Regulation FD: A Brief Look Back

Regulation FD: A Brief Look Back


Historians have a point; distance has its uses. There is not enough of that yet between today and the enactment of Regulation FD last October to permit a dispassionate reckoning of its virtues and defects. All that is certain is that few regulations of recent vintage have attracted so much attention to themselves or so quickly become the daily stuff of public market capitalism. Beyond that, one can probably offer the following points by way of retrospect, if not with safety, then at least with plausibility.

First, the regulation has simplicity to commend it. It has a central prong: it prohibits a company from intentionally disclosing material non-public information to securities market professionals and security holders unless the company publicly discloses the information simultaneously, or, if the disclosure was accidental, promptly.

The word "material" has occasioned both real and feigned confusion. The original guidance from the SEC which accompanied Regulation FD directed readers to the pre-existing case law for a definition of materiality and did not offer some new Simple Simon definition.

That was just as well. No new formulation would have beaten the common sense of the common law which instructs that information is "material" if a reasonable investor would want to know it in deciding whether to buy or sell. In fact, confusion over materiality has not brought corporate America to its knees in seeking to honor Regulation FD.

Second, Regulation FD does possess an unarguable appeal to unarguable morality: It was not fair that stock analysts should get company information - especially about earnings in the coming quarter - selectively to use as they deemed appropriate for the benefit of their clients and to the detriment of an investing public not privy to the inside scoop. No one can quantify how much selective disclosure took place before Regulation FD but no one can pretend that the practice was so infrequent as not to be worth correcting.

Third, correct it Regulation FD did. The singular fact of the first 11 months of the regulation's life has been its embrace by those corporate officials suddenly burdened with having to adhere to it. The preaching of adherence began with the lawyers as the proposed regulation achieved visibility in August 2000. There was an immediate and widespread recognition by the profession that there was about to be a considerable rearranging of the ways in which corporate officials and securities analysts related to each other. Quickly, law firms formed discussion groups pouring over the proposed text of the regulation as though it were the Talmud; the groups spawned white papers, the white papers spawned public seminars and client visits. Lawyers resumed, as they now too rarely do, their historic role as counsellors.

They may have counseled too conservatively (that is the nature of the profession) and possibly alarmed their clients more than necessary about what they could and could not say or about how heinous the consequences would be for even inadvertent selective disclosure. But the breadth and speed of compliance has been astonishing.

Fourth, that compliance proceeded as quickly as it did in part because Regulation FD was perfectly suited to the internet. CEOs and CFOs who as late as 1999 thought webcasting was something spiders did, learned that, if they had something to say to the analysts, saying it on a publicly advertised webcast offered close to a guarantee that they could not possibly be violating the regulation. Not only that, the same corporate officers were suddenly willing to tell investment banks that they would appear at the next investors' conference only if the general public could log on and hear for themselves what the officers were telling the attendees. Now, it is increasingly commonplace to see even one-on-one meetings with individual analysts available on the web.

Has Regulation FD's ride really been as effortless as the foregoing might suggest? Probably not. The SEC did terrify some people in some of its earlier pronouncements and some companies reacted in the name of compliance by simply clamming up. Others erred by deciding that nothing was too trivial not to disclose, thus yielding a flood of arcana under the name of disclosure. A very few continued to tell analysts that which they should simultaneously have told all.

Two broader cavils also remain. First, the relationship between a corporate officer and the analyst who cover his or her company has always been a game of cat and mouse with the officer always being the mouse. Regulation FD imposes no burdens on the cats. They remain free as ever before to try to prise inside information out of the officer they are interrogating. Fairness might have suggested as much regulatory imposition upon the hunter as upon the prey.

Second, there is an argument that far from being a work for all seasons, Regulation FD was an historical curio, a creature of the moment. It was conceived at the height of a very great bull market. It was enacted at a time when analysts enjoyed a now vanished cachet, at a time when millions wished to know precisely what Ms. Meeker and her minions knew.

That day is, of course, long gone but it is hard to imagine that it is gone forever or that the last mania was the last mania. In any event, selective disclosure has no more place in bad times than in good.

Jeffrey B. Rudman
Chair, Corporate and Securities Litigation Group

This article appeared in the Boston Business Journal September 14-20, 2001 edition, Volume 21, Number 32.