REG FD's LEVELING EFFECT.

• Author: Millman, Gregory J.
• Position: Fair disclosure

The SEC's new rule on fair disclosure has been widely supported in principle. But working out the mechanics of compliance is creating headaches and uncertainty for many companies.

As the calendar goes, the Securities and Exchange Commission's Regulation FD (for "fair disclosure") is very new, having been officially implemented late last October. But to hear the SEC tell it, the practices it addresses -- selective disclosure of important information by corporate executives to favored analysts and institutional investors -- have been going on for a very long time.

It's not hard to see why the SEC thinks this rule, also known as the rule on Selective Disclosure and Insider Trading, is a good idea. During the comment stage in spring and summer of 2000, the agency received more than 6,000 letters, most of them from individual investors who saw the rule as a vital step towards long-overdue equality with big institutional investors and fund managers.

Indeed, Stephen Cutler, the SEC's Deputy Director of Enforcement, tells stories that suggest that any small investor who's not paranoid about selective disclosure must he crazy.

"In June of this year, the CFO of a dot.com called analysts in seriatim fashion to discuss negative information," Cutler says. "After he called the first analyst, that analyst advised his trading desk and best clients that he didn't expect the firm to meet its earnings target. By the time the CEO had called the third analyst on his list, the company had lost 6 points. By the end of the day, it lost half of its value. But the company never issued a press release."

That's just for starters. Cutler goes on to talk about a company that, in October 1999, alerted analysts to a slowdown in sales. The analysts put the word out to their sales forces. Top clients got the first calls, of course, and the stock dropped 8 points in a little over a day. The company waited almost a week before telling the rest of the world that its sales weren't going to meet the market's expectations, and the stock fell an additional 19 percent on that news.

And then there's the one about the CEO who got confidential at a cushy conference where institutional investors nibbled lobster salad and foie gras. "He shared with attendees information about diminishing inventories and increasing market share," Cutler relates. "Before the day was over, the company s stock had risen 37 percent." The company didn't bother to issue a press release about the news.

Cutler says he has "dozens" of similar examples. Such selective disclosure of information to privileged market professionals unquestionably puts John Q. Public at a disadvantage in the trading and investing game. But until October, the SEC couldn't do much to combat it.

In fact, in a 1983 decision known as Dirks v. SEC, the U.S. Supreme Court had all but enshrined selective disclosure, writing that "such information cannot be made simultaneously available to all of the corporation's stockholders or the public generally." The effect of this decision was to immunize corporate tippers from prosecution under insider trading rules unless the SEC could prove they'd breached corporate policy by disclosing information to analysts. "It was terribly difficult for anyone to show that this kind of conduct wasn't happening pursuant to a corporate policy," Cutler explains.

That's why the SEC issued Regulation FD, which gives Cutler's enforcement crew the weapon it needs to go after corporate tipsters by requiring that any material information intentionally disclosed to analysts or shareholders must be simultaneously disclosed to the public. If a corporate official happens to inadvertently blurt out some material information in a meeting with an analyst, for...