Regulation FD, the “Fair Disclosure” rule adopted by the Securities and Exchange Commission last year, moves from the regulatory to the legislative arena on Thursday.
Rep. Richard Baker (R-La.) and his Capital Markets subcommittee of the House Financial Services Committee will hear testimony Thursday, May 17, from both friends and foes of the rule, which was intended to ensure the equitable dissemination of “material” information about firms participating in U.S. securities markets.
The session will consist of two sets of testimony: The first segment will hear from Acting SEC Chairman Laura Unger, who voted against the regulation when it passed last year, and Commissioner Isaac Hunt, Jr., who voted for it.
The second part of the program will hear from a variety of corporate officials and industry group representatives, including Daniel Hann, senior vice president and general counsel, Biomet; Patrick Sweeney, director and general counsel, Noomura Securities International, and Stuart Kaswell, senior vice president and general counsel of the Securities Industry Association.
Despite its noble aim, Reg FD–which took effect Oct. 23, 2000–has been criticized on the ground that its provisions against selective communication with analysts have actually led to a “chilling effect.”
And the very title of the program on the agenda for tomorrow — “Fair Disclosure or Flawed Disclosure: Is Reg FD helping or hurting investors?” — is indicative of some of this criticism.
On the other hand, investor advocates such as Thomas M. Gartner, co- founder of The Motley Fool, who is also on the witness roster, and most media representatives, have come out strongly in support of the rule in the more than six months since it has taken effect.
The decision to hold Congressional hearings came in the wake of an April 24 roundtable discussion in New York sponsored by the SEC.
According to a source in Rep. Baker’s office, the Congressman decided to hold the hearings after he heard a report by a staffer he dispatched to attend the SEC program.
“It’s fundamental that the $200 investor be treated with the same care as the $2 million investor, and that a select few not be given unfair advantage over the many when it comes to crucial, market-sensitive information,” said Baker in a press release. “The practical question for our hearing, however, will be to gauge whether Reg FD actually accomplishes these goals or has instead had unintended consequences of reducing disclosure across the board.”
In announcing the hearing, the press release issued by the Financial Services Committee also took note of other criticisms of the regulation, particularly charges that it has had the unwanted effect of increasing volatility in the stock market, which has been under downward pressure for most of the past six months.
“Some market observers have suggested a relationship between Reg FD and market volatility,” the release states. “In their view, information disclosures now result in more earnings surprises and therefore wider stock price swings.”
SEC officials themselves will probably be more circumspect.
John Nester, an SEC spokesman, told CFO.com that Unger, despite her past criticism of Reg FD, will come out in favor of fine tuning the rule rather than scrapping it.
“She’s been fairly consistent [about being] concerned with the quality of information, not the quantity of information,” said Nester.
Unger, he said, will also disclose SEC plans to offer “guidance to companies to help them define ‘materiality’ and ‘best practices.’”
Included in this guidance will be guides to “webcasts” and other “techniques that satisfy disclosure requirements.”
He cited as an example the question of whether a webcast constituted “fair disclosure” even if “not preceded by a press release.”
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