SEC's New Fair Disclosure Rule Won't Change Things All That Much

From the quaking-in-their-boots sounds emanating from Wall Street, you'd think the new fair disclosure rule from the Securities and Exchange Commission would change the investment world as we know it. Even the SEC admits, however, that the new regulation will leave certain investment industry practices untouched.

The one practice that seems especially to bother journalists and individual investors is the notorious "breakout" session, the backroom meetings that follow general speeches at investment-banking conferences. The Wall Street Journal suggested Wednesday that companies would become so skittish that breakouts will be history when the rule -- known as Reg FD -- takes effect in October.

First off, not all professional investors are upset about the change, as TheStreet.com's Brett Fromson reported Wednesday. Analysts and fund managers who do their homework aren't going to be too bothered by the cutoff of spoon-fed information to privileged competitors.

On breakouts specifically, the hand-wringing over whether they'll continue is misplaced. Assuming companies are following the normal rules of not ever disclosing material (i.e. stock-moving) information without informing the public, there's no reason they can't continue to have meetings with big investors or favored brokerage clients.

"Nothing in Reg FD says you can't communicate with analysts or shareholders in a one-on-one or small-group basis," says Stephen Cutler, deputy director of the SEC's enforcement division. "What you can't do is make material non-public disclosure without disclosing that information to the public."

Boris Feldman, a lawyer with Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif., who often defends Silicon Valley companies in shareholder suits, believes breakouts will continue. Yet he cautions in interpretive comments posted to his Web site: "circumspection will be even more important under Reg FD. In particular, at Q&A or breakout sessions, you should be extra careful not to provide updates as to how the business is performing that quarter, unless you've disseminated that update publicly and broadly."

The situation is likely to be confusing for some time to come, however. Wednesday, for example, Banc of America Securities analyst Rick Whittington issued a report based on a meeting with the management at LSI Logic (LSI:NYSE - news - boards), who indicated to him that bookings were "strong in July and continuing into August." CNBC parroted this report before the bell Wednesday morning, and the stock rose as much as 7% to 40 1/2, before closing the day up 2 5/16 at 40 1/16.

On the face of it, this would look like a clear violation of the new regulation, but acceptable behavior under the old one. However, the LSI official who met with Whittington, former investor-relations chief Bruce Entin, says he merely told the analyst that guidance hadn't changed since the company's recent conference call, when it addressed the health of its bookings. As Entin no longer is responsible for disseminating big-picture investor-relations information, he technically would be exempt from the new regulation. Furthermore, Whittington, who didn't return a phone call, should have known better than to suggest his comments came from "the company" as Entin currently runs one of LSI's divisions.

It's also worth pointing out that private meetings such as Whittington's are standard operating procedure in the securities world. The new regulation shouldn't change that, but it may alter what gets said at those meetings.

The bottom line is that these rules will take time to interpret. Charles Phillips, a software analyst with Morgan Stanley Dean Witter, notes that companies follow predictable patterns when policy changes threaten to slow the flow of information. "For the first five months people freak out and clamp down," says Phillips, who relies on deep and privileged access to the highest rungs of the companies he follows as well as exhaustive research in the software industry. "But when they have a bad quarter and the stock drops 25%, they want to get in front of shareholders badly."

I've never been overly upset about breakouts. Investment banks invite the press to their conferences to get publicity, not to give reporters the same access as clients.

Banc of America Securities, for example, allows reporters at its conferences but not in breakout sessions. A spokeswoman says the firm is investigating whether to continue the practice. Its major annual investment conference begins Sept. 18, before the new regulation takes effect. Morgan Stanley Dean Witter, on the other hand, didn't allow the media into its annual tech-stock conference in January -- though it allows CNBC to set up outside the host hotel so its clients can preen for the camera. A spokeswoman for Morgan Stanley says the firm hasn't decided yet if it will change its policy this year.

According to the SEC's Cutler, the new regulation will change behavior in one way. Before, it would have been difficult to punish a company -- an "issuer" of a security, in SEC parlance -- for selectively disclosing material information unless an individual or the company benefited from the disclosure, such as trading on that information. Now, the onus rests more squarely on the issuer to follow broader rules.

Companies still will find ways to talk when they need to. They're just going to have to speak more loudly.

Not so much power to the PeoplePC

Congratulations are in order to PeoplePC (PEOP:Nasdaq - news - boards) and its investment bankers, Chase H&Q, for completing an initial public offering in late 2000, despite having a company that promises to lose money for a very long time.

Never mind for a moment that the San Francisco-based company that sells PCs as part of an Internet service package had to lower the number of shares it offered to 8.5 million from 11.5 million. And never mind that it offered those shares at 10, below the expected range of 12 to 14. Oh, and never mind that the stock fell 11% to 8 7/8 on the first day of trading, meaning that even well-heeled institutional investors -- some of whom sources say were cajoled into buying the stock by an aggressive H&Q sales pitch -- haven't made money on the deal.

The important thing is that PeoplePC raised $85 million, before the fees it'll pay its bankers. It'll need that money because the company says it won't be profitable before 2003. So much for paths to profitability.

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In keeping with TSC's editorial policy, Adam Lashinsky doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback and invites you to send it to Adam Lashinsky .