Decent exposure: has America's much-scrutinised new legislation on the disclosure of financial data levelled the playing field for investors, or has it simply made companies less willing to divulge key information? Andrew Lymer and Amir Allam examine the official review of how the regulation worked in its first year to uncover the truth.

AuthorLymer, Andrew
PositionFinance Reporting

Few reporting regulations have come under more scrutiny in such a short period than Regulation Fair Disclosure (Reg FD). The legislation, which took effect in the US in October 2000, was a bold attempt by the regulators to eliminate the unfair advantage that analysts and favoured clients enjoyed from private information flows.

Reg FD requires that when a company issues material information to "certain people" it does so publicly. The certain people it refers to are typically securities market professionals and holders (as potential traders) of the company's equity. A disclosure should be simultaneous across a range of media--eg, press releases, the internet and other non-exclusive distribution methods--where it is intentional. And a disclosure should be prompt--ie, within 24 hours--where it is unintentional. As is often the case, however, the apparent simplicity of these demands hides a range of complex issues.

When the plans for what became Reg FD were announced in December 1999 the Securities and Exchange Commission (SEC) received more than 6,000 responses. Most of them supported the proposals and indicated that they represented a long overdue levelling of the playing field for potential traders in US stocks. The dissenting concerns focused on the possibility that Reg FD could chill the information flow and the associated harm this could cause to market efficiency.

Although the litigious environment of the US was already effective in encouraging companies to make information readily available, the SEC's commissioners voted to pass the regulation by a 3:1 majority. The dissenting commissioner, Laura Unger, argued that adopting such a far-reaching rule was not appropriate for addressing a trading issue, so it was not surprising that she was asked to head the review of the regulation throughout its bedding-in period.

Unger's first-year review, published in December 2001, pulls together surveys and analyses conducted by a range of representative bodies over Reg FD's first 14 months. It focuses on collecting evidence to assess which of the two potential effects suggested--"levelling" or "chilling"--has been more influential.

The review describes a series of studies that largely supported the legislation--for example, 88 per cent of respondents to a PricewaterhouseCoopers survey said they supported its continuation--yet provided no clear data as to which effect was dominant. It also includes findings from the Association for Investment...

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