Research Studies Show Differing Views on Regulation FD

AIMR: Regulation FD Means Less Information for Everyone

A year after its implementation, SEC Regulation Fair Disclosure (Regulation FD) has provided investment professionals and small investors with the same information, and it has also given many companies an excuse to provide less information to everyone. So say a majority of financial analysts and portfolio managers in a survey conducted in October 2001 by the Association for Investment Management and Research (AIMR). The controversial regulation took effect October 23, 2000.

When the AIMR conducted a similar survey in February, a majority of the analysts and portfolio managers responding said that the quality and quantity of substantive information had declined as a result of the Regulation FD. Another survey conducted later in the year showed no statistically significant change in that view.

"Regulation FD promised fair disclosure, and it seems to have achieved that, but apparently at the expense of full disclosure," said AIMR President and CEO Thomas A. Bowman. "Everyone has access to the same information at the same time, and that's laudable, but if there is less information in the marketplace, that's lamentable. Our focus now needs to be getting corporations to be more forthcoming in their public disclosures, to provide the level of detailed information investors need to make better-informed investment decisions."

Of the usable responses to the survey, sent electronically to randomly selected U.S. AIMR members that are investment analysts or portfolio managers, 76% of the respondents identified themselves as buy-side professionals (employed by institutional investment firms) and 24% identified themselves as sell-side professionals (employed by broker-dealers).

"Respondents still largely feel that companies with news they don't want to disclose can do so more easily by hiding behind Regulation FD," said Bowman. "Those companies may claim the regulation prohibits them from answering any and all questions outside of a public forum, when in fact the prohibition applies only to discussing material, nonpublic information in a private setting."

The following are types of information that respondents still consider to be less available:

• Earnings guidance (54% said it is less available; 16% said it is more available)
• Forward-looking information (53% less available; 14% more available)
• Facts about internal operations (46% less available; 7% more available)
• Facts about costs and pricing (45% less available; 5% more available)
• Facts about sales volume (43% less available; 9% more available).

The survey also showed that investment professionals are responding to Regulation FD by relying less on companies for information and more on their own research and analysis. Thirty-one percent of respondents said they are conducting more fundamental analysis (e.g., evaluating companies' competitors, talking with customers and vendors, and reviewing public documents), compared to only 4% that report doing less. Bowman said such an approach is positive, but "It shouldn't be a case of one or the other. Top-notch fundamental analysis requires full disclosure."

The survey found that other positive effects of Regulation FD identified in the earlier survey have continued, including the following:

• Opportunities to participate in company conference calls have increased since October 23, 2000, according to 36% of investment professionals.
• Opportunities to participate in webcast conferences have increased, according to 52% of respondents.
• Opportunities to receive e-mail alerts from companies have increased, according to 34% of respondents; 23% say opportunities to receive fax alerts have increased.

From a list of survey options, respondents favored the following ways for companies to communicate more effectively:

• Communicate more detail, more candidly.
• Hold intraquarter webcasts and conference calls.
• Issue more specific and detailed earnings guidance.
• Clearly define a material versus nonmaterial event and respond accordingly.
• Be willing to answer individual inquiries about nonmaterial matters.
• Issue earnings guidance updates more regularly.

Investment professionals preferred the following as the best ways to research companies under the parameters of Regulation FD:

• Rely less on the company as a source of information, and rely more on other sources.
• Conduct more fundamental analysis.
• Focus less on the quarter, more on the long term.
• Scrutinize all publicly available information.
• Encourage companies to be more forthcoming with nonmaterial information.
• Conduct more qualitative analysis. The most recent AIMR survey included a question aimed at determining whether Regulation FD has reduced pressures, such as legal action against analysts and their firms for negative reports and recommendations, from the companies that analysts research. Fifty-seven percent of respondents thought that these pressures had not decreased; 44% said that pressure from companies continues to be a problem, and 13% said these pressures have increased. Twenty percent responded that Regulation FD has made it more difficult for companies to shut out negative analysts. Five percent said pressures from companies was never a problem. The survey also asked analysts whether Regulation FD had any effect on the independence and objectivity of research and recommendations. Fifty-seven percent of respondents said analyst objectivity was unaffected by the regulation. Sixteen percent said objectivity had declined, and 10% said it had improved.

