May 1, 2000
Mr. Jonathan Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549
Dear Mr. Katz:
I am writing on behalf of Salomon Smith Barney, a member of Citigroup, to express the firm's views regarding the Securities and Exchange Commission's proposed Regulation FD. I am the Director of Global Equity Research for Salomon Smith Barney. Equity research analysts at SSB track nearly all the S&P industry groups, more than 90% of the S&P 500 Index, hundreds of mid- and small-cap stocks and 1500 companies internationally. Reflecting the quality of service to its growing and increasingly global client base, SSB ranked among the top firms in Institutional Investor's poll of global sell-side research teams. The firm is also recognized as having created the first fixed-income research department on Wall Street. Its coverage of government, investment-grade and high-yield bonds, as well as mortgage- and asset-backed securities, earned it the No.1 ranking in Institutional Investor's 2000 Survey of Chief Financial Officers. All of this is to underscores how significant Regulation FD is to our business and to our clients.
Let me begin by saying that Salomon Smith Barney shares the SEC's concern that selective disclosure of material non-public information can undermine investor confidence in the fairness of our markets. The firm has always maintained a policy that instructs our research analysts not to engage in "selective disclosure." Whenever research analysts come into possession of material non-public information they are instructed to contact our Legal/Compliance Department and not to disclose the information to selected clients and certainly not to trade for their accounts or the firm's account. It is critical to our business that both our retail and institutional customers know that we are dealing fairly with them. To that end, research analysts are instructed to issue research reports or comments widely and simultaneously to our investor base and never to give "select" favored clients previews.
It is the firm's experience that others in the industry have similar policies. More importantly, most large publicly traded corporations appreciate the problems selective disclosure can cause with their investors, so their senior executives, lawyers and investor relations people seldom engage in "selective disclosure." While there have been some well-publicized incidents of selective disclosure by corporations to select research analysts, it is the firm's experience that these are exceptions to the rule. Indeed the SEC has not engaged in any formal fact finding in this regard and instead the promulgation of Regulation FD apparently rests upon two incidents chronicled in the financial press. We believe that a "best practice" already prevails in the industry that discourages selective disclosure and that sweeping regulation is unnecessary.
While the intent of Regulation FD is noble, the firm cautions the SEC that there could be some undesirable consequences. The firm has participated in the preparation of the Securities Industry Association and the Bond Market Association letters on Regulation FD and we support those letters. I would like to add our emphasis to three possible results from FD: (i) a decrease in the quantity and quality of communication between corporations and investors; (ii) an increase in market volatility and (iii) a burden on non-U.S. issuers coming to the U.S. markets. Because of these concerns we believe the SEC should continue to foster the "best practices" that I spoke of above as well as make simple changes to encourage wider investor participation in corporate communication, such as encouraging quarterly earnings calls to be open to all investors. Our recent experience is that a substantial majority of these calls are already open to investors with call-in numbers posted on company websites.
Reduced Information Flow
Regulation FD has the potential to reduce the quantity and quality of information that issuers share with buy and sell side analysts, which ultimately impacts retail and institutional investors. While relationships between corporations and research analysts can vary, in many situations an analyst can have an ongoing dialogue that continuously augments his or her research. This dialogue can be with senior management, investor relations people or others in the organization. Regulation FD could cause corporations to curtail or monitor this dialogue, moving all communications with research analysts into large formal forums open to the public where questions are general and answers are scripted. The elimination of smaller, more substantive meetings will inevitably diminish the quantity and quality of the information disseminated to the market place.
The SEC has the luxury of reviewing "materiality" decisions in hindsight - corporate officers and their lawyers do not. Corporate officers will curtail or script answers to analysts' questions if Regulation FD raises the stakes for them being wrong about materiality. Research analysts often visit companies and have access to many layers of management. Research analysts cover entire industries and have a very informed view of trends and developments. A perfectly legitimate conversation between a corporate officer and a pre-eminent analyst that causes the analyst to reconfigure his or her "mosaic" may result in a change in estimate or recommendation, which could cause the company's stock to move significantly. Then, the officer's conversation becomes suspect in hindsight even though the conversation was general in nature and did not convey any material non-public information. Rather than take this risk, we are concerned that corporate officers may simply end the dialogue or meetings with the research analyst. The consequence will be less information to investors and the valuable market communication function research departments provide will be diminished.
