Financial regulators on both sides of the Atlantic deserve a bit of a pat on the back. Three cheers might even be in order. What have those guys and gals been up to that is so deserving of our admiration? Leveling playing fields, that’s what. The US Securities and Exchange Commission and, as ever playing catch-up, the UK’s Financial Services Authority have been smoothing the turf with aplomb. It is all very laudable stuff.
They are trying to protect the interests of the private investor; trying to ensure that every John Doe or John Smith or Aunt Sally receives the same information at the same time as the professional investor sitting on Wall Street or in the City. Selective disclosure via a nod and a wink to a favored few is a big no-no.
The SEC’s Regulation Fair Disclosure hit the Street at the end of October, outlawing companies from disclosing price sensitive information to the professionals ahead of the private investor. It has taken nigh on a year to come into effect and some Wall Street firms even bothered to take note.
The very same week – surprise, surprise – the UK’s man with his finger on the pulse, Sir Howard Davies, FSA chairman, warned the City in stern tones that selective briefing would just not be tolerated. He even wagged his finger once or twice and some appeared to be bothered by it for – well – at least a minute.
Don’t get me wrong: the regulators have the best of intentions in speaking out against this type of practice. People would have more confidence in markets if price sensitive information were always released to all investors at the same time.
But there are two aspects of all these good intentions that should trouble us. First of all, WE’VE SEEN IT ALL BEFORE. There’s nothing new here. The rules in the US and UK have been clear for several years. Leaking information to a privileged few by companies is against the law; trading on price sensitive information before it has been released to the whole market is against the law. Yet everyone knows it still goes on – just look at the number of jumps in share prices a few days before key announcements are made. Why, when the market has known the rules for years, should another regulatory slap on the wrists make a jot of difference?
Secondly, there is a fear that companies over-react to these regulatory concerns. I don’t wish to tar you all with the same brush, but too many investor relations professionals are inclined to be cautious in the extreme (flick through a random bunch of annual reports if you want the evidence.)
Now, again, that’s a perfectly laudable approach given the diverse range of pressures on the investor relations function. But it can work against you too. A lot of analysts and investors have been complaining of late that some companies have thought it too dangerous to answer basic questions for fear of breaking the rules on price sensitive information.
If the result of the regulatory crackdown is a corporate communication shutdown then the smooth functioning of the markets could be in even more danger. When companies clam up, the risk of leaks to a privileged few becomes even more acute. As Howard Davies said when explaining his concerns: ‘In fast moving equity markets the timely flow of accurate information to investors is crucial.’
