COMMENTARY--Wall Street took the pulse of the Securities and Exchange Commission's Regulation Fair Disclosure rule this week and introduced a buzzword you're likely to hear more about--"materiality."
Just what the world needs--another bit of jargon that companies, investor-relations folks and analysts will beat to death. But the materiality theme is notable. The working definition of material information is basically anything that a reasonable investor would consider important to making an investment decision.
Under RegFD, companies have to release material information to the masses by newswire and Web so they can't play favorites.
It's not hard to see why the material information thing is a squishy topic. I'm not going to sweat it if a company misses estimates by a penny if it's a one-time deal and long-term prospects are good. The guy next to me may find that information reason to dump the stock forever.
After six months of RegFD, many companies have taken the safe route and released every little tidbit of news as if it was needed to make a good investment decision. If a CEO winks at an analyst it's time for a press release. It goes on and on to leave investors wondering what exactly all the hubbub is about.
Critics of RegFD--usually the folks that now have to do more homework these days--say individual investors can't handle all this new information and they overreact, creating a volatile stock market.
Other companies have taken the opposite route and have clammed up. These firms have cut back on one-on-one meetings so they don't slip and release anything material, as if that's such a bad thing.
In other words, there's no happy medium right now.
Executives from Micron Technology (NYSE: MU), EMC (NYSE: EMC) and Intel (Nasdaq: INTC) said RegFD and worries over what's material information hasn't altered their analyst meetings or disclosure practices.
Indeed, Intel in its earnings release disclosed that it will meet with investors, and it left the pack at the RegFD roundtable meeting. Doug Lusk, director of investor relations for Intel, said the company hasn't pared back the information it hands out. Intel will chat with an investor about a new chip and meet with analysts one-on-one. The caveat is that no material information will be given out at these meetings.
And if there is material information, the companies have 24 hours to release it, said Chuck Hill, director of research at First Call. That allowance is more than enough to keep companies out of hot water.
The whole materiality issue is probably the most important one surrounding RegFD, and don't be surprised if it's cleared up soon. SEC acting chairman Laura Unger seemed keen on creating a better definition of materiality. Once that topic is defined better and companies know the boundaries, a lot of kinks will be worked out. Look for more companies to follow Intel's lead and give more disclosures such as this:
- Intel expects that its corporate representatives will meet privately during the quarter with investors, the media, investment analysts and others. At these meetings, Intel may reiterate the outlook published in this press release. At the same time, Intel will keep this press release and outlook publicly available on its Web site. Prior to the business update and related quiet periods, the public can continue to rely on the outlook on the Web site as being Intel's current expectations on matters covered, unless Intel publishes a notice stating otherwise.
Other RegFD issues to note:
Analyst whining: During the roundtable discussion a few analysts noted that the days when they would have a healthy "give and take" with companies are over, much to their chagrin. Companies have clammed up and analysts now diverge with their estimates. That's why you see such entertaining disagreements among chip analysts these days. Bottom line: Good analysts will be even more appreciated under RegFD. In many respects, it's already happened.
Company silent treatments: Even though some analysts appear to be whining, they have a point when it comes to companies banning one-on-ones, plant tours and other educational meetings. Some firms have even asked analysts to avoid talking to competitors. That's insane. Companies should open up, if only to ensure that Wall Street knows executives and operations well. Also consider Hill's point above: If a company spills the beans on something, it has 24 hours to issue a release.
The SEC's first victim: At some point, a company is going to botch RegFD and leak information without telling the masses. When that happens, Wall Street will have clear guidelines to work with.
RegFD should stay: Despite plenty of naysayers, RegFD has worked out well so far. There's more information for individual investors, who now have just about the same information as the institutional guys.
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