Fair Disclosure Rule Seen as Impediment
August 21, 2000
The fair disclosure regulation that the SEC approved Aug. 10 is causing widespread concern among mutual fund portfolio managers and analysts that it will stop the flow of corporate information needed to effectively run funds, executives said.
The new rule could have a "chilling" effect on the flow of information that funds need from securities issuers, said John Collins, a spokesperson from the Investment Company Institute of Washington. Issuers are likely to have lawyers thoroughly screen all information before releasing it - or not release it at all, Collins said.
There is nothing the industry can do to overturn this rule, now that it has been passed, Collins added.
However, the ICI has asked the SEC to clarify what it deems "material" information and provide examples of the type of non-material information that can be disclosed to select parties, Collins said.
The Association for Investment Management and Research of Charlottesville, Va., on the other hand, plans to contest the new rule in its entirety, said Michael Caccese, senior vice president and general counsel at AIMR.
The issue of "materiality,' one of the most amorphous concepts in the securities laws [is ICI's] single greatest concern" with the new rule, the ICI told the SEC in one of 6,000 comment letters investment companies and the general public sent to the SEC about the new rule.
The SEC thus far has only released a fact sheet that refers to material information briefly, as information that could affect stock prices, such as earnings, sales figures, and new product information. Further details on material information will be included in the full document, which will be published in the Federal Register shortly, said John Heine, a spokesman for the SEC. The rule will take effect 60 days after it is published, Heine said.
The new rule, Regulation FD, for fair disclosure, is designed to prevent issuers from providing nonpublic, material information to securities analysts or institutional investors before that information becomes available to the general public.
It requires firms to release market-moving information in one of three ways: in a press release, in a webcast or in SEC filings.
The rule is intended to "bring all investors, regardless of the size of their holdings, into the information loop - exactly where they belong," said Arthur Levitt, chairman of the SEC.
Janus of Denver told the SEC in its comment letter it was "concerned that the proposed rule will have the effect of foreclosing altogether appropriate communications by issuers with securities analysts and investors, thus degrading the quantity, quality and timeliness of information available to Janus and other market participants."
Janus stressed how it takes a bottom-up, research-oriented approach to investing. Regulation FD will seriously impede this approach, Janus said.
Fidelity Investments of Boston expressed similar concerns. "Rather than promoting more timely, and broader, disclosure, the rule is likely to have precisely the opposite effect. [It] offers no safe harbor for issuers, no precision on what may or may not be said to any investor or shareholder in the absence of a contemporaneous press release or webcast, and no incentive for issuers' management to stray from prepared scripts in one-on-one discussions with investment managers," Fidelity told the SEC.
AIMR shares these and additional concerns over how Regulation FD will impact the mutual fund industry
Besides affecting equity mutual fund analysts and portfolio managers in general, Regulation FD will particularly thwart fixed-income and money market mutual fund mangers, Caccese said. These funds need to do credit research on short-term debt, and Regulation FD will make amassing this information difficult, Caccese said.
"The SEC requires the boards of fixed-income and money market funds to make sure that the paper they hold has minimal credit risk. Managers of these funds are now afraid they will not get the information they want," Caccese said.
However, some industry observers do not believe the new regulation will seriously stem the flow of corporate information.
"The regulation will provide a chilling effect for a short while, until corporations see how far the information envelope goes," said Burton Greenwald, president of B.J. Greenwald Associates of Philadelphia.