On October 23 the SEC’s Regulation FD (for ‘fair disclosure’) will take effect and corporate communicators are fearing the worst. The commission has made selective disclosure its cause celebre and it has new ammunition. So IROs find themselves caught between probing analysts and stern regulators. What can they do? The answer, for many of them, is to simply shut their mouths.
Since FD was approved in August there has been an increased conservatism about disclosure. The regulation essentially requires companies to deliver information transparently and simultaneously to all audiences. It is likely to affect almost everything IR professionals do – from speaking on roadshows to manning the phones. For those companies who until now have relied on the Street as their conduit to the rest of the financial world, practices need to be revised.
SEC chairman Arthur Levitt summarized it best during the commission’s open meeting on Regulation FD: ‘There’s a saying that only three things matter in real estate: location, location, location. Unfortunately, in some quarters, the same principle is taking root in investing, and the place to be is inside the information loop – that small circle of Wall Street professionals with whom companies share significant non-public information before the rest of us.’ Like those neighborhoods with gated entrances and tall fences, moving into the information loop isn’t always an option for US small investors.
The SEC intends FD to bring small investors into that loop, and many of them celebrated when the regulation was approved. Those were the same investors who wrote most of the 6,000 letters the commission received during FD’s public comment period.
Information flow
Although Regulation FD was supposed to enhance the information flow, many people fear that it is having a contrary effect and is giving rise to a culture of caution. In a recent Niri survey of investor relations officers, 42 percent said that they would limit their communications practices as a direct result of FD, while a further 12 percent said they would do so ‘significantly.’ One-third of the respondents said they would either not participate or would limit their participation in broker-sponsored investor conferences and one-on-one meetings. Furthermore, one-third said they would no longer review draft analyst reports at the request of the analysts.
Boris Feldman, an attorney with Wilson Sonsini Goodrich & Rosatti based in San Francisco, says he sees many of his clients taking the safe road. ‘Most of them are not saying, Let’s put out a press release a day to cover ourselves. They’re saying, We need to cut way back on what we talk to people about. People are afraid that if they just say what they think and they turn out to be wrong, they’ll get sued. They realize they’ll have to give guidance at the beginning of the quarter transparently, and then not give any updates during the quarter.’
The Niri survey echoes this caution: roughly 23 percent of IROs said they would cut back or eliminate conference Q&As, and an even higher percentage said they would cut back or eliminate their participation in company sponsored group meetings and guided tours. Will the regulation do as it intended to do – facilitate the flow of information? Many say it will not; and they wave the Niri survey as proof of FD’s chilling effect. Volatility
While FD prohibits selective guidance to the Street, Feldman believes this will cause more volatility during earnings season. Rather than nudging analysts’ expectations as they have done in the past, he says, IROs will have to stay tight-lipped until they issue their earnings reports. That means there will be a polarization of information towards the end of each quarter, instead of a more even trickle throughout the year.
Feldman says the best way to disclose information is through a news release. Companies can then follow up with conference calls or one-on-one discussions, so long as they stick to material that has already been disclosed. He says companies should aim to put more information in their releases and less in the follow-ups.
The occasional mistake is inevitable, however, and when a company lets new information slip out, it will have to disclose that information publicly through a news release. Still other companies may feel it is necessary to issue releases even if their information is only marginally significant – just to be on the safe side.
Eugene Goldman, a McDermott Will & Emery partner and co-chair of the firm’s SEC defense group, says this could flood the newswires. ‘The best way for companies to inoculate themselves from rule violation is to put it all out on the table for everyone to see,’ Goldman maintains. ‘A potential downside is that you may see minutiae being spread around in an overabundance of caution. The companies would view the news release as a safe harbor.’
And then there’s the question of what constitutes ‘materiality’. For instance, an executive may disclose some information that wouldn’t normally be considered material, yet it moves the market. If the information hadn’t already been disclosed through a news release, the company should consult its legal counsel to determine whether or not the incident merits a release of its own. Feldman says an ounce of prevention is better than any market correction: ‘I tell my clients, I don’t want to see many of those releases because they’ll shorten your life.’
Most everyone agrees FD will increase the volume of news releases, though estimates differ on how much. The SEC estimates the average company will issue about five releases a year: one each quarter and an extra one during the year. That’s good for the newswires, but not so good for corporate bean counters.
Business Wire’s president, Lorry Lokey, predicts FD will increase the number of news releases but not by much. Instead, he says, companies will cut back their casual dialogue with the Street. ‘We will probably see executives going into analyst meetings following a script more closely. I tend to think they’ll use news releases to announce what they expect to say at these meetings. They’ll be on guard because there are always questions and answers, and undoubtedly there will be some questions that lead to new material being disclosed.’
