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2HRS2GO: New SEC disclosure rule falls short

My idealistic side cheers the U.S. Securities and Exchange Commission for its latest ruling.

The cynic in me shrugs.

The SEC yesterday approved Regulation FD. The new rule basically says: if a publicly-traded company reveals information to one outside investor or analyst, the company has to reveal it to everyone. Now individual investors can enjoy the same level of corporate access as Wall Street big shots.

No doubt Joe and Jane Shareholder would enjoy that if they had it. Unfortunately, this rule changes nothing.

Sure it does. Read the full text of the rule, you'll see.

Can't read the full text, it's not widely available. "Not yet," SEC spokesman John Heine says. "Check back (later) on our website."

No matter, it'll be published in the Federal Register soon.

Hmm. So much for that part of the rule requiring information to be widely disseminated within 24 hours of disclosure.

Stop being so sour. The SEC passed Regulation FD for companies, not for itself. Besides, the 24 hour rule seems sufficiently timely.

You're kidding, right? You know how many trades can be executed in 24 hours? All Fred Fund Manager needs is lead time of a few minutes to get in or out before anyone else knows what's going on.

Real investors don't care about 24 hours. They're in it for the long haul.

Then why do they care about selective disclosure at all?

Now who's the naive one? It's not only about timing, but also the information itself. Wall Street analysts often get more information than individuals. Remember that brouhaha over the IPO of Webvan (Nasdaq: WBVN)? Or the complaints last year about the way Compaq Computer (NYSE: CPQ) revealed a slowdown in first quarter sales?

Yeah, and guess what? That and other selective forms of disclosure will continue. Consider:

  • Registered offerings are exempt, so the private, institutional-only road show will continue.

  • Press is exempt, so "exclusive" leaks to the Wall Street Journal and The New York Times will continue.

  • Investment conferences aren't necessarily exempt, but companies claim they reveal any material information during the formal presentations, so the closed breakout sessions will continue.

  • Along the same line of reasoning, companies say they disclose all material events during their quarterly conference calls anyway, so the standard "Let's talk about that offline" exchange between analysts and company executives will continue.

Does any of that matter? Few, if any, individual investors are going to use the operations minutiae typically discussed during those offline talks and fund-manager-only shows. And good journalists don't trade in the stocks they cover.

Besides, as the SEC's lone dissenting vote pointed out, you could end up with so much data that it overwhelms people.

And you're supposed to be the idealist? You think individual investors are too dumb to sift through and find relevant information? Anyone astute enough to clamor for Fair Disclosure in the first place deserves more credit than that.

Okay, just relax there, O Friend Of The Little Guy. Be happy the new rule provides penalties for some types selective disclosure.

Puh-lease. According to the SEC's Fact Sheet, Regulation FD goes out of its way to state that selective disclosure does not create liability for fraud. In other words, investors can't sue to recover capital losses resulting from selective disclosure.

And that's a problem? We should be happy to avoid frivolous lawsuits.

Point taken, but the alternatives don't appear promising: a cease and desist order ("Don't do that again"); a civil action seeking an injunction ("Stop that"); and/or civil penalties ("Here, have a glorified parking ticket.")

But you're right about one thing: this debate is as much about the information itself.

What is material data? Shouldn't M&A negotiations between parties be considered material data? Shouldn't large contracts (including the Who, When, and How Much) be considered material data? How about the results of technology pilot testing? The company's own financial targets?

Why don't you ask companies to give up all their trade secrets while you're at it?

Spare me your corrupt extensions of logic. Most investors aren't asking for everything, just more than they get now. This rule doesn't accomplish that.

Regulation FD at least codifies Fairness as a principle.

For principles you can read the Gettysburg Address, it's shorter and more articulate. As far as investments go, people need less loftiness and more solid information.

You are so skeptical.

I know. That's why I talk to you every now and then.


• SEC rules in favor of disclosure rule 22GO>