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No More Business as Usual: Disclosure Rule Will Pressure Firms

Corporate America may want to consider joining Toastmasters International , the public-speaking group.

On Thursday, the Securities and Exchange Commission voted to ban selective disclosure, the practice of telling only certain people, such as analysts, about important information. In other words, the agency wants everyone to know everything at the same time. ( TSC wrote a story earlier Thursday about the vote.)

The new rule, which is expected to go into effect in a few months, could have a major impact on how companies communicate with the outside investing world -- and how individual investors get information. For example, companies currently hold private briefings with analysts and institutional investors, leaving individual investors to find out days later through analyst reports. At investor conferences, companies make presentations to large groups of investors and members of the press and then slide into a nearby room for private "breakout" sessions with the chosen few.

Now, all that seemingly will have to change.

For instance, the rule most likely will push companies that exclude the public from their conference calls to open them up to a wide audience. Mark Coker, president of, a Los Gatos, Calif.-based company that organizes conference calls, figures about 25% of companies that hold conference calls restrict who gets on them. These companies range from big firms like consumer-products maker Colgate (CL) to smaller firms like Southern bank AmSouth (ASO).

Colgate didn't immediately comment. An AmSouth spokesman says that in the past AmSouth has been careful not to release material information on its calls. But he concedes that the SEC's new rule could spark a rethink, and adds: "We're committed to being in compliance with all regulations that relate to the proper disclosure of information."

The new rule doesn't force companies to let the wider public into their calls, "but to be safe, they will need to open up," says Coker. The alternative is to say nothing significant on a closed conference call or release the information at the same time as the call, but those measures risk making the calls empty events.

Already fewer companies today close their calls compared to early 1999, when Coker figures about 75% of companies holding the calls restricted access. The reason for the change: Companies began to hear of the SEC's desire for open disclosure.

Many companies seem to be still trying to figure out how to react.

Schwab (SCH), for instance, is all for the idea of more information for individual investors, its main customers.

But what about its own communications with investors? The company doesn't even hold conference calls, opting instead to talk to individual analysts and major investors, so it'll have to evaluate the rule, a spokesman says.

Then there's the issue of investment conferences. Each year investment firms hold dozens of investment conferences, some of which are open only to institutional investors. For instance, Goldman Sachs' technology conference earlier this year was closed to the media, the conduit to individual investors. A TSC reporter even was kicked out .

Even conferences open to the media feature breakout sessions, which exclude reporters and allow institutional investors to ask for and often receive material information.

For now, the investment banks that hold these conferences are saying little, even though the rule passed and was first published for comment last December. Merrill Lynch (MER) said it would have to wait and look at the final rule before making a decision. Credit Suisse First Boston declined to comment.

The companies themselves are taking different approaches to the conferences.

Ariba (ARBA) said it most likely would continue to attend conferences and breakout sessions but also would make an effort to release at the same time any material information disclosed there.

"All of our disclosure is full and always has been," says a spokeswoman. "We're in perfect agreement with this ruling."

The National Investors Relations Institute says it expects that some companies will simply pull out of investment conferences.

There are other indications that the new rule could actually cut the information flow, which was the argument from major Wall Street firms that opposed the measure. Institute President and CEO Louis Thompson says a recent survey of its members found that many companies new to investor relations planned to pull back, eliminating one-on-one interviews and ending the practice of reviewing draft versions of analysts' reports.

Indeed, there's already been some evidence that the SEC's fair disclosure crusade has backfired. In January, San Francisco-based Wells Fargo (WFC - Get Report) decided to end conference calls altogether to avoid possible instances of selective disclosure. Now, the nation's seventh-largest bank merely puts out detailed press releases and a prerecorded message when reporting earnings.

A Wells spokeswoman says the bank isn't considering reintroducing calls after the SEC's decision Thursday. But the bank's move may not have settled the disclosure issue. Both Wall Street pros and small investors get access to Wells' investor relations department, but only the pros get to speak to senior management, the spokeswoman says.

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