VideoCarol DiRaimo was fed up. Last February, the head of investor relations for Applebee's International began an earnings call by urging analysts to stop hounding the restaurant chain's franchisees for confidential information. Callers were frequently "rude and disruptive," complained DiRaimo, even badgering restaurant managers at their homes. They used deceit to pry sales and trend data from unwitting employees — claiming to be Applebee's employees, or market researchers, or students working on a paper. Some offered to pay for the information.
DiRaimo noted that employees who disclosed such data were in danger of losing their jobs. And she concluded her reprimand by saying that the analysts' tactics violated "the spirit, if not the letter, of Reg FD."
Regulation Fair Disclosure, of course, is the 2000 law that prohibits companies from selectively disclosing material nonpublic information about their business to analysts and stockholders. But analysts have no liability under the law — although bribing people to give information could lead to fraud charges, and trading on information gained through misrepresentation or bribery could constitute insider trading, notes Tom Murphy, a partner at McDermott Will & Emery.
Moreover, calling or visiting a franchise's locations to gather information is standard practice for some analysts — "channel checking," in their parlance. Surveying customers and employees is "just good old-fashioned research," says Jonathan Boersma, director of standards of practice at the CFA Institute.
Arguably, though, Reg FD has caused analysts to become even more zealous in their pursuit of corporate information. The elimination of selective disclosure has put a higher premium on other types of primary research, like channel checking, as analysts strive to distinguish their work. "You've got commoditized information out there now that everybody has access to," says Louis Thompson, president and CEO of the National Investor Relations Institute (NIRI). "Analysts are scrambling for little bits and pieces of proprietary information."
Meanwhile, buy-side research is growing, driven in part by hedge funds, whose number has risen significantly over the past few years. Many funds are known for their aggressive — and in some cases legally dubious — research tactics (see "The Booming Buy Side" at the end of this article).
Chris Morris, CFO of CEC Entertainment and a former colleague of DiRaimo's, has seen his share of enterprising analysts. CEC operates the Chuck E. Cheese's chain of pizza and arcade venues. "Where I believe [analysts] cross the line is when they start to interrogate our employees," says Morris. "If they call 200 or 300 store managers and ask for sales information, that is just a systematic way of potentially obtaining material nonpublic information."
Restaurant chains aren't the only subjects of aggressive research. At medical-device maker Kensey Nash Corp., CFO Wendy DiCicco says analysts frequently call doctors to ask questions about the company's products. "What is aggravating is we'll get a call from a doctor who says, 'This guy has called me four times.' We can't stop the analysts from calling, and it turns into a negative thing between us and the doctor," she says. DiCicco adds that analysts will also visit trade shows to try to get information from Kensey Nash salespeople. "If a new guy is working at our trade-show booth and he tells an analyst that we're expecting approval on something tomorrow, and we haven't announced that, we have a problem."
Struggling for Relevance
True, many CFOs consider channel checks a routine part of being a public company. "Our analysts are in our stores all the time," says Michael Kramer, CFO of apparel retailer Abercrombie & Fitch. "You can't get anything by them. The minute something goes on markdown, they know about it." Kramer claims he has no problem with the practice. "We're always open to hearing what's going on with our stores," he says. "We really don't have anything to hide."
But thanks to Reg FD, companies have become increasingly cautious about how and when to release data. Gone are the days when analysts would send their earnings models to CFOs for review. "There was a time when an analyst might expect a CFO to run through those models line item by line item," says Charles Glovsky, a senior vice president and portfolio manager at Independence Investments, a buy-side investment-management firm owned by City National Corp. "That certainly doesn't happen anymore."
In addition to the restrictions placed on CFO-Wall Street communications by Reg FD, analysts have also had to struggle for relevance since the 2003 global research settlement mandated the separation of research activities from investment-banking business. Many analysts have lost their jobs, with Morgan Stanley one of the latest investment banks to announce layoffs.
CFOs, meanwhile, have seen a well-documented increase in both their workload and their personal liability with the passage of the Sarbanes-Oxley Act in 2002. "I think you're seeing frustration by both parties," says Patrick Hojlo, a former health-care analyst for Credit Suisse who recently left to co-found hedge fund Coeus Capital Management. "Analysts may feel that in years past they got more information from companies, and perhaps that lack of information leads to an inappropriate level of mistrust."
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