SOUTHERN CALIFORNIA / A news summary
Financial regulators voted Thursday to end one of Wall Street’s most controversial practices by requiring companies to divulge sensitive information to small investors at the same time it’s released to professionals.
The Securities and Exchange Commission voted 3 to 1 to approve the rule change, which proponents say will put individual investors on a more level playing field with big investors.
In a sign of the intense emotion that the “selective disclosure” issue has aroused in amateur investors, the SEC received a record 6,000 letters and e-mails on the proposal--most from individuals pleading for its passage.
The rule is aimed at preventing companies from favoring institutional investors with news that is likely to affect a stock’s price, allowing them to react well before that information is shared with the general public.
There have been several highly publicized incidents in recent years in which company executives appeared to leak key information--often bad news--to select analysts, who then passed it to favorite clients. The stocks ended up falling sharply before individuals had heard the news.
“If investors see a stock’s price change dramatically--but are given access to critical, market-moving information only much later--we risk nothing less than the public’s faith and confidence in America’s capital markets,” said SEC Chairman Arthur Levitt, who lobbied hard for the rule change.
Levitt and the consumer groups that supported the proposal faced vehement opposition from securities firms and business groups, which contended that it would ultimately hurt all investors by making companies less forthcoming.
Opponents claimed that company executives, fearing they’d violate a law that could be subjectively applied, would simply provide less information to everyone.
Individuals would be harmed, critics said, because mutual funds and other firms managing the public’s assets would be less knowledgeable about the stocks they’re buying.
“We have people’s money at stake and we have a duty to take care of that money,” said Stuart Kaswell, general counsel of the Securities Industry Assn., Wall Street’s main trade group. “We’re going to be prevented from meeting one on one with a CEO and asking detailed, sophisticated, probing questions and getting” critical insight.
The rule, which will take effect in 60 days, requires U.S. companies to inform the public, via news releases or SEC filings, of news at the same time it is disclosed to Wall Street pros. If an executive inadvertently reveals key information, such as by answering a question at an analysts’ meeting, the company must publicly reveal that news within 24 hours.
The 24-hour provision has raised concern that some companies would use it as a loophole to continue leaking information to favored investors. But the SEC said it would look closely at any company that did so repeatedly.
“If you get away with selective disclosure on this basis, you get away with it only once. There’s only so much homework that can be eaten by the dog,” SEC General Counsel David Becker said. “Your credibility quickly wanes.”
The SEC said it also was targeting the common corporate practice of withholding key information from analysts who criticize management. Some companies have barred certain analysts from conference calls in a thinly disguised effort to staunch their criticism.
The rule passed only after lengthy negotiations, during which some elements were trimmed back or eliminated. For example, the proposal was revised so that it can’t be used as the basis of a lawsuit even if a company has clearly violated the rule. Companies had worried that the rule would spur litigation by giving investors a powerful new legal weapon.
But the SEC can pursue “administrative” penalties or lawsuits against companies.
Also, the rule was modified to apply only to a company’s senior managers, thus allowing stock analysts to continue the nitty-gritty research of interviewing lower-level employees and outside firms such as suppliers and customers.
Finally, the SEC exempted from the rule all corporate contact with journalists. The media objected to their inclusion in an earlier SEC plan on the grounds that it infringed on 1st Amendment rights.
The deciding vote was cast by SEC Commissioner Isaac Hunt, who originally criticized the proposal. Commissioner Laura Unger cast the dissenting-vote.
Consumer groups generally supported the revisions to the rule. But Barbara Roper, head of investor protection for the Consumer Federation of America, said “there will never be a totally level playing field” for individuals because “you’ll never get rid of all the whispering” of nonpublic information.
Letters and e-mails had poured into the SEC from small investors, many saying they had suffered when companies in which they owned stock shared private information with selected investors.
“It is hard to believe that any question still exists as to whether individual investors should have the same timely access to information that the pros do,” wrote one Michigan man.
But business groups warned the rule may cause companies to stop talking, period. A recent National Investor Relations Institute survey found that 42% of investor-relations executives said they would probably limit communications with investors because of the law.
Another 12% said they would significantly” cut back on contact.
The securities industry also said that more companies are already sharing information with individuals. The NIRI survey showed that 61% of firms let small investors tune in to analyst conference calls.
