For years, publicly traded companies have been citing rules from the U.S. Securities and Exchange Commission as reasons not to discuss almost anything related to corporate operations in the weeks preceding a quarterly report. "SEC-mandated quiet period" often becomes a boilerplate phrase for public-relations personnel when earnings are less than a month away.
Yet it's not even an SEC rule.
"The quiet period phenomenon is a matter of practice rather than regulation," SEC spokesman John Heine said. "You're not going to find a regulation that says 'you have to be quiet for 30 days' or something like that. However, there are provisions in securities laws that lead people...to be careful in how they handle certain types of information."
Companies tend to be more than a little careful these days. Take chip-equipment maker Applied Materials as an example.
The San Jose Mercury News reported 100 job cuts at Applied last week. Earlier this week, a Prudential Securities analyst released a brief note about "modest" layoffs at Applied. At least three other brokerages--Thomas Weisel Partners, Morgan Stanley and UBS Warburg--recently produced research reports predicting or suggesting more cost cutting, which usually means layoffs.
"There has been a lot of market speculation in recent weeks suggesting Applied Materials may be poised to execute a 10 percent to 20 percent layoff," Morgan Stanley analyst Jay Deahna wrote. "While we can't confirm or deny this, it would not surprise us if it occurred. In fact, in our new forecast we assume layoffs do occur."
Applied reacted to the growing buzz with the briefest response possible: none. "I can't talk about that because we're in our quiet period," Applied spokesman Jeff Lettes said, referring to the second-quarter earnings report scheduled for release next week.
Lettes rejected a CNET writer's usage of "declined to comment" as a paraphrase for his statement. "'No comment' makes it sound like we don't want to comment," Lettes said. "But we can't, or else we risk breaking the law."
There is no law to break. The SEC does not require any quiet period before a quarterly report. Published SEC rules hardly touch the issue. "The securities anti-fraud law basically says, 'If you're in the securities markets, don't commit fraud,' and that's about it," Heine said. "It's very broadly worded."
Analysts who follow Applied Materials believe the company's reticence is merely the latest example of increased caution from most companies since the SEC last year instituted Regulation FD, which requires all important data to be disclosed widely.
Applied is far from alone in going silent shortly before a financial report. Before this week, the phrase "quiet period" appeared in at least 19 stories this year on News.com, involving companies such as ADC Telecom, AT&T, Texas Instruments, Intel, Webvan and PurchasePro.
Cautious corporate lawyers believe it's safer to say nothing than to prematurely reveal market-moving information that could leave companies open to shareholder lawsuits or SEC investigations. But not all companies rely on quiet periods, said Pierre Hirsch, investor-relations manager for Intraware, and a board member of the San Francisco chapter of the National Investor Relations Institute. "It's something that each company decides whether to have or not," he said.
Even a small number of layoffs, for instance, could have a long-lasting effect on earnings, so a company might be justified in keeping mum on the topic until its next quarterly report, Hirsch said. However, companies with a history of good investor relations don't have to worry about quiet periods, because they have always disclosed important information widely and at the right time, Hirsch said.
In fact, since the passage of Reg FD, quiet periods have lost their importance, Hirsch believes. Quiet periods now are nothing more than "a bit of insulation," Hirsch said. Survey results released last month by the Investor Relations Institute indicate that 27 percent of the organization's 577 member companies now disclose more information than in the pre-Reg FD era.
Still, there's no doubt that companies over the years have used quiet periods as a shield that protects them from uncomfortable topics, Hirsch said. "I wouldn't argue that," he said. "There's always going to be territory that you don't want to cross into."
About 24 percent, or almost one out of every four, of the investor relations group's members now disclose less information compared to the days before Reg FD. The figure is a cause for concern, said Louis Thompson, president and CEO of the institute.
But investors understand that companies want to protect themselves, Hirsch said.
"Everybody does what's right for them," he said. "I don't believe it's wrong for a company to not want to comment. That's their prerogative."