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SEC approves rule banning selective disclosure

Companies can’t give critical information to analysts before public

SHARE SEC approves rule banning selective disclosure

The Securities and Exchange Commission has approved a new rule that bans companies from giving important information to analysts and professional investors before disclosing it to the public.

The rule should accelerate the so-called democratization of investing fostered by the Internet. Over the last few years, online trading, financial message boards and the rapid-fire dissemination of news from Web sites have helped close the gap between average investors and Wall Street.

Regulation FD — short for fair disclosure — should benefit small investors even more, said Arthur Levitt, the chairman of the SEC.

"High-quality and timely information is the lifeblood of strong, vibrant markets," Levitt said. "But when that information travels only to a privileged few, when that information is used to profit at the expense of the investing public, we must ask, 'Whose interest is really being served?' "

Though the full text of the regulation will not be released for several days, it will require that companies give Wall Street professionals and individual investors equal access to information and will give companies 24 hours to inform the public after accidental disclosures.

A company could not, for example, disclose a profit warning on quarterly earnings to analysts at 5 p.m. and issue a news release to the public the next day. Instead, it would have to inform everyone at the same time.

Opponents of the regulation say it could lead to an "information blackout" if companies grow more cautious about talking.

"It will actually hurt, rather than help, the investing public," said Stuart Kaswell, a senior vice president for the Securities Industry Association, the top trade group for Wall Street firms like Merrill Lynch. The concern is that some companies, used to filtering sensitive information through favored analysts, could disclose less as an end result.

"Many companies say they'll clam up," Kaswell added.

Most experts think there will be an uncertain transitional period as companies learn to live by the new rule.

"The reality is that most of the time when you have a proposal like this, you'll have predictions of horror stories," said Joel Seligman, dean of the School of Law at Washington University in St. Louis. "Most of the companies find a way to live with it."

Ordinary investors will gain access to information either by reading news releases or watching for a company's SEC filings, which can be found on Web sites. Broadcasts over the Web may be acceptable in some cases, but postings on a company's Web site will not be sufficient enough notice on their own.

The rule, which will take effect in two to three months, will not ban selective disclosure to the media, to firms that rate corporate bonds or to a company's customers and suppliers — as was proposed in the original draft released last December. It will also exclude information about initial public offerings and foreign companies whose shares trade in the United States. And the regulation will affect only senior management and officials who speak with analysts and stockholders.

"There are going to be some tough questions," said Daniel J. Kramer, a securities lawyer and partner at Schulte, Roth & Zabel in New York. "If an analyst calls a lower-level person in the company, can that person return the call, and what can they say?"

Kramer said, however, that the fact that infractions will be handled by the SEC and that the regulation will not allow shareholders' suits, is positive for companies.

"That gives comfort to companies that they're not going to be subject to a lawsuit any time there's an unintentional violation."

The new rule will undoubtedly transform how Wall Street securities analysts do their jobs. There will be fewer, if any, face-to-face meetings with top-level executives, and no hot tips to deliver to prominent clients.

"I believe the principal benefit of this will be to enforce the independence and objectivity of the securities analyst," said John C. Coffee Jr., a Columbia University law professor.

"Right now, corporate executives have a key weapon to hold over the securities analyst," he said. "An analyst, to remain competitive, has to get as much or more selective disclosure as his competitors."

The SEC received nearly 6,000 letters and e-mail messages, most in support of the measure. Some were detailed legal briefs. Others were more blunt criticisms of the way business is conducted on Wall Street.

"Vegas would love to play by these rules," one correspondent wrote about existing regulations in an e-mail message posted on the SEC's Web site. The measure passed on a rare split decision. The only Republican member of the commission, Laura Unger, dissented in a 3-1 vote. Two other rules intended to strengthen existing prohibitions against insider trading passed unanimously.