An SEC Bead on Insider Info


The Securities and Exchange Commission rightly thinks it’s unfair for executives to disclose material information about their companies only to a few select investors. The agency proposes to outlaw this practice, and it should. The prospect of a prohibition should also remind companies and Wall Street of the need to make voluntary improvements in financial reporting or face mandatory rules.

SEC Chairman Arthur Levitt has been on a crusade against what he calls “gamesmanship” in corporate financial reporting for well over a year. Speaking to the New York Economic Club recently, he was harshly critical of companies tweaking the numbers and bending the rules to come up with the financial results that Wall Street stock analysts anticipate. He was just as critical of analysts who act more like promoters and marketers of the shares they are supposed to impartially scrutinize. Company auditors whose independence is being undermined by a conflict of interest or pressure not to rock the boat also contribute to what Levitt sees as an erosion of the credibility of corporate financial reporting.

The widespread practice of companies disclosing important inside information to a small group of big-time investors or handpicked analysts is high on the list of Levitt’s grievances. Releasing the information to analysts is a way for the companies to buy their goodwill, which the analysts presumably repay by issuing opinions that bring in investor dollars. The SEC says movement in the markets can be seen while such conferences are taking place. The practice is clearly unfair to the ordinary investor, who is of course cut out of this process.


The SEC proposal to ban selective disclosure of “material” information--such as a new patent, planned cutbacks or a management change--would not hinder companies in communicating with analysts. They can simply invite news reporters to take part in conference calls or conduct road shows for analysts.

Levitt has been signaling his unhappiness with selective disclosure for months. To avoid further SEC regulation, Wall Street would do well to address some of his other concerns.