Bank Earnings Warnings Suggest SEC Openness Push Has a Way to Go

Investing by individuals may be proliferating, but their share of market-moving information is not growing at anywhere near the same pace. Consider some recent developments in the banking sector.

Around the middle of the month, Bank of America (BAC Quote) started telling analysts about weaknesses in its business, prompting several brokerage analysts to cut fourth-quarter earnings estimates.

One of the brokerages was Merrill Lynch. On Dec. 16 the brokerage slashed its fourth-quarter earnings-per-share forecast for Bank of America by a nickel to $1.15, which was 10 cents, or just under 8%, below the consensus forecast quoted at the time by First Call/Thomson Financial.

National City (NCC Quote) is also experiencing sluggishness that could lead to an 8% shortfall in expected fourth-quarter profits. But the bank chose to let everyone know the bad news at the same time, through a press release issued on Nov. 16.

Same quarter, same shortfall. But when it comes to disclosure methods, it's likely that National City's is closer to the heart of the Securities and Exchange Commission, which is proposing new rules to combat the selective information sharing with industry analysts.

Pounding the Pavement

A chief reason for the SEC's crackdown is that selective disclosure can put individual investors at a disadvantage to better-informed market participants.

Frequently, those better-informed participants are Wall Street stock analysts and their clients. While National City's way of disclosing appears more helpful, Bank of America's method is actually far more common. In fact, it's a well-established Wall Street custom for analysts to have informal, yet in-depth, discussions with company executives about operating trends.

In these briefings, analysts can learn of developments that are passed on to investor clients well before individuals find out about them. As a result, individuals don't get a chance to act on news that can possibly move stocks.

These guidance briefings should, for the most part, be opened up, says Louis Thompson, head of the Vienna, Va.-based National Investor Relations Institute, a trade body that represents corporate investor relations officers. "Any material guidance should be put in a press release," he says.

A spokesman for National City said his bank's potential failure to meet analysts' estimates this quarter would be a material event, which is the yardstick the SEC uses in determining whether a press release is warranted. "We're probably not going to miss estimates by a lot, but the market doesn't like surprises," he says.

Bank of America declined to comment when asked why it didn't issue a press release on fourth-quarter earnings forecasts. But a spokesman did say it's the bank's general policy to make a release "if earnings are likely to be materially different to the company's guidance to the investment community."

The SEC wants all material corporate information to be disclosed to the general public through press releases, Webcasts or filings with the SEC itself.

The agency voted in favor of its proposed rules Dec. 15. After a 90-day period in which market participants can comment on the proposal, the SEC will consider any suggested changes and then either adopt the rules, withdraw them or make amendments that then must be resubmitted for public comment.

Flattening the Pitch

Recognizing the SEC's long-stated desire to combat selective disclosure, many companies are gradually becoming more open. For example, about 50% of companies let individuals listen in to conference calls that are held to discuss earnings releases or other events they deem to be significant, says Mark Coker, president of BestCalls.com, an online directory of earnings calls and company events. That's up from roughly 25% in March, Coker adds.

However, the vast majority of guidance briefings remain very selective in nature and are not done through conference calls or other means of public dissemination. Instead, analysts generally call or visit companies and chat individually. Most companies say that individuals are welcome to call their investor relations departments with any questions. But firms don't generally announce when they are giving out earnings guidance (although analysts have learned to call two to three weeks before the end of each quarter).

Clearly, companies can claim an event wasn't material enough to warrant a press release. But if firms, in the manner of National City, start to more liberally define what's material, then other firms may be shamed into following suit. One can only hope.