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Reg FD's global ripples

The Securities and Exchange Commission's controversial new rule mandating that corporate disclosures simultaneously reach investors big and small exempts foreign companies.

The Securities and Exchange Commission's controversial new rule mandating that corporate disclosures simultaneously reach investors big and small exempts foreign companies.

By Eric Rosenbaum
January 2001
Institutional Investor Magazine

The Securities and Exchange Commission's controversial new rule mandating that corporate disclosures simultaneously reach investors big and small exempts foreign companies. Even so, its impact is spreading around the globe.

Regulation FD, which went into effect in October, aims to level the playing field for big institutional investors and investment banks with easy access to companies and smaller retail investors, who tend to fall to the back of line when new information emerges. Many U.S. analysts and portfolio managers complain that the rule hasn't widened the flow of information for some but has rather reduced it for everyone. For fear of failing to comply with Reg FD, some companies are simply choosing to communicate less frequently and offering less information when they do.

Outside the U.S., says Faraz Naqvi, a director and portfolio manager at Dresdner RCM Global Investors, corporate management has always been more open than in the U.S. "Enforcement of Reg FD overseas would be a setback," Naqvi notes, although he adds that it is too soon to see any tangible change in interactions with non-U.S. companies.

Although some foreign companies and investors may have breathed a sigh of relief when the SEC excluded them, their respite is likely to be brief. Regulators in many countries, including Australia and Italy, have begun formulating their own sets of rules using Reg FD as a model. Companies, particularly those with a U.S. shareholder base or plans to list here, are reviewing their disclosure policies. And another heavy shoe is poised to drop: The SEC is working on a broader review of foreign companies' dealings with the agency, and some variation of Reg FD is sure to be included in the final proposal, though that won't happen any time soon.

In short, Reg FD will be very hard for any market participant - corporation, brokerage, regulator or investor - anywhere to ignore.

"We're evaluating all of this. A lot of foreign companies are. We're now looking at how and if our disclosure practices will change," says Bill Seymour, managing director of investor relations at mobile phone maker Nokia. Adds Peter Campbell, director of investor relations at French telephone giant Alcatel, "Sometime in the future, similar regulations will apply to foreign issuers, and this gives us the chance to look at our policy and prepare ourselves."

Although Alcatel wants to avoid extreme measures, such as referring all investor queries to a Web site, it is changing the way it shares information. The company will continue to hold one-on-one meetings with U.S. analysts (some foreign issuers have banned the practice), but there will be no discussion of material issues in anything but the broadest terms, Campbell says. Future annual meetings with analysts in the U.S. will also include a live Webcast.

Says Campbell: "We don't think that the intention of FD was to come down to the lowest common denominator in financial communications. We want to avoid that extremely conservative approach but also recognize that investor confidence is built through openness."

At Nokia, 50 percent of whose shareholders are in the U.S., both internal and external counsel are reviewing the rule, and Seymour expects the company to release revised guidelines soon. "We're sensitive to the U.S. base and don't plan to use loopholes [to get around FD]. We plan to adhere to it," he says. "It's the best way to go, given the risk status otherwise."

With their substantial U.S. shareholder base, the Nokias of the world are taking note of a recent study of U.S. investment professionals conducted by Broadgate Consultants. It showed that financial releases from European companies were considered less helpful than U.S. releases by 75 percent of those surveyed. And 68 percent of the respondents said European companies were less likely to provide profit warnings.

Securities regulators in certain countries have already embraced Reg FD. The Australian Securities and Investments Commission, for one, released a broad set of guidelines for price-sensitive information shortly after the SEC acted. The new ASIC guidelines primarily suggest that companies put procedures in place to ensure fair disclosure and that they use technology such as the Internet to disseminate any information that could affect their share price.

In Italy Giovanni Sabatini, head of market regulation at the Commissione Nazionale per le Societö e la Borsa, also known as Consob, says the agency is considering granting itself enforcement powers in cases of unfair disclosure. The Italian securities watchdog is looking at Reg FD for other ways its principles can be applied locally, he says.

These days Consob's major concern, and the Italian market's point of vulnerability, is the country's treatment of insider trading as a criminal offense to be handled by the courts. Consob has no authority in this regard. It would like to directly fine issuers who are guilty of insider trading - which would of course inspire Italian corporations to be more cautious about what information is or is not disclosed to analysts and investors.

Investors say they haven't seen much direct effect yet, but they expect fewer private meetings with companies as a result of the new rule. Richard Forde, a portfolio manager at Cigna Corp., which manages roughly $1 billion in international equities, says it's not clear how quickly changes will be made. "There will be less one-on-one and more of an open community. But it won't be a knee-jerk reaction," he says.

As European and Asian companies respond to the new U.S. regulation, the International Organization of Securities Commissions, a leading international group of 91 securities market regulators, is expected to play a role. The organization aims to ensure better regulation of all markets, issuing guiding principles and shared regulatory objectives. Says Consob's Sabatini, the head of a working group on secondary markets at Iosco, "Reg FD has an impact for our working party, and we will discuss it."

Adds Tom Franko, chairman and CEO of Broadgate Consultants: "When FD gains traction here, it will be the standard by which the world operates. The way I see it is that non-U.S. companies really are trying to set a unified policy, and the trend is toward the U.S. standard."

But others hope that overseas players will forge their own way rather than rigidly adhere to an American precedent. Cigna's Forde thinks that Reg FD will prove influential, but not in a simple, straightforward way.

Adds Gerson Rothenberg, an international equity manager at United Asset Management Corp. subsidiary Thompson, Siegel & Walmsley: "The imposition of the American system can only go so far. Foreign markets will not want to feel there is no third way."