In the U.S. securities markets, issuers do not publish projections because of liability and updating concerns. While the SEC has encouraged companies to publish projections, it has never required that issuers do. Instead investors look to broker-dealers like Salomon Smith Barney to publish their own estimates. Sometimes companies try to guide the street's estimates to mitigate surprises or bring in outlying estimates. This guidance to the "street" followed by broad public dissemination of research by the street serves a valuable market function in the absence of any requirement for companies to publish projections. This type of guidance is not tipping the current quarter's results to the street; rather, it typically involves the company expressing its views on longer term macro economic or company specific trends which ultimately impact the street's one or two year estimates. I believe Regulation FD will choke-off this type of guidance to the detriment of all investors and not supplement it by requiring issuers to disclose projections.
Salomon Smith Barney has more than 11,000 financial consultants servicing over 6 million retail clients, in addition to institutional sales people servicing numerous institutional accounts. Unlike the institutional clients of the firm, who have access to research at other brokerage firms and speak and meet with issuers directly, our retail clients rely on Salomon Smith Barney research on securities they own or are thinking of purchasing. If the SEC, by adopting Regulation FD, causes issuers to shut off meetings or discussions with sell-side research analysts other than in public forums, then retail investors could be placed at a distinct disadvantage to institutions who may have more frequent direct access to issuers. We do not believe that issuers intentionally disclose material, non-public information at these meetings, but institutions will be able to put together a "mosaic" based on the information discussed at meetings to make investment decisions, which could cause the price of securities to move and retail investors will only be able to react, after the fact, to these price movements.
If the "chilling" effect on information flow outlined above comes to pass, then corporate information releases to the market will become a periodic event, resulting in more potentially dramatic stock moves around the event. A more continuous dialogue with the market should reduce volatility. This is not to say that when there is a continuous dialogue, material information is selectively being disclosed to analysts. However, if one limits the number of meetings with investors and research analysts and relegate them to large and less frequent public forums, they will take on an event status. Moreover, eliminating the ability to guide street estimates will, without a doubt, lead to more surprises and price volatility.
Impact on Non-U.S. Issuers
We believe that Regulation FD is without precedent in the major offshore financial markets. Requiring non-U.S. companies which come to the U.S. markets to comply with Regulation FD will certainly put them at a disadvantage in their home market. This burden on non-U.S. issuers who are already listed or traded here has to be measured in light of the fact that currently the SEC does not require quarterly or current reports. Non-U.S. issuers are guided by home country disclosure standards. Because of this dramatic increase in the burden of Exchange Act filings on non-U.S. issuers, Regulation FD could cause a number of non-U.S. issuers to list and trade elsewhere and only come to the U.S. Rule 144A market. This would not mean that U.S. investors could not buy these stocks; it will simply require that they do it through foreign exchanges with substantially inferior disclosures. No matter what the SEC does with Regulation FD, we would strongly encourage the SEC not to extend Regulation FD to non-U.S. issuers. Home country disclosures have been very effective at encouraging non-U.S. issuers to come to the U.S. markets and Regulation FD would be a substantial departure and burden.
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Again, we applaud the Commission's goal of eliminating selective disclosure. Fair and equal disclosure is the cornerstone of the U.S. market and Salomon Smith Barney's franchise. We, however, do not support Regulation FD but instead suggest the SEC find ways to encourage "best practices." Our firm would gladly participate in any forum or panel to develop and promote "best practices" in this area.
John B. Hoffmann
Director of Global Equity Research
cc: The Honorable Arthur Levitt, Chairman
The Honorable Norman S. Johnson, Commissioner
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Paul R. Carey, Commissioner
The Honorable Laura S. Unger, Commissioner
David Becker, General Counsel, Office of General Counsel
David B.H. Martin, Director, Division of Corporation Finance
Annette L. Nazareth, Director, Division of Market Regulation
Harvey Goldschmid, Special Advisor to the Chairman