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The SEC Gets Tongues Wagging, for Once

A revolutionary SEC rule fosters an unprecedented Internet debate -- but will it empower Internet investors?

There's us. Then there's


. They have friends and they have influence and they have knowledge and they have agents, and, well, they have money. And they use it against


. The public market, the


market, enables us to get some of what's theirs. That's our tool. They can run with us or at us, but the public stock market -- and the Net -- are ours.

But until a few weeks ago, they set the rules. Now, for the first time, the Net may be changing that.

SEC Proposal:

TSC message boards.

On Dec. 15, the

Securities and Exchange Commission

opened a forum for public comment -- in the process tapping an unprecedented vein of Internet investor angst. And the results suggest a change in securities law -- fueled by the ire of Net investors, who are becoming more involved in the process.

On Dec. 15, the SEC issued a press release and fact sheet about a sweeping rule that seeks to level the playing field in a clear-cut fashion. The

Selective Disclosure and Insider Trading Rule would make it illegal for publicly traded companies to give anyone an edge. "Material" release of nonpublic information would be outlawed. No more private conference calls with select investors; no more select guidance to privileged analysts. When a publicly traded company opens its mouth, this rule would require it to keep it open, so everyone can hear.

As is its tradition, the SEC invited comments on the proposed rule change from the "public" for a 90-day period. In the past, these comments have been limited to reaction generated by mention in the

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Federal Register, a newspaper published every business day by the

National Archives and Records Administration

(don't look for it from

Publisher's Clearing House

). As such, the "public" commenting on these rules too often consisted only of the powerful financial elite. The voices of CEOs, investment banks and the big accounting firms were loud among this group. The opinions of dentists, daytraders and other dabbling ducks unlikely to pick up the wonky D.C. paper were scarce. And to read the comments one actually had to go to the SEC's public reference rooms in Washington, D.C., or New York City.

As soon as the Dec. 15 press release hit the SEC's

Edgar site -- even before the proposed rule was printed in the

Federal Register

, where federal agencies are required to publish notices of proposed rulemaking -- the SEC invited comment on a

public bulletin board. And a funny thing happened: Angry Internet investors responded en masse, at least by SEC standards. More than 300 Internet traders have their responses posted on this bulletin board: The Internet investor, for the first time, is convening in Washington.

"This is amazing," says Chris Ullman, the SEC's director of public affairs. "Wow, I'm psyched. I've been here three years and I've never seen anything like it. It really shows that people are paying attention and it has hit a serious hot button."

To be sure, 300 investors is a pathetic representation.

Robertson Stephens

, a unit of

Fleet Boston


, in a report last fall estimated that some 28 million Internet users have brokerage accounts. And the SEC has been taking comments via the Internet for several years, says Ullman. But the response this time is arresting.

So what has inspired the outcry? It's the enlightened view that the Internet investor -- despite Level II quotes,



charts and chat rooms galore -- still can't compete with professional investors. "Dear SEC," writes Father Robert Wickizer, a North Carolina Episcopal priest. "The amount of insider information and trading irregularities that continue to go on could make a lawyer blush. I heartily support leveling the playing field with Regulation FD."

Even the SEC admits that it can't do much about selective material disclosure. Short of insider trading, blatant favoritism is still legal. "Most people try to link the selective disclose to insider trading; there is no rule that prohibits the selective disclosure of information," says Ullman. "We have looked at the arrows in our regulatory and legislative quiver and have found that the target was out of reach."

The SEC, for all its bluster, is a hamstrung organization. Its limited funding and a burgeoning field of investors to oversee have shown just how infirm the commission is. Commissioner

Arthur Levitt

has been making threats about material disclosures for some time, but the agency lumbers along, regulating a process that's taken flight. Rather than rush to regulate, the chairman had been appealing to the industry to monitor itself, Ullman says. "I think he's found that the bully pulpit has its limits."

The forum on Edgar promises to flourish, and bodes well for the passage of the rule when the 90-day comment period closes at the end of March. And yet, the rule hardly goes far enough. There are still vast fields of important, selective disclosures that will go on uninhibited. Take, for example, the egregious issue of private investment conferences.

On Thursday, Jan. 13,


Founder and Vice Chairman Jay Walker spoke before a packed crowd at the

Donaldson Lufkin & Jenrette Internet Conference

at the Ritz Carlton Hotel in San Francisco. It was no surprise that Walker was bullish -- his enthusiasm during presentations is already legendary on Wall Street. But many of these big-money investors learned for the first time that's

WebHouse Club

had 120,000 customers and had sold three million items. Walker told the assembled crowd, close to 1,000, that the site had sold 80,000 airline tickets the previous week. Money managers stumbled over themselves to buy the stock, and within an hour after the presentation it had gone from 50 3/8 to close at 51 5/8. There was no other news on the stock. By the end of the next day, shares of priceline were up to 56 7/8, ending a weeklong slide.

Riveting Material?'s stock jumped 13% after a presentation at a professionals-only conference.

If that's not material information, what is? The big boys had special knowledge and were buying the stock from regular investors who did not have that knowledge.

The SEC is to be commended for taking a stand here. And Internet investors are finally making their voices heard in the regulatory corridors. But this is simply the first step in what needs to be a giant leap forward for fair, regulated investing.

Cory Johnson files weekly from's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

For more columns by Cory Johnson, visit his column