Spelling Out Nuances Poses Biggest Obstacle in SEC's Disclosure Push
The Securities and Exchange Commission, the stock market's chief cop, wants the Little Guy to get more information about publicly traded companies. But proposals to improve corporate disclosure may be hard to enforce without more detail on what regulators want, observers say.
The SEC Wednesday voted in favor of proposed new rules to clamp down on companies that provide important information only to a limited number of individuals, a practice known as selective disclosure. Instead, the SEC wants all "material corporate information" to be made available to the wider public through press releases, publicly accessible conference calls and meetings, or through filings with the agency itself.
SEC Chairman Arthur Levitt recently called selective disclosure "a stain on our markets" because it puts the specially picked recipients of nonpublic information at an advantage. The SEC is seeking public comment on the proposed rules for 90 days.
There are plenty of potential targets for the SEC.For instance, KeyCorp (KEY) recently told one analyst it would fall short of the fourth-quarter earnings forecast. (TheStreet.com reported this Tuesday.) KeyCorp declined to comment.
I Say TomatoHowever, the SEC will probably have to draw more detailed guidelines. The first problem is defining what's material. The SEC is clear about what must be supplied in quarterly and annual filings, as well as in filings on executive compensation. But when it comes to disclosure outside of those filings, SEC guidance can be vague. An SEC spokesman says material information is what "the reasonable investor needs to know in order to make an informed decision about an investment." This very broad definition may cause problems given the complex issues surrounding disclosure. Two recent actions by financial institutions illustrate some of the difficulties that the SEC may confront. Wednesday morning, several Wall Street bank analysts cut their estimates for First Union's (FTU) 2000 earnings by as much as 6%. First Union made no public announcement about its operations or future profitability on Tuesday or Wednesday. Instead, the analysts called the company for guidance after an important board meeting Tuesday. A First Union spokeswoman says the bank gave the analysts "qualitative" and "strategic" information that the analysts then plugged into their models to come up with new 2000 profit targets. In this case, the bank said some of its costs would be higher, according to an analyst who spoke to the bank. (The analyst, who requested anonymity, works for a firm that hasn't done underwriting for the bank.) Was First Union's disclosure selective? Hard to say from the details made available by the SEC on its disclosure rules. The bank thinks it's in the clear. First, the spokeswoman says the bank had not given guidance -- privately or publicly -- on what 2000 earnings would be in the first place, so it was under no obligation to make a public release on analysts' 2000 forecasts. Moreover, when First Union earlier this year twice revised down earnings forecasts it had made itself, press releases were issued. Second, she says that if individual investors -- who are usually the victims of selective disclosure -- had requested the information, they would've gotten it. "We have a whole team of people who share information with individual shareholders," she says.
The Best DisinfectantAnother alleged instance of selective disclosure took place at an early December conference hosted by Goldman Sachs, at which a number of top bank executives made presentations to institutional investors. One sell-side analyst who requested anonymity says SunTrust (STI) CEO Phil Humann disclosed material information that should have been made public in a press release. (The analyst's firm hasn't done any recent underwriting for SunTrust.) Humann said at the conference that SunTrust would have to book a loss on bond sales, according to a note from Lori Applebaum, the Goldman analyst who helped host the conference. The analyst who requested anonymity says this loss totaled around $95 million. (Goldman didn't say whether it has done recent underwriting for SunTrust, and Applebaum didn't return calls seeking a comment.) But a SunTrust spokesman says the bond loss "is not a material event and not part of core earnings." He adds that the conference could be seen as a public event, since the press attended, although Goldman didn't confirm reporters were there. The SEC didn't comment on how investor conferences should be handled to prevent selective disclosure.
Thin Gray LineWhile it's easy to identify potential gray areas, other observers think that the proposed SEC rules will press companies to find new, workable ways of improving disclosure. Instead of giving information to analysts selectively, companies will probably adopt the following procedure: Issue a press release with general points followed by a publicly accessible conference call in which more detail can be given, says Boris Feldman, a securities lawyer at Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif. That way, companies will be able to comply with the new rules and still satisfy analysts' needs for a detailed briefing. However, if this is what the SEC intends, "it will have to give more guidance," says Feldman. On the question of what constitutes a material event, companies, in an effort to stay on the right side of the SEC, will go to the length of making information public even if they aren't sure whether it's material, says Mark Coker, president of BestCalls.com, an online directory of earnings calls and company events. "Companies will be more cautious in one-on-one meetings, but open up more in public forums," Coker says. But one securities lawyer isn't so optimistic. The new rules will initially "clog the information flow" as companies become nervous about what they can release on a nonpublic basis, says John Olson, senior partner at Gibson Dunn & Crutcher in Washington, D.C. The rules "will cause managements to spend time with lawyers deciding what can be disclosed," he says.
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