A little over a month after Reg FD’s official launch on October 23, a panel of experts gathered on the virtual stage to assess its impact. The US SEC’s new regulation requires companies to communicate all material, non-public information to all audiences simultaneously. When FD was first proposed, many IROs predicted a chilling effect on corporate disclosure; others foresaw the opposite. As it turns out, both were right: Reg FD’s inception has both promoted and inhibited corporate communications.
As part of a CyberSeminar series hosted by Investor Relations magazine and WorldCom, a panel of experts discussed the impact of Reg FD. The panel included Phil Livingston, president and CEO of Financial Executives International; Vinny Catalano, founder and president of iView Research and former president of the New York Society of Securities Analysts; and Chuck Hill, director of research and chief financial analyst at First Call. The seminar was moderated by Investor Relations magazine’s North American editor, Anthony Parish. Here are some highlights from the event.
Word on the street
Livingston: Prior to the start-date of FD, we did a survey of about 230 major companies as to their practices post-FD. A clear majority – 59 percent – said they thought their behavior was going to change going forward. This is a reflection of the concern that was out there already. Many of our companies felt the proposed rule reflected a lot of best practices that were already in place. Now, since the regulation’s implementation, I’m hearing a lot more noise, a lot more concern. One of the concerns is whether there’s going to be greater legal liability for the officers and for the companies under these new rules. Also, are the analysts’ estimates going to get commented on less frequently and therefore, are we going to have less accurate estimates and more earning surprises, thus creating more stock price volatility? What I’m seeing now is more companies publishing and updating their own forecasts, of course using safe harbor language. Some IROs may not know this, but when you comment on an analyst forecast and then that forecast gets into a shareholder lawsuit, it becomes your forecast if you commented on it. So, if you put a forecast out and use the safe harbor language with it, you’re in much safer territory.
We are also seeing lots of published Q&A’s each quarter and lots of ranges being given for analyst estimates. The number one question I’m getting from people is, How do we know when to disclose information? And there’s not a lot of guidance from the SEC or from accountants. So people are struggling with how far they should go and what’s material and what’s not material.
Guidance guide
Catalano: We all know there’s a lot of activity that happens between corporate management and Wall Street analysts away from the formal company presentations. There are legendary stories of Mario Gabelli [of Gabelli Asset Management] going directly to the warehouses before he went to senior management to find out more about what a company was doing. So what’s going to happen to this relationship between corporate management and Wall Street analysts? And how is that change going to affect Wall Street analysts?
So much of what’s happening for the Wall Street analyst is influenced by company guidance. We all know about the potential for conflict of interest between the investment banking portion of firms and the analysts. Unfortunately there’s perhaps a little bit too much of a transference of information between the analyst and corporate management. The Association of Investment Management & Research’s Financial Analysts Journal has published numerous articles talking about securities analysts not doing the kind of work that they really should be doing and relying too much on guidance instead.
Under Reg FD, what’s happening to this pipeline of information from private meetings? Are Wall Street analysts getting back to doing the traditional research that they should be doing? Also, what is corporate management doing with this requirement to disclose information? Are they crafting the message more like a media package?
There is really potential for the resurgence of the public forum. Imagine the internet becoming the platform for this new, expanded corporate communications environment. The players are the analysts; the audience is the entire world. And the whole world is listening in now.
Information flood
Hill: We’re seeing a flood of pre-announcements coming from companies. Companies are now scheduling mid-quarter reviews to provide public releases on guidance, usually with conference calls. And they are sending out releases when they’re going to appear somewhere at a conference. We are also seeing confirmations that say things like, Three weeks ago we gave you guidance; we just want to update and say that’s still valid.
We’re also seeing a lot more companies webcasting presentations. For example, companies are webcasting not only their conference calls and meetings but also their appearances at broker-sponsored conferences. Brokers obviously wanted to keep this just for their clients but the bigger companies forced the issue and it’s now becoming common practice.
Companies are also webcasting industry sponsored conferences. At the American Electronics Association conference a few weeks ago in California, a great number of companies webcast their presentations. These are examples where a company’s presentation might move the stock, and therefore it’s a good thing that the information is being made available to everyone.
As for concerns over less accurate earnings estimates, more earnings surprises, and increased volatility, we’re not going to see any of that. It’s going to be the opposite, since most of the companies are providing regular public guidance. That’s going to mean that the ball game is over for a lot of these analysts who haven’t been doing much more then parroting the companies’ guidance. Most companies are going to continue to talk to the analysts in private situations or in groups but there won’t be any guidance given, other than what’s already out there. Face-time with the CEO and other management people is still very important; so that will continue.
Analysts may be complaining because they have to do more work, but they’re going to be turning out a better product. Regulation FD has leveled the playing field for the individual investor. Their problem is going to be deciding what to listen to; there’s going to be too much available.
Conclusion
Regulation FD has been the center of a maelstrom of controversy which calls into question an entire history of privileged communications between companies, analysts and institutional investors.
The regulation’s goal is to abolish these cozy relationships. However, before the rule can successfully govern and equalize corporate communications, it must first bring to light the skeletons in Wall Street’s closet. During these nascent months of the rule’s implementation, the dynamics and underpinnings of corporate relations are coming under the microscope.
Some practices will flourish, as webcasting seems to have done in the early weeks of FD; some will merely survive. Still others will be discontinued and go down in the history books as old-school practices that have become outdated.
