SEC Rule Impacts Information Sharing - United States. Securities and Exchange Commision's Regulation Fair Disclosure - Brief Article

Internal Auditor, April, 2001 by C. Brune

NEARLY A QUARTER OF companies responding to a recent survey are sharing less information with the general public since the U.S. Securities and Exchange Commission's (SEC's) disclosure rule took effect last October. Regulation Fair Disclosure (FD) forbids companies to selectively leak substantive financial information to favored market professionals -- such as analysts and investors -- before it's released publicly. The rule was enacted to level the playing field in the investment community by ensuring that all investors have equal access to company information.

The survey, commissioned by the National Investor Relations Institute (NIRI), found that the regulation has not only made some companies apprehensive about disclosing earnings information, but it's also caused many analysts to be wary about asking companies to review their draft earnings models. Although 81 percent of companies reviewed analysts' drafts before the regulation, only 53 percent have continued the practice.

"NIRI and other organizations predicted [this drop in information sharing] would happen once a regulatory structure was placed around the voluntary disclosure process between companies and the investment community," said Louis M. Thompson, president and chief executive officer of the NIRI. He added that the institute will conduct further research to determine the specific reasons for this phenomenon and to devise possible solutions.

On the flip side, the study also found that many organizations are reacting to the new regulation just as the SEC had envisioned. Since the rule's adoption, 28 percent of companies have begun releasing more information to the public. In fact, 89 percent now allow public access to their quarterly conference calls, during which earnings results and forecasts are discussed.

"In terms of the impact of Regulation FD on analyst coverage and institutional investor ownership, we found that only 1 percent [of survey participants] attribute a loss of sell-side analyst coverage or the sale of the company's securities by institutional investors to their company's changes in disclosure policies," Thompson explained. Additionally, despite skeptics' forecasted concerns that Regulation FD would halt one-on-one meetings between companies and analysts, 74 percent of those surveyed have continued holding private meetings, and 5 percent are meeting more frequently to provide supplementary nonfinancial information.