By DAVID MOON, Moon Capital Management
Imagine you are one of several owners of a business. You are not
involved in the actual management of the business, as you have hired others to
run the day-to-day operations. How would you react if your managers wanted
to more freely disclose information about your business to some of the other
owners? What if the managers were more willing to disclose information
about your business to non-owners? Then imagine if your mangers and the
recipients of this preferential information disclosure complained about a legal
requirement that all shareholders receive the same information about their
business. This is exactly what is happening in the securities industry
Most research analysts at large brokerage firms are not analysts at all; they
are salesmen. Part of their job is to support the transactional business
of the retail stockbroker. But the vast majority of their job and
compensation is the result of the new investment banking clients they attract to
Last year, the Securities Exchange Commission passed Regulation FD ' Fair
Disclosure. The aim of Regulation FD is to prevent publicly traded
companies from selectively disclosing financial information to the
analysts/investment bankers who cover their stock. Brokerage analyst
reports are typically little more than publicity pieces for the stocks they
cover. Why would a company consider hiring a brokerage firm for an
investment banking job if that firm's research department produced negative
research reports about the company?
The relationships between the analysts and the companies they research are
warm and cozy; so is the flow of information. Analysts produce research
reports forecasting earnings, even though these forecasts are little more than a
repackaged, regurgitation of the 'guidance' provided by the companies the
reports purport to analyze. At least this was the case until the passage
of Regulation FD. Now companies are prevented from selectively disclosing
information; analysts get their information at the same time as does the general
public. There are no more 'whisper numbers' or heavy guidance on future
earnings by the companies. Theoretically, the value of a good analyst
should increase, since actual research is required by the research analyst.
But who is complaining about Regulation FD? Wall Street analysts and
corporate executives. A recent Security Industry Association survey
indicates 69 percent of brokerage firm analysts complain that regulation FD has
negatively impacted the quality of their reports. The Wall Street Journal
says that 'Regulation Fair Disclosure has been anything but fair for Wall Street
Who cares about fairness to the analysts? What about fairness to the
people who own these companies ' the shareholders? These analysts and
company executives are complaining that their jobs are now more difficult.
American Institute fellow, James K. Glassman, argued that the rule denies
investors 'the benefit of free-market competition.' How? AIM
Management analyst, Gabriel Birdsall, however, sees the situation
correctly. He says, 'All FD does is level the playing field because we all
have access to basic corporate data. It hasn't hurt smart analysts at
Regulation FD requires companies to disclose material, non-public information
simultaneously to all investors, rather than first selectively sharing it.
Trust is the cornerstone on which the entire financial industry is built.
Investors trust that the little pieces of paper they receive each month from
their broker actually represent ownership in specific companies. Brokers
trust that investors will honor transactions to which they have committed.
And all investors trust that the playing field is level and everyone is working
with access to the same information. Regulation FD helps ensure
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).