Companies now have to reveal everything to the public that they previously spilled to analysts behind closed doors, according to a SEC ruling Thursday.
The effect on individual investors, however, is unclear. The Securities and Exchange Commission ruled in favor to ban publicly traded companies from selective disclosure, but there are plenty of arguments indicating the effects could be better or worse.
A flood of over 6,000 letters to the SEC from individual investors in favor of the new rule reportedly influenced the four member board in their vote. Investors argue that the ruling will democratize investing by giving them access to information previously limited to analysts and their clients. Others argue the rule will force companies to clam up in order to stay within the SEC's sticky boundaries.
The rule requires companies that intentionally disclose information to simultaneously publicize it, either by press release, a filing with the SEC, or any other reasonable means.
In the event of an unintentional disclosure, companies would have to release the same information within 24 hours. Some say that may make companies less likely to reveal information to analysts, who draw information from executives through cross-examination, and tire-kicking tours of companies.
Other points of controversy in the ruling include the definition of material information, the window in which to disclose information, and fears that it will only drive backdoor communication further underground.
"Simultaneous means simultaneous," in the case of intentional disclosure, officials said. From now on, stock prices may not see the usual run-up ahead of news release, and if that does happen it may be reason for an investigation.
Some see the 24-hour window on unintentional disclosure as a huge loophole that companies will exploit. The SEC's response was that "the overwhelming majority of securities professionals try to follow the law," and many companies argued that 24 hours was hardly enough time to put out a release. Of course, a lot of trades can occur within that 24-hour window.
On whether the ruling will only make whispers quieter, the SEC said it is confident it will ferret out offenders. "A dog can only eat so much homework," said David Becker, SEC general counsel.
Skeptics have also questioned whether analysts will still be able to get the information they need. "It depends what you consider their job to be," said Steve Cutler, Deputy Director, Division of Enforcement. "Most people think it’s the job of an analyst to analyze - if you think it’s the job of an analyst to collect or be favored with material non-public information, it does change the job. I don't expect issuers will stop talking to analysts or shareholders."
The SEC also fielded questions on whether the ruling could come to the Supreme Court for contradictions with prior anti-fraud rulings. Officials said since it’s a rule of disclosure, not anti-fraud, this won't be an issue. It fills the holes left be prior anti-fraud rulings.
Concerns that the rule will make it more difficult for journalists to ask senior company officials probing questions were also dispelled: the rule does not apply to communications between issuers and members of the press.
The rule doesn't cover most public offerings, or foreign issuers. It has also been narrowed to apply only to top corporate executives, not regular employees.
Since the SEC first proposed the rules last December, companies have increasingly opened their conference calls with analysts to the press and public. Meanwhile, companies such and Abercrombie & Fitch Co. (NYSE: ANF) have come under fire for disclosing information to analysts far ahead of the public.
Penalties for failure to follow the rule include federal court action against guilty personnel, and monetary penalties, which could range from $5000 to many multiples of that amount, depending on the severity of the violation.
The effective date of rule is 60 days after publication in the federal registry
Reuters contributed to this report.>