NO ADO ABOUT EVERYTHING
TOO MUCH OF THE NAKED TRUTH? THE SEC’S REGULATION FD HAS PUBLIC COMPANIES REVEALING MORE THAN EVER BEFORE. BUT MANY AREN’T SURE THAT’S NECESSARILY A GOOD THING.
Byline: Dan Burrows
Dolly’s Designer Dress Shops Inc. Expects First Quarter Loss of 58 Cents, Better Than Estimates.”
Sound familiar? It wasn’t too long ago — 18 months to be exact — that this sort of self-congratulatory company announcement and its dubious value probably wouldn’t be written at all. But since the controversial enactment in October 2000 of Securities and Exchange Commission Regulation FD (Fair Disclosure), analysts, investors and financial reporters have found themselves awash in a constant flow of information.
Be it earnings guidance (generally lowballed, to make it easier to exceed), the completion of a new credit facility, or what the chief executive officer of Company X had for lunch, Reg FD, as it’s known, mandates that any potential stock-moving disclosure be released to everyone at once. Private conversations between management and favored analysts are no longer just bad etiquette, they are forbidden.
And no one wants to break the new rule, no matter how inadvertently, lest their company become the dreaded “first test case.”
Now, while Dolly’s investors are certainly interested in how the company did last quarter, pre-Reg FD this sort of press release likely wouldn’t have been issued because the firm probably wouldn’t have disclosed earnings guidance in the first place. But in the brave new world of fair disclosure, companies issue guidance like Gap reports same-store sales declines: constantly. And while in some cases the amount of information coming from companies has actually decreased, since it’s often safer to say nothing rather than risk the SEC penalties that could come from nasty old selective disclosure, more and more companies are holding Webcasts, hosting conference calls, and issuing press releases by the ream. Indeed, corporate Webcast service CCBN.com handled a more than tenfold increase in broadcasts in the fourth quarter of 2000, just after Reg FD kicked in, compared to the prior-year period. The number expanded another 27 percent in the final quarter of 2001, to 3,624.
“Retailing was affected by Reg FD a little bit differently than other industries because it’s always been pretty straightforward with regular sales information,” says Eric Beder, an analyst with Ladenburg, Thalmann & Co. Inc. “But Reg FD has definitely made it more of an issue of quantity versus quality. Now, if a company has anything to say at all, they have to put out a release. While I don’t think you can ever have too much information, with the increase in information coming out, you need to go through more information more carefully.”
Lauri Brunner, an analyst with RBC Capital Markets, agrees with Beder. For her, in fact, there’s no such thing as “too much information.”
“I think there’s something useful in every press release a company puts out,” says Brunner. “There are fewer surprises now. When a company goes south, we know about it immediately. So in that sense, Reg FD is an improvement.”
Conversely, Carol Murray, a Salomon Smith Barney analyst, says Reg FD has led to a different trend regarding company news.
“One purpose of Reg FD has been achieved, but another hasn’t,” says Murray. “My view is that we’re getting better information, but much less frequently. Every time a company releases a statement, it’s a much bigger issue than before. So some companies are only talking once a quarter, which is not optimal. They’re giving more information than previously, but less frequently, so the net effect is the glass is both half empty and half full.”
Given the onus Reg FD has put on companies to be more forthcoming with news, should we pity the poor investor relations directors who spend more time dealing with Business Wire than with their families? Not hardly, because in some ways Reg FD has actually lightened the workload.
“It’s made some things easier,” says Cindy Knoebel, vice president of financial and corporate communications at VF Corp. “People on the buy side and the sell side all want the same type of information they got in the past, but they can’t have it. The Street has been trained to know they can’t call and ask the questions that they used to. The burden of handling those calls has been lifted. The difficulties lay in the practicalities of making sure information is disseminated in Webcasts, conference calls and press releases even if you don’t think it’s material, which doesn’t matter anymore. It has to go out to everyone at the same time.”
And whether Reg FD leads to more or less paperwork for a director of investor relations, it has had the unintended consequence of creating something everyone dreads: the never-ending conference call.
“The problem has been that we have more analysts in on conference calls who aren’t as backgrounded on the company,” says Carol Sanger, vice president, external affairs, at Federated Department Stores. “Now we get questions about the kind of minutiae — the nits and gnats of this or that aspect of the company — that aren’t really the place to deal with on a call.
“But overall, Reg FD hasn’t affected us because we were going in that direction anyway. We have always worked very closely with our lawyers to follow both the letter and intent of the law.”
That said, can Reg FD prevent future Enrons? No way, says one retail analyst, because corporate officers aren’t going to disclose they’ve been stealing or, ahem, “borrowing” money off the books — a crime far worse than any selective disclosure.
“Reg FD and Enron are two different conversations,” says the analyst, who spoke on condition of anonymity. “Reg FD is about transparency. Enron is about fraud.”
Emanuel Weintraub of Emanuel Weintraub Associates Inc. concurs, but adds that the point is largely moot for a couple of reasons.
“Reg FD is a good thing and can certainly open up the question of what firms are doing under various arcane accounting rules,” he says. “But traditionally the industry has not been involved in off-the-book partnerships. The only way you can play around is with inventory, and then only for a little while, because eventually that’s going to come out in the wash.”
So with the financial community for the most part adjusting well to the new burdens of Reg FD, it’s hard to remember that when it was first proposed, Reg FD quickly became the most contentious policy issue in the SEC’s history.
Reg FD was a parting gift from then-outgoing SEC chairman Arthur Levitt. The idea was to “level the playing field” for ordinary investors who weren’t privy to the sorts of selective disclosure a corporate officer might relate to a favored analyst behind closed doors. The argument was that that sort of communication favored institutional investors over individual investors and others. Sounds reasonable enough, but when the regulation was first proposed it generated more than 6,000 letters to the SEC and ignited a furious debate. Opponents of Reg FD became crazed Cassandras, insisting that companies would stop disclosing all information, lest they get in trouble, and that the stock markets would be subject to brutal volatility as everyone got bad news all at once.
In retrospect, the Reg FD debate looks a lot like the Y2K hysteria: much ado about nothing.
“In some ways it’s still a work in progress,” says Walter Loeb of Loeb Associates. “There are still some companies afraid of maybe giving too much away, but overall I don’t think anyone’s not complying or not disclosing. And it’s still up to the analysts to interpret what comes out.”
Moreover, a joint study published last summer by the business schools at Purdue and the University of Southern California found there had been “no significant deterioration” in Wall Street analyst forecasts.
“We find no evidence to support the dire predictions that have been coming from Wall Street during the past year,” said USC professor K.R. Subramanyam in a statement. Additionally, PricewaterhouseCoopers published a study on Reg FD’s first birthday that concluded the rule greatly improved disclosure. Even more telling, the survey reported 90 percent of the 201 corporate officers polled said Reg FD should be continued.
As Dresdner Kleinwort Wasserstein analyst Steven Marotta puts it, “All in all, investors like it. Reg FD is here to stay.”
So, financial community, be warned: Whatever its value, there’s a lot more investment news and earnings guidance coming.