The complete survey information is available online at www.aimr.org/ pressroom.

PricewaterhouseCoopers: Regulation FD Is Working

SEC Regulation Fair Disclosure (Regulation FD) is fulfilling its promise of fair and equal disclosure of companies' financial information to the general public and industry analysts, according to top executives surveyed in PricewaterhouseCoopers' latest "Management Barometer" survey.

Although nearly 90% of those surveyed said Regulation FD should be continued, 68% said the SEC should issue specific guidelines about which information is material and requires disclosure and which is immaterial and does not. (Twenty-seven percent said such guidelines are not needed and 5% were not certain.)

Overall, 75% of those surveyed reported no impact on their company's stock price from Regulation FD; 18% were uncertain. A change was noted by 7% of respondents: 6% said it had a negative impact, 1% said it had a positive impact.

More than 90% of those surveyed said Regulation FD increased fairness or provided about the same level of fairness as before to all analysts and investors. Only 7% said the regulation led to less fairness; 2% were uncertain. This assessment was true regardless of respondents' industry or market capitalization, and regardless of whether they were investor relations or financial executives. "

On balance, the key aspects of corporate disclosure are being improved," said Frank Brown, Pricewaterhouse- Coopers's global leader for assurance and business advisory services. "But the call for specific SEC guidelines suggests a higher comfort level could be achieved."

Overall, 86% of executives surveyed said they have a good understanding of what can and cannot be done under Regulation FD, encompassing the 62% who understand the regulation "very well" and the 24% that understand it "well."

Eighty-eight percent of executives said Regulation FD had a neutral (71%) or positive (17%) affect on their company. Only 10% reported a negative impact, 2% were uncertain.

Asked whether Regulation FD should continue, 88% said that it should, 10% said it should be repealed, and 2% were uncertain. Nevertheless, 42% of those in favor of continuing thought changes were needed. Those changes included clarifying the rules for disclosure, relaxing the rules, and limiting penalties for violations.

Respondents to the PricewaterhouseCoopers survey said that Regulation FD has favorably affected company disclosures in several ways:

• Quantity or scope: 48% of respondents said the regulation has influenced the quantity or scope of disclosures; 37% said they are disclosing more and 11% said they are disclosing less, a net of 26% providing more information.
• Quality: 33% of respondents noted a change in the quality of their company's disclosures, 29% higher and 4% lower, making a net of 25% with higher- quality disclosures.
• Frequency: 32% of respondents cited a change in the frequency of their company's disclosures, 23% more frequently and 9% less frequently, making a net of 14% percent disclosing more often.
• Timing: 22% of respondents reported a change in the timing of their disclosures; 15% reported disclosing sooner and 5% later, making a net of 10% disclosing sooner.

Since Regulation FD took effect, 62% of respondents to the PricewaterhouseCoopers survey have allocated the same relative importance to quarterly earnings announcements. These announcements have become more important to 36% percent of those surveyed, and less important to only 2%, making a net of 34% finding them more important. While 74% of respondents saw no change in off-balance-sheet information reported by their company, 23% reported more, versus only 2% reporting less-a net of 21%.

The two major concerns about Regulation FD shown by survey respondents focused on the added costs (cited by 51%) and higher litigation risk (41%). A lesser concern was greater company stock price volatility (19%). However, among the 51% of respondents citing increased costs in implementing Regulation FD, 47% said these costs were low to moderate; only 4% felt the costs were high. Forty-one percent of respondents thought the risk of litigation is higher than it was before Regulation FD; 9% thought it was lower.

Overall, 74% reported that Regulation FD has had no impact on the volatility of their company's stock price, due, in part, to greater volatility caused by other factors. Of those respondents reporting changed volatility due to Regulation FD, 19% attributed more volatility to it; 1% attributed less volatility.

"Overall, the benefits of Regulation FD seem to outweigh the concerns," said Brown. "Despite the dire predictions of the securities industry, the overall impact has not been onerous, but the risk of litigation clearly bears watching."

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