The SEC’s new regulation, dubbed ‘FD’ for Fair Disclosure, has been controversial from the start, pitting corporate issuers against small investors – or at least that’s the way the SEC has portrayed it.
At the heart of the issue is the SEC’s claim, championed by chairman Arthur Levitt, that favoritism can taint the corporate disclosure process for financial information, giving an unfair advantage to Wall Street professionals and leaving out individual investors. The SEC maintains a company’s financial information should be available to all interested investors simultaneously, regardless of their ability to fully comprehend the information.
No one is arguing information should be withheld from small investors. In fact, the National Investor Relations Institute testified before the SEC, arguing that most of its members are already following ‘best practice’ by allowing press and individual investors to participate in earnings conference calls. Webcasting these calls and posting analyst presentations to a company’s web site are also becoming increasingly more common.
Some believe the SEC is overreacting to a situation already remedied by natural market forces. Others point out that Reg FD will cast a chill over the communications process as companies, fearful of saying something the SEC would regard as non-public, are simply shutting down the communications process – reasoning the best way to stay out of trouble is not to communicate at all (other than press releases and required filings). So Reg FD has not created a level playing field; instead, it may have removed the playing field altogether. If that happens then both professional and individual investors lose.
If the SEC truly wants to ensure full disclosure to individual investors, it should turn its attention to a different, and more worrisome, aspect of the way shares are bought and sold among Wall Street pros. The SEC currently requires any institution that manages more than $100 mn to file a Schedule 13F, listing the companies in its portfolio and the number of shares owned. The institution must file this information at the end of each quarter, with a 45-day grace period starting at the end of the quarter. During this period the shares are held in secrecy at a bank – with no one except the bank and the institution knowing the exact position.
This timing is ludicrous, especially given today’s technology. When institutions can trade millions of shares at the click of a button, this antiquated disclosure system is the functional equivalent of no disclosure at all. Moreover, institutional insiders confess 13F filing is typically an afterthought left to the last moment or sometimes forgotten altogether without fear of consequence. Instead of this untimely and lax disclosure, companies should know who owns their stock on a real-time basis – and all investors should have equal access to this information.
All too often, dramatic movements in a company’s share price can be attributed to buying or selling by large institutions. Rather than trading on some non-public information, they may base their investing decisions on strategic factors – such as restructuring a portfolio or other events that have nothing to do with the fundamentals of a company. Seen in a vacuum of information, sudden price movements may be viewed by small investors as a signal to sell or buy. To be sure, institutions wouldn’t want their decisions documented so closely, but shouldn’t small and large investors alike know where and when a prominent institution is moving the market?
Technologies exist today to require institutions to provide real-time information on their investment holdings. The SEC is pushing companies to file required documents electronically, so why aren’t they forcing shareholders to provide real-time information as well? An efficient market is one that deals with all relevant and available information. To concentrate on only one side of the information equation is shortsighted on the part of the SEC.
If Arthur Levitt wants to leave a legacy as the man who brought fairness and openness to the investment process for all investors, he now has the opportunity to truly create a level playing field. Let’s hope he takes on the institutional investors just as he took on corporate issuers.
Ernest Sando is US director of financial communications for Hill and Knowlton
