Once upon a time I was an idealistic investor relations professional who assumed that when Reg FD (Regulation Fair Disclosure) was enacted in 2000, all public companies would follow the SEC’s initiative to the letter of the law. No speaking to one before speaking to all, at least where material, previously undisclosed information was involved.
Did Reg FD have the impact the SEC was hoping for – a more level playing field? In 2001, CFO magazine quoted Boris Feldman, a securities attorney at Wilson Sonsini Goodrich & Rosati as saying, “Is the market better informed? Of course not. There’s more transparency, but less meaningful information.” The article went on to say that in that year’s fourth quarter there were nearly 800 pre-announcements because “analysts are less likely to be told on the QT to shade their estimates.” The Pepperdine Law Review in 2002 surmised that “the only thing that has changed is the amount of securities regulation operating on American markets. The investors are no better off; the analysts are no worse off; the lawyers are the only ones who may have benefited.”
Although I could not find many examples of how Reg FD has benefited corporate disclosure or the investment community at large, there are many examples of the SEC’s enforcement of the rule. To name a few, in 2007 the SEC contended that Office Depot’s then CEO and CFO selectively disclosed to analysts and investors that the company would not meet analysts’ earnings estimates. Office Depot paid a $1 million fine to settle the allegations. In 2013, the SEC charged the former head of investor relations for an Arizona-based company for giving certain analysts and investors a heads up about an upcoming major development. He paid a $50,000 fine. Last year Bloomberg reported that since Reg FD’s beginnings, the SEC has brought 14 enforcement actions.
Today, the practice of meeting one-on-one with investors appears as robust as ever. In addition to non-deal roadshows, companies routinely present at broker-sponsored conferences with individual meetings sprinkled throughout the day, while one-on-one phone conversations between companies and their investors happen multiple times a day, every day. What’s being said during these conversations? According to a new article in the Wall Street Journal, Barry Diller, chairman of Expedia and IAC/InterActiveCorp, “analysts and investor-relations executives work together to keep estimates low. ‘It is a rigged race,’ he says.” The supposition is that companies send signals to analysts to ensure the companies meet or beat quarterly Wall Street expectations. An analysis by the paper found that after the end of a quarter, earnings estimates often decline steadily. The Journal looked at daily changes in analysts’ estimates at S&P 500 companies since the start of 2013 and compared them with what the companies actually reported for each period. In nearly 2,000 instances, companies “would have missed the average earnings estimate if analysts hadn’t changed their numbers in the 40 trading days before the company’s quarterly earnings report.”
To avoid the potential of selectively disclosing material information, in this case where revenues and EPS will land in any given quarter, many companies have adopted stricter quiet periods and formalized processes related to analyst and investor communication. The idealist in me wants to believe that more companies than not adhere to the rules and don’t give some an unfair advantage over others. However, while I in no way condone running afoul of securities law, the hardened realist in me thinks there will always likely be some nudge, nudge…wink, wink.
— Laurie Berman, email@example.com