A 4-year-old reform gets small investors 'in the loop'

The Insider

Your Money

July 11, 2004|By BILL BARNHART

THE INDICTMENT of former Enron chief executive Kenneth L. Lay dredges up unpleasant memories that many investors can't shake.

It's a good moment to mark the four-year anniversary of a genuine reform that made the financial world a lot friendlier.

In 2000, the Securities and Exchange Commission adopted Regulation FD (fair disclosure).

Widely denounced at the time by Wall Street and corporate America, Regulation FD exposed one of the big lies that governs the stock market: Exclusivity brings liquidity.

The concept seems false on its face. A company that wants to sell something, including shares of its stock, needs as many people as possible to hear about the attributes of the product.

Wall Street operated on a different theory. In return for dealing in their stock, brokerage firms expected companies to give exclusive guidance to a few major investors and analysts.

These individuals turned their knowledge into profitable trades that, secondhand, sparked broad interest in the stock. It's called the lead-steer theory. Ordinary investors were the cattle, held in disdain.

Aside from the clubby nature of this insiders game, the primary benefit went to the trading desks of major brokerages.

The public always got the worse trade.

Regulation FD called a halt by requiring material information about stocks to be released to everyone at the same time.

Critics complained that forcing companies to level the playing field between professional and amateur investors would result in less information about stocks and more volatility in stock markets.

Numerous academic studies in the past four years proved the critics wrong.

A recent study in the Financial Analysts Journal found no evidence of greater market volatility and concluded that "information has increased enough to encourage more participation by retail investors, who previously had complained they were `out of the loop.' "

The Securities and Exchange Commission has taken the next step. Last month, the agency sued software developer Siebel Systems Inc. for a repeat violation of Regulation FD. The company, which was fined in 2002, insists it did no wrong. This could be the first trial involving the regulation.

In a new twist, the SEC charged that Siebel failed to maintain proper procedures for complying with the rule. One bureaucracy knows how to attack another.

Many years ago, federal banking regulators changed their target from responding to episodes of unsafe banking practices to examining a bank's internal risk-control procedures.

The SEC has moved in the same direction, looking for a loose culture of disclosure, not just instances of loose lips.

"Issuers may be liable for making improper disclosures, as well as for failing to have controls in place to ensure that management is collecting all of the information it needs to make timely disclosure decisions," said Scott W. Friestad, a member of the SEC's enforcement staff.

The SEC also charged Siebel's chief financial officer, who is accused of making the selective disclosures, and its former investor relations officer.

Investors might wonder why it takes the SEC to force companies eager for support to tell their stories equitably to all.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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