Risk & Compliance

Did Reg FD Really Level the Playing Field?

A group of researchers question whether Regulation Fair Disclosure achieved the goal of giving all investors more information.
Kate PlourdJuly 31, 2008

Hoping to inject some fair play into the system, the Securities and Exchange Commission also may have given investors less to work with, according to a new study. Indeed, researchers found that the SEC’s Regulation Fair Disclosure rule has curtailed the amount of information that companies disclose to the public.

Baljit Sidhu from the Australian School of Business, Tom Smith from Australian National University, and Robert Whaley and Richard Willis from Vanderbilt University’s Owen Graduate School of Management studied the effect of Reg FD by comparing cost components of the bid-ask spreads of NASDQ-listed stocks in the months before and after the Reg FD went into effect. “While Reg FD gave everyone the same info at the same time, what it’s done is it has made firms release less information and it drove up the cost of trading,” Robert Whaley, co-director of the Financial Markets Research Center at Vanderbilt, told CFO.com.

The study revealed that market makers demanded higher premiums after Reg FD was implemented because they were trading against better informed individuals. In fact, adverse selection costs increased about 36 percent after Reg FD was issued as compared to the previous five months.

When the SEC, then chaired by Arthur Levitt, implemented Reg FD in October of 2000 it sought to increase transparency and the amount of information available from publicly-held companies. The Commission suspected that some investors had a trading advantage over the general investing community because of access to private corporate information and created the rule, which prohibits companies from disclosing material nonpublic information to select groups or individual investors as well as financial analysts and institutional investors.

Whaley says that the findings have pushed him to favor a continuous disclosure system, similar to how companies in Australia and Canada are required to disclose material information immediately after it’s learned. “The point is if you want healthy markets news, the material events should be disseminated immediately,” he says. “The SEC is there to protect shareholders and the more info you give shareholders the better it is.”

In related news, on Wednesday, the SEC voted to issue new guidance on how to disseminate public company information via the issuer’s Web site. In certain circumstances, companies will now be allowed to distribute investor information using its official Web site exclusively, instead of through a system limited to SEC filings and press releases.