Subject: Regulation - Full Disclosure

Last-revised: 30 Jan 2001
Contributed-By: Chris Lott (contact me)

The full disclosure rules, also known as regulation FD, were enacted by the SEC to ensure the flow of information to all investors, just just well-connected insiders. Basically the rule says that publically held companies must disclose all material information that might affect investment decisions to all investors at the same time. The intent was to level the playing field for all investors. Regulation FD became effective on 23 October 2000.

What was life like before this rule? Basically there was selective disclosure. Before regulation FD, companies communicated well with securities analysts who followed the company (the so-called back channel), but not necessarily as well with individual investors. Analysts were said to interpret the information from companies for the public's benefit. So for example, if a company noticed that sales were weak and that earnings might be poor, the company might call a group of analysts and warn them of this fact. The analysts in turn could tell their big (big) clients this news, and then eventually publish the information for the general public (i.e., small clients). Put simply, if you were big, you could get out before a huge price drop, or get in before a big move up. If you were small, you had no chance.

Now, information is made available without any intermediaries like analysts to interpret (or spin) it before it reaches the public.

There have been some very noticeable consequences of forcing companies to grant all investors equal access to a company's material disclosures at the same time. For example, company conference calls that were once reserved for analysts only are now accessible to the general public. Another example is that surprises (e.g., earnings shortfalls) are true surprises to everyone, which leads to more frequent occurrences of large changes in a stock's price. Finally, now that analysts no longer have an easy source of information about the companies that they follow, they are forced to do research on their companies - much harder work than before. Some have predicted wide-spread layoffs of analysts because of the change.

Timely information (i.e., disclosures) are filed with the SEC in 8-K documents. Note that disclosures can be voluntary (i.e., planned) or involuntary (i.e., goofs). In either case, the new rule says that the company has to disclose the information to everyone as quickly as possible. So an 8-K might get filed unexpectedly because a company exec accidentally disclosed material information during a private meeting.

Here are some sites with more information.

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