The Pros of Reg FD Outweigh the Cons

Fair disclosure.

That's what the Securities and Exchange Commission's Regulation FD is all about -- providing equal access to material information for all investors, regardless of whether you own one share of a company's stock or 1 million.

What's wrong with that? After all, information is power. In a free and open market, all participants should have the same access to the same information on the same time schedule. Right?

Wrong, say the critics. At first blush, their arguments make sense. They say that individual investors aren't prepared to make decisions based on raw data from companies. An individual's knee-jerk reaction to a company report may be the wrong one. In short, individual investors can't handle the truth -- or, at least, the unadulterated truth -- on a real-time basis.

But consider the source of those arguments. They come primarily from institutional investors and analysts who have long benefited from selective disclosure. Before Reg FD, companies routinely got away with telling whatever they wanted to whomever they wanted. Usually, they gave the best scoop to high-profile analysts at firms with which they had cozy banking relationships.

While nobody will expressly cop to it, those conversations translated into actionable -- essentially, inside -- information that was shared with the analysts' high-profile institutional clients, who could then position themselves accordingly before the broad dissemination of the news. That usually occurred in the form of a research note or a comment on a firm's morning call. Retail clients then chased the news while the big institutions sat back, watched and profited.

This happened all the time in companies of all shapes and sizes, even in the most obscure companies, such as a little real estate investment trust called Mid-America Apartment Communities (MAA), which quietly met with selected analysts to lower its guidance back in 1999.

Some analysts would argue that type of selective disclosure isn't especially egregious. In fact, they argue, the predisclosure allows the analyst community to prepare comments that put the news in "context," which provides more, not less, information to individual investors. It could mean less volatility once the news is widely disseminated.

Not coincidentally, of course, that could also mean potentially larger profits in the pockets of the analysts' best clients.

An important point to remember is that Reg FD was never meant to soften volatility. In fact, you can cite some cases where it's caused some pretty ugly reactions that may not have been as violent with some hand-holding. But I wonder if the debate would be so vociferous if the market's bias were higher than it is today. I doubt it.

Moreover, many stocks reacted similarly when analysts released news in the old, selective system. Regardless, volatility isn't a compelling reason to return to the unfair caste system of disclosure. That's like arguing you should shield people from the truth because they can't or don't want to deal with it.

And let's not forget the universal good that Reg FD has done for individual investors. Earnings conference calls, analysts' roadshows and news can actually be disseminated fairly to all in real time now using the power of the Internet. Equal access to scores of supplemental financial data is now a reality. That can only make the market more efficient over time and, in fact, less volatile.

In a free market, information is power. Reg FD should continue to bring more power to all market participants.

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