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New SEC rule promises more information, turmoil

The Securities and Exchange Commission's Regulation FD, or Fair Disclosure, goes into effect Monday and will likely lead to more market volatility.

Market volatility is about to go from bad to ugly.

Blind earnings
That's the conclusion of market watchers, analysts and investor-relations managers as a new Securities and Exchange Commission rule goes into effect Monday.

Regulation FD, which stands for "fair disclosure," requires companies to disclose all important information to the public at the same time, rather than giving out information on a selective basis to favored analysts or large investors.

Simply put, such information must now be released publicly, such as via a press release, press conference or corporate Web site. That's good news for individuals and institutional investors, who will have unprecedented access to market-moving information, such as earnings warnings.

On the other hand, dropping these damaging--or positive--announcements into the public's lap will lead to some dramatic price swings, as has already been seen in recent weeks. Although the rule becomes effective Monday, many companies have already altered the way they disseminate "material" information, which has led to highly volatile days, particularly for tech stocks, analysts say.

"I think we'll see more volatility as companies clam up, with more earnings surprises on the upside and downside," said Chuck Hill, a spokesman for First Call/Thomson Financial, which tracks analysts' earnings estimates.

Market watchers say it's unlikely companies will begin issuing monthly updates to the public on their financial progress during the quarter. More likely, companies will withhold all information until the end of the quarter.

And that's what will lead to more volatility. Currently, analysts periodically adjust their earnings estimates as they talk with a company's executives throughout the quarter.

"If information isn't flowing like it usually does, there's no way for companies to readjust the expectations as the quarter goes on," said Dan Niles, an analyst with Lehman Brothers. "Usually a company will walk you through the numbers and as they get more negative, the (earnings estimates) will gradually come down. But now, what we'll have to do is chop the numbers."

And slashing earnings estimates usually leads to a plunging stock price, as was the case with Apple Computer and Intel in the past few weeks. The reverse is also true when a company suddenly announces it will likely perform better than analysts expected.

Brad Eichler, head of Internet research for private merchant bank Stephens and an analyst covering DoubleClick, believes a lack of information may drive analysts to be more conservative in their earnings expectations.

"I probably took DoubleClick's earnings estimates down more than I would have if I had been able to talk to management," Eichler said. "It's cases like this that I think there'll be more volatility in the markets when they release their (earnings) numbers."

DoubleClick, for example, already has given the new rule a trial run. After it reported its third-quarter results earlier this month, it received a number of calls from analysts and investors seeking additional information.

The online advertising company, which reported a widening loss, said the first quarter would likely see weaker ad sales. The news sent its stock down 14 percent to around $18. The shares closed Friday at $13.44.

"Before, when people would ask for more information to help them understand our earnings results, we might have given them more insight or said they were 'off' or 'needed to look at their figures again,'" said Brenda Fields, DoubleClick's investor relations coordinator. "Now, we're more stringent with our information."

Although analysts tend to run in packs with earnings estimates, First Call's Hill believes a wider range in earnings estimates will emerge, as analysts will have to rely more on grassroots research, such as contacting a company's suppliers, customers and company sources.

But Lehman's Niles disagrees. He said analysts are likely to have estimates that are more in line with one another because the industry is risk-averse and will rely even more on the company's public communications.

Market volatility surrounding missed whisper numbers, however, may ease with the new regulation. Whisper numbers are the earnings estimates that are "whispered" among analysts and investors, as opposed to the analysts' published estimates.

"There'll be fewer whisper numbers, too," Niles said. "You can't have whisper numbers if you can't whisper."