Does this mean companies will increasingly replace live dialogue with pre-programmed talking heads? Cathleen Mayrose, Hill and Knowlton’s senior managing director, thinks not. ‘It’s not that we would ever advise our clients to refrain from talking to the sell side. Because the sell side is a vehicle to take information not only to the institutional investors but to the retail investors as well. They do a service to the companies and to the market by providing informed commentary that helps to educate the market at large. So I don’t think anyone – including the SEC – has any intentions of preventing that which they all generally view as a good thing.’ Mayrose says FD is an invitation for her clients to review their existing disclosure policies.
Deja vu
Ron Gruner, president of Shareholder.com, believes history may show us how the new regulation will play itself out. He believes FD will have a similar effect as the SEC’s mid-1990s ruling on quarterly reports. ‘When I saw the reaction to Niri’s FD survey, I said this is deja vu. Five years ago the SEC made a ruling that said, essentially, you don’t have to distribute quarterly reports – it’s not required by law, or by exchange regulation – but if you do, you need to do it fairly and equitably to all shareholders. A lot of companies came out and said, Well, we’re just not going to send them out at all. But many of them reverted back to sending quarterly reports or found other mechanisms to communicate that information – the internet came along and answered that particular question.’
Gruner believes companies cannot afford to clam up because competition is too fierce. In any industry peer group, all it would take is one aggressive competitor to set standards of open communication, and other companies would quickly follow suit. He maintains FD may have a short-term chilling effect, but it will become a catalyst for new communications practices.
Feldman agrees that IROs will have to alter their practices in order to accommodate FD. ‘Companies will continue to give guidance, but it’s going to be open kimono guidance – the full monty. It’s not going to be one-on-one. It’s going to be done over a call with the whole world listening and they’re probably going to put it all on their web site.’
Eugene Goldman says FD will accelerate the growing trend towards open meetings. ‘It will certainly chill the one-on-one meetings, but in terms of broader meetings with multiple analysts, I think a lot of companies were already moving toward allowing all the shareholders in on these discussions. This rule will mean those companies that have not joined all the other companies will have to do so now.’
According to the Niri survey, more companies are bringing their meetings to the web: 61 percent say they currently webcast their conference calls – up from 48 percent six months earlier – and an additional 22 percent say they are planning to do so. The SEC hopes FD will give them additional incentive.
Ron Gruner believes the regulation will force all companies to re-think their methods of communication, and that is undoubtedly a good thing. ‘I think it’s going to be good for everybody. Some firms may cut back on their communication, but that’s a very short-term reaction and in the long term FD is going to do just the opposite. I think with what’s available today in technology, there are going to be a few firms that say, We no longer can have preferential discussions, so we have to find a way to get our message out to a very broad base simultaneously. Many innovative companies are going to look at this as a new opportunity, and there will be a lot of exciting ideas to come out of it.’
Setting standards
My sense is the internet will become the standard for full disclosure. While Reg FD states that the internet alone is not enough, it is becoming a major player. Companies will work on ways to notify interested parties. They’ll put information on their web sites, they’ll use an e-mail alert service, they’ll put out a release to notify interested parties, and they’ll get that information on all the major portals.
Material vs non-material
Deciding what is material information is an issue, and it’s really in the eye of the beholder. One person might say a CEO in a car accident is a non-material issue in relation to the business. But, if the CEO is Michael Dell, that information may be considered material. Companies will be careful to err on the side of caution, disclosing whatever they believe to be material even if it turns out not to be.
One-on-one meetings
While companies may not feel they’ve been materially disclosing anything in one-on-ones, there was certainly a touchy-feely relationship with key shareholders. Companies now will be more reluctant to have that kind of relationship and will be concerned with getting information to a broader audience on a timely basis.
Gray area
Don’t think about how a minority of companies will look for the loopholes. The power of Reg FD is that it mandates companies to disclose on a broader, more timely basis. In a way, it’s similar to when they mandated press releases. I think you’ll see companies figuring out inexpensive way to notify large populations.
Boon to IR
IR is clearly coming into its own both because of stock price volatility and technological developments. In fact, IROs are becoming media managers for top management. They’re important conduits in two ways: they know how to phrase what senior management wants to say and they know which medium to use. With this regulation, IROs have become regulatory gatekeepers for companies. – Jeff Parker, CEO of CCBN.com and First Call’s founder
Slight impact
Cathleen Mayrose, a senior managing director with Hill and Knowlton’s New York office, says Regulation FD shouldn’t cause companies to become overly sensitive about the SEC’s definition of ‘material information’. ‘One thing we tell our clients is that if it wasn’t material before FD, then it’s not material after FD, and there’s no sense putting out press releases about immaterial news developments. That would only serve to create a reputation for the company that they’re a drop-of-the-hat press release issuer, which can obviously dilute the value of some potentially significant news in the future.’
Mayrose says the regulation should have very little impact on companies that have been in compliance with disclosure regulations all along. ‘Obviously we will recommend to all of our clients that their current programs are in compliance with existing and new regulations. But at the end of the day, those who have been practicing good disclosure – making sure that all material news developments are shared simultaneously with the financial community at large – shouldn’t have to change their practices much.
