SEC rule used to cloak, not disclose, information

July 26, 2006|By JAY HANCOCK

PHH Corp. Chairman A.B. "Buzzy" Krongard has punched a great white shark in the face, learned kung fu and helped run the CIA, but last week he did something even more swashbuckling.

He returned a journalist's phone call. And talked about his company.

The feat, unthinkable for too many corporate bigwigs, left Krongard unscathed, as always. But it shouldn't take a daredevil chairman for a public corporation to fulfill one of its most basic duties: dispensing information to the public.

Too many corporations have taken federal rules designed to improve financial disclosure and twisted them into an excuse to duck reporters and citizens.

What's known as Regulation FD (for fair disclosure) almost certainly has cut down on leaks of corporate tidbits to Wall Street analysts, big shareholders and other people likely to trade on the information. But it has also given companies a pretext to opt out of the discussion that makes the economy run.

I don't have data, because nobody seems to have done the research. But any business reporter can tell the story.

Over and over, corporate officers and directors decline to comment about anything and refer journalists to their company's "public relations" or "investor relations" people. These highly trained professionals also say "no comment." Then they often tell you that securities laws sharply restrict them from saying anything except in a filing with the Securities and Exchange Commission.

Which is wrong.

Regulation FD allows corporations to talk to anybody about anything pertaining to their affairs, as long as it's "material" and "non-public." In other words, unless the information reveals a substantial change in a company's financial prospects, it's fair game.

But numerous companies are shy about discussing even basic issues such as hiring, layoffs and regulation. And even when information is financially significant, falling into the "material and non-public" category, corporations get a free pass if they disclose it to the media. The ban on selective disclosure applies mainly to securities professionals and shareholders.

The SEC assumes that news organizations disseminate key information just as efficiently as a government filing. The law explicitly allows material disclosures to news reporters, which Nancy Humphries, president of the National Investor Relations Institute, acknowledged when I reached her on the phone.

Any system of disseminating news that is "reasonably designed to provide broad, non-exclusionary distribution of the information to the public" is OK, said the SEC's commentary that accompanied the rule's debut in 2000. "Regulation FD will not apply to a variety of legitimate, ordinary-course business communications or to disclosures to the media."

Somebody tell corporate America.

After I talked to Krongard last week about PHH's bookkeeping problems and whether its fleet-management unit in Sparks ought to be in the same company as its mortgage operation, I told the company's public relations department about the interview. The people got a little excited, because like most PR shops they're used to being in control. Somebody at PHH - the spokeswoman wouldn't say who - wanted to read my column before publication to "verify it for accuracy."

Give me a break.

More corporate directors ought to speak with journalists. Independent directors are the purest representation of shareholder interests.

Yet they almost always leave the job of communication to public relations and investor relations folks, who work for management, which is separate from the board. As Enron, WorldCom and the unfolding options-timing scandal have showed us, the interests of management and shareholders aren't always the same thing.

It's true that the New York Stock Exchange has more restrictive rules for releasing important corporate news than the SEC, and this probably restrains companies. For material disclosures, the exchange generally requires a formal press release to be distributed to many news organizations.

But this doesn't stop numerous exchange members from leaking news of their impending mergers to The Wall Street Journal a day before the news release comes out. The exchange - which had its own disclosure problems concerning former Chief Executive Officer Richard A. Grasso's salary - ought to conform to the SEC's standard.

And the SEC should revisit the matter of whether Regulation FD is properly understood. When the rules came out, the agency worried about a "chilling effect" on the flow of information, with a "cost to overall market efficiency and capital formation."

The chill is here. Let's turn up the thermostat and open up the conversation.

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