Analysis: Investor Relations - Could full disclosure be an IR headache?/We are living in an information economy. Yet, public companies have been able to limit access to critical financial information to selected parties. Now the SEC is ushering in an era

From the boardroom to the courtroom, selective disclosure is a hot topic these days. Mulling a number of rule changes, the Securities and Exchange Commission (SEC) is about to raise the bar for IR professionals.

From the boardroom to the courtroom, selective disclosure is a hot topic these days. Mulling a number of rule changes, the Securities and Exchange Commission (SEC) is about to raise the bar for IR professionals.

From the boardroom to the courtroom, selective disclosure is a hot

topic these days. Mulling a number of rule changes, the Securities and

Exchange Commission (SEC) is about to raise the bar for IR


The SEC, led by chairman Arthur Levitt, shoved the issue into the

spotlight last month when it voted 4-0 to solicit public comment on a

proposed rule requiring public companies to disclose significant

information, rather than limit initial access to selected people.

Levitt has driven the push towards greater disclosure for some time


’Sixteen months ago, I voiced concerns over what I saw as an emerging

culture of gamesmanship within the financial reporting process,’ said

Levitt in a statement posted on the SEC’s web site ( ’A

culture that allowed the pressure to meet earnings expectations to come

before long established precepts of financial reporting, and ethical


Among the rules being considered by the SEC is one barring companies

from selectively disclosing material information, and another assigning

liability to a person trading while aware of non-public information.

Virtually every response posted on the SEC site is in favor of fair

disclosure, but that’s not too surprising, as most respondents are

individual investors.

Not everybody, though, is exactly thrilled with the proposed rule


More harm than good?

Stating that they share the goals of the SEC in promoting full

disclosure, officials at the Securities Industry Association (SIA) have

expressed strong reservations. ’Our principal concern centers on the

chilling effect that may result from the SEC’s more stringent

regulations on what companies can tell the financial analysts who cover

them for the clients and other firms,’ says Stuart Kaswell, SIA’s

general counsel and senior vice president.

’We are concerned that by imposing detailed rules on companies, the

proposal will end up restricting the flow of information rather than

encouraging it.’

Meanwhile, selective disclosure is at the center of a growing number of

class-action shareholder lawsuits, as well as the SEC’s accusations of

fraud and related misconduct against 68 individuals and companies last

fall. One such case, involving NFL Hall of Fame quarterback and Atlanta

businessman Fran Tarkenton, made national headlines. ’There have been a

couple of highly publicized cases which were egregious violations of

what companies would normally do,’ Sokolow says. ’There’s now a higher

level of scrutiny, because now they have the ability to disseminate

information in a number of formats.’

’One of the more ironic consequences of the shareholder class-action

phenomenon is that it has led some public companies to give guidance

with a nod and a wink,’ says Boris Feldman, partner at Palo Alto,

CA-based law firm Wilson Sonsini Goodrich & Rosati. ’Particularly among

smaller companies, executives may be reluctant to publish their guidance

because they fear shareholder lawsuits if their expectations do not come


Sensing the lack of tolerance for even minor inadvertent material

disclosures, many law firms that represent public companies are urging

IR pros to take measures to head off any legal repercussions.

As a partner at New York City-based law firm Thacher Proffitt & Wood,

Mark Sokolow also deals with issues of selective disclosure


’For some time, we’ve recommended to our clients that during the weeks,

days, even hours before they attend an analysts’ conference or hold a

conference call, they review all material and file a form with the SEC

disclosing any material non-public information, no matter how small,

before it is presented,’ says Sokolow.

While he expects the new rules to pass, he adds, ’There will be some

changes made to the way it is proposed now, especially providing more

flexibility in the area of reporting inadvertent disclosure.’

Lawyers are not the only ones urging IR pros to tread carefully. Louis

Thompson Jr., president and CEO of the National Investor Relations

Institute, says NIRI has been encouraging its members to rehearse their

conference calls and analyst meetings for some time now: ’Most IR

professionals tell me they don’t see these rule changes as that big a


But one concern of many IR pros is the subject of materiality. ’The

lawyers are going to have a field day with this one,’ predicts Thompson.

’The rules aren’t that difficult, and everyone understands them. It’s

the judgement calls when it comes to materiality.’

San Francisco-based Woodruff-Sawyer & Company has compiled a database on

class-action lawsuits. According to the Securities Class-Action Alert,

of the roughly 10,000 public companies tracked between December 1996 and

April 1998, 12%, or some 1,200, were defendants in shareholders

lawsuits, including selective disclosure, insider trading and accounting


Still, preparations and rehearsals will only get you so far. ’Companies

typically use great care in planning these forums, anticipating most

questions likely to be raised, and therefore scrupulously avoid straying

into inside information,’ says Ted Pincus, chairman of The Financial

Relations Board (FRB). ’But the simple fact is that a wide open

teleconference - with reporters listening - would be the best insurance

against any likelihood of selective disclosure.’

The technology to make it real

Whatever side one takes on this issue, no one doubts that the technology

exists today to meet the demands. For example, thousands of individual

and institutional investors browsed through more than 200 investor

presentations and interviews during the Virtual CEO Summit hosted in

December by FRB/BSMG Worldwide. During the four-day event, top

executives from more than 80 public corporations presented their company

investment stories with interactive slide presentations and audio via

the Internet.

’This is an absolute bonanza for IR professionals, because rather than

just simply living in a world of press releases and the occasional

inquiry, now they’ll have a real show to produce,’ says Pincus. ’It’s

one thing for a CEO to get on the phone and get cozy with a couple of


It’s quite another when you have a large audience to prepare for.’ For

Pincus, the merits of increased disclosure ’vastly outweigh’ the

concerns of the SIA and other detractors: ’There still may be some

inherent fear in the minds of corporate officers. If they stumble,

they’ll be exposed to a wider audience than the analysts they’re used to

talking to, but they have to get used to the fact that they’re not

living in a goldfish bowl.’

Currently, some 15% of large, publicly traded companies transmit their

conference calls publicly over the Internet, says NIRI’s Thompson. While

NIRI is yet to survey these firms, Thompson says that more and more

companies will soon follow suit.

In all likelihood, the securities industry will soon be force-fed these

new disclosure rules. ’My prediction is, it is going to be adopted,’

Sokolow says. And from staging teleconferences and webcasts to everyday

contact with analysts, IR pros will be challenged like never before in

an increasingly transparent financial landscape.

Have you registered with us yet?

Register now to enjoy more articles and free email bulletins

Already registered?
Sign in