– by Neil Hershberg, Senior Vice President – Global Media, Business Wire
It is the hidden paradox of the regulatory reform debate dominating today’s headlines. While improved disclosure and transparency are widely seen as the ‘silver bullets’ to remedy Wall Street’s worst abuses, the integrity of the disclosure process itself is under attack. And individual investors are once again in danger of bearing the brunt of the damaging fallout.
For all the current talk among reformers, regulators and journalists touting the need for better disclosure and transparency, there is an inconvenient truth that is being ignored. Hardly anyone has bothered to “look under the hood,” specifically to examine the engine that drives the disclosure process. It is deliberately being throttled, resulting in ‘inadequate disclosure,” and having the reverse impact of what the reform movement is seeking to accomplish. Today’s transparency challenge could very well lead to tomorrow’s financial crisis.
Equal and Unrestricted Access to Market-Moving News
Disclosure has traditionally been defined as providing material information to ALL market participants, simultaneously and in real-time. The ideal is that all investors have equal and unrestricted access to market-moving news that may influence their investment decisions. The SEC, under Arthur Levitt, got it right when it published Regulation Fair Disclosure in 2000, formalizing the egalitarian concept of a ‘level playing field.’
By most accounts, Reg FD as originally conceived worked reasonably well, correcting certain practices that had favored Wall Street professionals, often at the expense of the average investor.
Unfortunately, the SEC didn’t leave well enough alone. It tinkered with Reg FD during the Christopher Cox regime, coming up with a solution for a problem that didn’t exist.
Interpreting the SEC Interpretive Guidance
The agency issued its Interpretive Guidance Release on Web-based Disclosure in 2008, and it quickly proved to be the modern-day equivalent of a Rorschach test for investor relations professionals. The SEC’s guidance left much to the imagination, and that is the crux of the problem. Nearly two years later, IR professionals are still trying to figure out what it all means.
Rather than providing clarity as to the appropriate use of technology in investor relations, the SEC’s guidance offered ambivalent guidelines and imprecise circumstances that created unnecessary uncertainty in the marketplace.
The true intent of the SEC’s guidance was to encourage companies to make more information available to the marketplace, by posting ‘supplemental’ news to their corporate web sites, information that may not have warranted a news release. Unfortunately, the message never resonated with the IR community, which failed to appreciate that the SEC’s guidance was simply meant to augment their communication initiatives.
The agency’s indecisive guidelines have led to predictable results, and unintended consequences. Whenever there is a perceived policy void, opportunistic individuals will seek to step in and fill the breach. Many self-anointed experts have aggressively advanced their own interpretations of the SEC’s intent, which coincidentally coincide with their own commercial interests.
More ominously, however, a handful of companies have tested the waters by deliberately limiting the information that is broadly disseminated to investors. Several companies have published “notice-and-access” releases, which are brief announcements that direct investors to full-text postings on corporate websites.
Based on the sharply critical response, no one has confused “notice-and-access” with “best practices.” The decision continues to be unpopular among journalists and investor advocates. Obviously, no one wants to play “Where’s Waldo?” during earnings season, or go scrambling for information in today’s millisecond trading environment.
The equation is clear: “Notice-and-Access”= Inadequate Disclosure. No advanced calculus required here; it’s Logic 101.
Here’s a checklist of critical shortcomings:
- Simultaneous? No.
- Easy and equivalent access for all investors. No.
- Archived permanently in leading databases? No.
- A definitive audit trail for regulatory and legal review? No.
- Protection against future insider-trading allegations? According to authoritative legal experts, no.
- In synch with the SEC’s intent to consolidate financials in a universal programming format [XBRL]? No.
- Worth the risk for the modest cost-savings involved? Definitely not.
Best-Practice Disclosure Mosaic
The bottom line is that disclosure is a mosaic of distribution channels; all platforms that encourage investor outreach – traditional, web-based, and social media — should be embraced as part of an integrated and comprehensive IR strategy. The use of Business Wire ensures simultaneous, secure and real-time delivery of price-sensitive information to ALL market participants. Corporate web sites, RSS feeds, and other emerging technologies can, and should, play an important complementary role in reaching investors.
Business Wire is a strong proponent of orderly and efficient capital markets; we are justly proud of the critical infomediary role that we play in the process. Of equal importance, we pride ourselves on the outstanding value proposition that we provide our clients, which continues to expand with the addition of new mobile applications, SEO platforms, and enhanced metrics that quantifies our return on investment.
The cost of our service is fair; the value we provide could be described as extraordinary. And when all the different expense elements that public companies pay annually to meet their listing requirements and disclosure obligations are considered, Business Wire clearly ranks as one of the least expensive charges among all compliance expenditures.
Better disclosure and transparency may well be the answer to the problems that have plagued our financial system. We ask that if improved disclosure and transparency requirements are indeed part of the financial reform package that is ultimately enacted, that the integrity of the disclosure process is upheld, and that the interests of ALL investors are protected.