What species of animal shows such different faces to investment professionals? The answer is the SEC's Regulation FD, which incessantly rears its head in the new Investor Relations Magazine Awards US Research Report 2001.
The Erdos & Morgan survey which underlies the report shows the opinions of 1,675 sell-side analysts, buy-side analysts and portfolio managers identified by Thomson Financial/Carson and another 233 retail investors who are Barron's Online subscribers. In addition to identifying award winners, the survey seeks to uncover general views on American investor relations practices, and while the questionnaire included an open-ended question about FD, most of the respondents brought up the topic unprompted. We asked about the change in quality of IR over the last three years. FD, they answered, has been both a good and a bad influence. We asked about the change in importance of IR over the next three years. FD was again the answer, and again they were divided over whether it will hinder or help.
Verbatim comments gathered in this year's survey typically range from 'FD is a travesty' to 'FD rewards good analysis.' One wag even suggests that FD stands for Forever Dumb, while at the other end of the spectrum, his opposite number almost parrots current SEC propaganda: 'Due to increased disclosure requirements, there is more information disseminated and such information is disseminated in a more equitable manner.'
If there is any line demarcating supporters and detractors, it may be between small and large firms. Drake Johnstone of Davenport & Co epitomizes the small firm analyst grateful for the SEC diktat. 'Reg FD is probably bad for the analysts at the big investment houses,' he says in an interview outside of the anonymous survey. 'They're the ones that companies curried favor with, disclosed more to. But we're a small firm, and for us FD is a positive.'
Richmond, Virginia-based Davenport has a retail brokerage managing over $10 bn for its clients, as well as a corporate finance department which Johnstone says is geared more toward M&A than IPOs. 'Our analysts are fairly independent in their thinking and their ability to change ratings. We're not handcuffed by the corporate finance department.'
Johnstone doesn't pull any punches when he recalls the world before FD: 'In the past, if companies had investment banking relationships with an investment firm then its analysts may have gotten the inside skinny before others. Now there's more of a level playing field. FD is a positive for both retail investors and the investment community as a whole.'
Nor does he mince his words on the changing nature of the analyst's job since Reg FD arrived. 'The rule encourages analysts to be more independent and do their own research instead of just spewing company guidance.'
Standing in the opposite corner to champions of FD like Johnstone are many analysts and investors who say a lot of companies - not all - have reacted to the new rule by clamming up. They're not arguing for selective disclosure - all new material information should indeed be disseminated equally, they grant - but they call for a return to candid one-on-ones which help them assess management and add color to the information that's already public.
'Reg FD has made some corporate officers afraid to speak to analysts, even when we just seek perspective,' points out one respondent. Adds another, 'Many companies are afraid of making even the most general comments for fear that they will break the rule. In sum, Rule FD may be reducing the information flow more than it initially intended to.'
Many survey respondents also express concerns about the lack of proactive earnings guidance given by companies under FD: 'An analyst with an outdated model can skew the entire consensus, but companies are fearful of discussing models with analysts individually.'
Conversely, some investors believe that IROs will save them from some of the negative effects of FD. Several portfolio managers predict that sell-side information will decrease further in importance, and that investor relations will step in to fill the gap. Adds another, 'IR now becomes the de facto pipeline into the company.'
But just what is this investment community segment expecting from IR departments? With senior executives now often terrified of violating Reg FD, one respondent says, the IRO should fill in the details of their bland comments. Another says IROs have to get 'craftier' to work under FD, with their skill judged by how much information they can 'insinuate'.
Another reaction is to downplay the company's role in providing information to investors. Now analysts will get more data from other sources such as customers or suppliers, and there will be more channel checks - looking into distribution channels to determine the success of a company's products. In other words, checking out the store shelves to see what's in stock and what's selling.
At least that's a constructive suggestion, and as both Wall Street and the corporate community continue to debate the pros and cons of fair disclosure, it's definitely time to turn from criticism to constructive suggestion for change.
The US Research Report 2001, with the results of the survey and extensive verbatim comments from analysts and portfolio managers, is published by Investor Relations magazine at $295 ($350 to non-subscribers). Go to irawards.com or contact Gabriel Barbaro at 212 425 9649.
Feeling the bite
Sir Howard Davies, the head of the UK's Financial Services Authority, made his stand days after FD's October 23 launch. In a flashback to Arthur Levitt's 'stain on the markets' speech that launched the FD crusade, Davies called selective briefings corrosive to the market and sternly pointed out that UK rules have long banned the practice. Still, he promised an update of the UK listing authority's 1996 guidelines on price-sensitive information dissemination early in 2001.
