New SEC Rule Will Restrict What Firms Say

Wall Street analysts who complain that they have a tough job tracking companies might find that it’s going to get a lot tougher.

Starting next Monday, a new Securities and Exchange Commission rule, Regulation FD, takes effect.

The controversial rule forbids companies from releasing potentially sensitive information to analysts without releasing it to the general public at the same time.

Previously, some companies would give a selected few analysts a “heads-up” when good news or bad news was coming. The hints--often referred to as “guidance”--would often be enough to cause analysts to change their earnings estimates, if not their stock ratings.

Major investors, such as mutual funds, could interpret the changes as signals to either buy or sell the stocks involved. But the public overall often got that information only after the fact.

Under Reg FD--for “fair disclosure”--companies can no longer provide analysts or big investors with special favors or insights.

But the rule has been strongly opposed by many on Wall Street, who argue that companies now will suddenly be releasing information that many small investors won’t know what to make of.

“It’s going to prevent companies from making any statements unless they make a broadcast; and if they do make a broadcast, it is going to be misinterpreted by at least half of the people who hear it,” argued Robert Armknecht, who runs the $2-billion Galaxy Equity Growth fund.

With the new rule looming, companies already have started to cut off the information flow to analysts and big investors, money managers say. Some say that has accounted for part of the rise in the number of third-quarter earnings warnings dropped on the market in recent weeks.

Indeed, one argument against the rule has been that instead of leaking out bad news bit by bit, giving their stocks more time to adjust, companies now will say nothing--and then, out of the blue, announce a major earnings disappointment.

“Instead of slowly leaking it out and giving a few people a chance to sell, and then the stock drops by few points, it ends up being a bombshell,” said Steve Colton, who manages the $276-million Phoenix-Oakhurst Growth and Income fund.

Still, Colton agreed that the SEC needed “to level the playing field.”