If the devil is in the details, we are witnessing the devil at work when it comes to the practical impact of Reg FD.It's time to reassess whether its practical impact actually squelches communication between companies and investors instead of encouraging more dialogue.
The purpose of the Securities and Exchange Commission's enactment of Regulation Fair Disclosure toward the end of 2000 was to stop the whispering that sometimes went on between companies and analysts, especially around quarterly earnings. A nod here and a wink there between companies and analysts was seen as unfair, especially to retail investors.
Putting an end to selective disclosure was touted as leveling the playing field. Less than two years later, Sarbanes-Oxley (SOX) was put in place as another tool to blunt corporate misdeeds.
Of course, critics quickly pointed out that there were already plenty of laws against insider trading and that the massive costs of SOX might discourage companies from seeking listing in the US markets and send them overseas instead. Well, that's what has happened, and now there is discussion of reforming SOX.
The unintended consequences of Reg FD were reinforced in recent weeks as investors' concerns over the credit markets led to furious market volatility and historic volume. Many IR officers were swamped with calls from worried investors, as well as the media, and often said little in fear of violating the rule's best intentions.
While, in theory, Reg FD encourages expanding ongoing communications between a company and investors, the reality is that most companies err on the side of prudence and say little, or only repeat what has previously been publicly disclosed. This tight scripting avoids slips of the tongue that lead to revealing anything that might require an 8-K filing. Corporate counsels are only doing their jobs when they keep a close watch on what is being said and opt for safety.
If the intention of Reg FD was to bolster investor confidence, it's clearly not working. In fact, Reg FD has severely limited conversation between companies and investors, making the markets far less dynamic and confident. Sure, some investors seek an unfair advantage in the markets, but the vast majority play by the rules and want to engage a company in meaningful dialogue to better understand its business strategy.
But Reg FD has forced companies into a tight corner, where their answers are often clipped. That tone may make sense for Sam Spade, but not for a CFO. It creates suspicion where none is justified. Conversation requires a give and take. Keeping a vigilant watch on each word uttered is a verbal straitjacket. What's more, many investors complain that companies hide behind Reg FD as an excuse to stay mute.
Now is the time to take another look at Reg FD and to figure out whether it is really necessary and what can be done to fulfill its goal of increasing communication between companies and investors. Can we talk?
Fred Bratman is president of Hyde Park Financial Communications.