Davies has since repeatedly criticized companies and City analysts alike for 'tipping' and insider trading, though real enforcement is only awaited this summer when the Financial Services Act goes into effect and gives the FSA teeth to attack insider trading and selective briefing with fines for individuals and companies. The FSA's role in setting and enforcing disclosure standards will be highlighted in Davies' keynote speech at Investor Relations magazine's conference on award-winning IR on July 9 in London.
Is there more information or less under Reg FD? Is it better quality information or has it declined in value? Is there more or less volatility? As Regulation FD reaches its half-year birthday, opinion is decidedly split among companies as well as investors and analysts.
Take the latest Niri member survey, released in February: 48 percent of companies are releasing the same amount of information since FD went into effect, 24 percent are releasing less and 28 percent are releasing more.
A corporate survey from Thomson Financial/Carson from January paints a similar picture of indecision: 54 percent say they've added additional information such as guidance to quarterly earnings releases, while 46 percent say they have not.
Another more recent survey, this one from Palo Alto's Stapleton Communications, shows that 45 percent of CEOs and CFOs say they're communicating more, while 61 percent of buy-side and sell-side professionals say they're getting less information.
Volatility - who knows? Anecdotal evidence suggests there's now more because information flows into the market in spurts instead of a trickle. But only 25 percent of Thomson clients say their stocks have become more volatile as a result of Reg FD - not bad considering 100 percent feared more volatility before the rule took effect.
The SEC launched its own study which suggests no impact on volatility, though the agency's own economists say it's too soon to tell. The issue will continue to be debated as acting SEC chairwoman Laura Unger convenes a roundtable discussion on FD in New York in April; and the SEC will produce a comprehensive study on FD once it's been going a year.
|FD: Investors & analysts say...|
|Improved info flow||18|
|Makes my job more difficult||12|
|Forces more creative thinking||22|
|FD: Retail investors say...|
|More level playing field||72|
|More earnings webcasts||46|
|More press releases on the web||46|
|Better quality info||34|
|More market volatility||30|
|More missed earnings||26|
|Companies withholding info||25|
|Greater dependence on media||21|
|More confusion without sell-side interpretation||16|
|Lower quality info||14|
Source: Investor Relations Magazine Awards US Research Report
Companies in Europe and elsewhere have been watching warily as FD takes hold in the US, since where the SEC treads, other securities regulators often follow. Besides, the SEC is expected to extend FD to non-US companies traded on US exchanges. But have Europe's analysts and investors experienced FD's impact? 'Not yet,' says Alan MacDonald, who covers BP and Shell for UBS Warburg in London, 'but I think we're about to.
Companies are going to be much tighter with information in one-on-one briefings. And while they'll endeavor to provide much of the information that they did before, they're going to do it on the web, not in private meetings.'
MacDonald also predicts that companies will be slower to provide information as the FD ethos spreads to Europe. 'In terms of estimates on quarterly flows and margins, they're going to want to have that information nailed down more, so it probably won't be available until well after the end of the quarter if at all.'
Still, MacDonald is taking it all in stride. 'It's a fact of life, isn't it?' he muses. 'If companies give out limited information then it could potentially give some competitive advantage to those analysts who do the most fundamental analysis, as opposed to those relying too much on guidance from companies.'
Alex Patterson, a Merrill Lynch analyst in London, is less sanguine. He has already seen a negative change in the disclosure practices of US companies he follows and is concerned about it spreading elsewhere. 'The weaker players have taken the opportunity to hide behind FD, to avoid answering questions they would otherwise be required to answer,' he says. 'For the better companies, FD provides a further obstacle to communicating clearly with large groups of their shareholders. For instance, at investor conferences, many US companies won't give information that's anything but a reiteration, which I think is a shame.' Meanwhile, companies in the UK and Europe 'have continued to be as explicit as they can without making selective disclosures.'
Patterson predicts the FSA's stance will wind up close to the SEC's. 'And anything that prevents more detailed information going into the market is a bad thing. Companies that give a lot of detail in their results may become reluctant to do so in the future. For now, in conversation with a company, I can get information that is not exactly material in itself, but which as an analyst I can put together to help understand the trends. But companies will be reluctant to give such information out to individuals and it won't be of enough significance to be put out as an announcement, so it will be denied to the market. People won't understand the company or the industry as well as they did previously, therefore the market will become less efficient.'
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To view the report, click here.