The Securities and Exchange Commission yesterday proposed a rule that would force companies to publicly disclose any important information to ordinary investors at the same time they give it to analysts and major investors.
"The all-too-common practice of selectively disseminating material information is a disservice to investors and undermines the fundamental principle of fairness," said SEC Chairman Arthur Levitt Jr. The proposed rule "would require that when a company discloses material information, it does so through public disclosure rather than limiting initial access to . . . the privileged, select few."
The SEC measure offers three alternatives for disseminating information to the public--a news release, a public filing with the SEC, or opening up conference calls to the public.
Levitt strongly urged companies to open up their conference calls--where companies brief analysts on their financial outlook--to all investors. He noted that new technologies over the Internet "offer extraordinarily broad access at minimal costs."
Selective disclosure has been a controversial issue, in part because it is not always clear when it is illegal. The SEC is proposing a new Regulation FD (fair disclosure), which states that companies cannot disclose market-moving information to special groups.
So, for instance, if a company were privately briefing analysts on earnings, it would have to issue a news release first. If executives inadvertently disclosed other market-moving information during the meeting, a subsequent news release would be required.
Louis Thompson, president of the National Investor Relations Institute, an association of investor relations professionals, said he expects the new rule to push more companies to open up their conference calls, because it will "immunize them from selective disclosure liability." Sometimes stock trading surges after a conference call because of the tone of the presentation or information that the company had not considered major, he added.
A NIRI survey taken last June found that 55 percent of the companies that hold analyst conference calls let individual investors participate, compared with 29 percent a year earlier. Based on recent conversation with members, Thompson believes that number is now far higher.
The major opposition to opening conference calls to the public has come from the securities industry, because it makes reporters their competitors, Thompson said. One analyst told a NIRI conference in Santa Monica, Calif., that she expected to be tipped in advance to important announcements, and that if she wasn't she might drop coverage of their companies.
The securities industry, however, says its major concern is that the proposed rule could impede the flow of information necessary for it to accurately evaluate companies.
The SEC also proposed tightening up a provision of insider-trading law affecting family members. A series of court cases has made it clear that it is illegal for employees, lawyers, accountants, psychiatrists and others to trade on inside information obtained from their jobs or professional relationships.