The mail is piling up at the
Securities and Exchange Commission
, where the public comment period on proposed new rules for financial information disclosure is set to close on March 30. The invitation to comment on the new rules -- aimed at giving individual investors similar access to the information that Wall Street analysts get -- struck a mighty chord.
"Bravo, Arthur Levitt!!!" cheered an email, with a tip of the hat to the SEC chairman. "It's about time that the SEC is looking out for the little guy," said another. "Congratulations for standing for truth, justice and the American way," exulted a third.
And so it goes through most of the hundreds of emails and letters sent to the SEC since the comment period began last December. The collective demand: end selective disclosures of "material" corporate information to Wall Street giving the big institutions and their clients extra insight that the public doesn't get. Most of the correspondence is from small investors who can barely contain themselves at the prospect of reform.
But despite the public support, reform is not assured. The
Securities Industry Association
, a trade group representing the top brokerages, is trying to kill the proposal, which it claims would actually deprive the public of useful investment information.
How so? First, the SIA says, the public would be denied the valuable analysis that Wall Street firms provide when material events are disclosed. Second, the group has sided with companies that have warned the SEC that requiring instant dissemination of news to the public would have a chilling effect, because companies would be more reluctant to broadcast information that the public might misunderstand. The rules, in fact, could abridge free speech, the SIA says.
"We do not know how such a rule can be made compatible with First Amendment concerns," Stuart Kaswell, general counsel of the SIA, admonished in a letter to the SEC.
Such bold reaction is the sign of how sweeping the SEC's proposed reforms could be. The rules would affect what companies say about their business, to whom they say it and when they say it.
The reform has been a pet project of Levitt, who regards the current system as a closed-door arrangement that leaves the public in the dark. While securities laws require companies to divulge material developments through routine public announcements or formal SEC filings, regulators say that close corporate relationships with analysts have led to repeated abuses.
One such incident occurred Feb. 16, when two rival companies developing satellite communications systems alerted analysts at midday to a joint announcement after the close of trading, indicating that something big was up.
Shares of the companies,
Sirius Satellite Radio
XM Satellite Radio
, both jumped, with XM closing up 25% and Sirius up 16%.
After the close, the companies indeed had a major announcement: that they would work together on standardized technology to speed introduction of millions of new car radios capable of producing cable-quality programming.
When Daniel McCann, a Sirius investor in Los Angeles, heard the news, he was livid. The merger-and-acquisitions director for the
Kaufman & Broad
real estate development concern says he left thousands of dollars in profits on the table because he prematurely sold 3,500 options contracts in Sirius stock about the time the company was alerting analysts.
"The stock kept running and running and there was a lot of chat on the message boards but no news from the company," says McCann, who watched in exasperation as Sirius rose from 54 to its close the next day at 66 1/2. "Surely, an awful lot of people sold into that rally and got the short end of the stick."
Mindy Kramer, spokeswoman for Sirius, says the company was disillusioned when the stock shot up, but adds that the alert was part of the normal course of business with analysts. In retrospect, she says, it would have been better to make a public announcement.
The SEC proposal embodies the desire to level the playing field for all investors when it comes to access to information that could affect stock performance. It does so by prohibiting the intentional sharing of "material" information on an exclusive basis, while also requiring that companies publicly disclose within 24 hours information that might be released unintentionally to people close to the company.
"The all-too-common practice of selectively disseminating material information is a disservice to investors and undermines the fundamental principle of fairness," Levitt says. "In a time when instantaneous and free-flowing information is the norm, these sorts of whispers are an insult to the principles of free and open disclosure ..."
The SEC is largely stymied in going after selective disclosure now, because the issue falls under insider-trading laws and regulators must show that corporate officers profited by selectively releasing the information.
There are many issues chafing opponents, ranging from new burdens that would be imposed on corporate communications to how the rule would hurt analysts' ability to dig for information needed to assess a company's prospects. But the main flashpoint is what constitutes "material" information and whether the SEC will take such a restricted view of corporate disclosure that it will chill the flow of communication generally.
The proposal does not spell out what material means, but cites instances in which companies give analysts guidance on earnings. Under securities law, information is generally regarded to be material if there is a "substantial likelihood" of an investor considering it important in making an investment decision or if the information "significantly altered" what was already known about a company.
Despite the good intentions of the proposal, SIA's Kaswell argued in his letter that barring selective disclosure may hamper the work of analysts and deprive the public of their insights. "Without an opportunity to digest and interpret news before it becomes public, investors have less guidance on the possible significance of corporate announcements when they are made," he said.
Kaswell, siding with many corporations, also objected that the plan would stifle normal business conduct. "The rule would hamper legitimate business talk in which issuers (companies) float ideas, discuss strategies and seek new markets," he said.
The securities industry faces a tough time stopping the proposal, though. Observers point out that the SEC seems to have gone to substantial lengths to try to deal with the criticism, including sending signals that it would take a relatively broad view of the definition of material information.
While looking askance at companies that give "guidance or express warnings to analysts or selected investors about important upcoming earnings or sales figures," the SEC said in its proposal that it also would take a benign view toward release of "more generalized background information."
Corporate opponents, meanwhile, must deal with dissension in their own ranks. "It's good to have rules in this area," says Louis Thompson, president of the
National Investor Relations Institute
, composed of 4,500 corporate officials. Thompson says the trend is clearly toward improving investor access to corporate developments and that much of the opposition to the SEC proposal is overboiled.
The next key step in the controversy is the scheduled close of public comment at the end of this month, although the SIA has asked for a 30-day postponement. It could be summer before a final rule is adopted by the commission.
Thomas Sweeney, a former top lawyer at the SEC, sees few major hurdles to approval, noting that the proposal has strong support at the agency. "The commission is hanging its hat on improved investor confidence in the market," he says. "If they get broad support from individual investors, I think it passes."