NEW YORK CLEARING HOUSE
100 BROAD STREET, NEW YORK, N.Y. 10004
JEFFREY P. NEUBERT
TEL: (212) 612-9200
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FAX: (212) 612-9253
April 28, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Proposed Regulation FD - File No. S7-31-99
Dear Mr. Katz:
The New York Clearing House Association L.L.C.1 is pleased to submit the following comments regarding proposed Regulation FD set forth in Release No. 33-7787 (the "Release").
We support the Commission's goal of improving the flow of information from public companies to the marketplace. We believe that this goal has been largely achieved in recent years through the Commission's efforts, similar efforts in the private sector, rapid advances in technology and concomitant increases in demand for information. The scope, volume and timeliness of information available to the marketplace have never been greater than they are today.
We do not, however, support proposed Regulation FD. We believe that the proposal is fundamentally flawed, and that its adoption would be counterproductive in attempting to achieve our common goal. In practice, Regulation FD would (1);reduce the scope and amount of information that companies provide to financial analysts, the media and other outsiders, (2);delay the disclosure of information to outsiders, and (3);substantially increase the cost to companies of providing information to outsiders. Imposing a mandatory disclosure requirement and creating potential liability based solely on the voluntary disclosure of information to outsiders would discourage companies from making voluntary disclosures.
We also agree with the Commission that it would be unfair for certain investors to be able to trade on the basis of a company's selective disclosure of important upcoming earnings or sales figures prior to its public release of such information. The radical departure embodied in proposed Regulation FD, however, is unnecessary to address this issue.
Accordingly, we urge the Commission not to adopt proposed Regulation FD.
We favor improved disclosure of information to the marketplace. We believe, however, that Regulation FD would have the exact opposite result.
We believe that the Commission has severely underestimated the practical difficulties in making judgments regarding the materiality of specific information. The Release states:
"Although materiality issues do not lend themselves to a bright-line test, we believe that the majority of cases are reasonably clear. At one end of the spectrum, we believe issuers should avoid giving guidance or express warnings to analysts or selected investors about important upcoming earnings or sales figures; such earnings or sales figures will frequently have a significant impact on the issuer's stock price. At the other end of the spectrum, more generalized background information is less likely to be material." (Emphasis added.)
We agree that there is no bright-line test for materiality. Indeed, in many situations, there is no line of any kind - bright or otherwise. We also agree that in a number of cases the materiality of specific information is reasonably clear. Whether these "reasonably clear" cases actually constitute a "majority" of the innumerable real-life situations is, however, highly doubtful. Moreover, there is absolutely no doubt that in a vast number of situations the materiality issue is far from clear. On the "spectrum" from black to white, there is a huge gray middle. The Release discusses only the "ends" of the spectrum. But even at the "ends", the issue is often neither black nor white, as demonstrated by the language of the Release itself - every one of the phrases "more generalized", "background information" and "less likely to be material" includes multifarious shades of gray.
The vagueness of this discussion in the Release is reminiscent of the vagueness of the asserted rule criticized by the Supreme Court in Dirks v. SEC, 463 U.S. 646 (1983):
"The SEC asserts that analysts remain free to obtain from management corporate information for purposes of 'filling in the "interstices in analysis" ...' [citation omitted] But this rule is inherently imprecise, and imprecision prevents parties from ordering their actions in accord with legal requirements. Unless the parties have some guidance as to where the line is between permissible and impermissible disclosures and uses, neither corporate insiders nor analysts can be sure when the line crossed." 463 U.S. at 658 n.17.
Under proposed Regulation FD, the consequences of inadvertently crossing the line could be severe. The substantial uncertainties resulting from the imprecision inherent in Regulation FD would inevitably hinder the voluntary flow of information.
The Release indicates the Commission's recognition that "materiality judgments can be difficult" and its being "mindful of the potential burdens of requiring instant materiality judgments to be made by those put in the position of responding immediately to questions." Nevertheless, the Commission states: "We believe that these concerns are significant but can be mitigated in several ways, many of which involve practices already in place at many issuers."
Although heartened by the Commission's recognition that these judgment concerns are significant, we respectfully submit that none of the practices mentioned in the Release mitigates these concerns in any meaningful way. First, the fact that issuers can and do "designate a limited number of persons who are authorized to make disclosures or field questions from analysts, investors, or the media" in no way lessens the difficulties faced by those so designated. Second, taping or keeping a written record of conversations may change the timing, but not the ultimate substantive difficulty, of making the "materiality" decision. Such a process, which is not widely followed, is likely to chill questions, answers and dialogue, particularly because of its potential use in regulatory proceedings and in litigation. Third, although it is true that company officers can decline to answer certain questions until they have had the opportunity to consult with others, this does not render materiality judgments any easier to make, may unintentionally signal something to the analyst, hardly facilitates open discussion, and in any event would delay the voluntary disclosure of information. Moreover, in some situations this may be highly undesirable or impractical, especially in the case of communications with members of the media, where there is often acute time pressure for the reporter to meet a deadline. Fourth, the Commission's suggestion that issuers could obtain limited-term confidentiality agreements from analysts, which is contrary to current practice, is not realistic; we doubt very much that many analysts would be willing to be put into this position. Finally, the fact that unintentional disclosures would have to be publicly disclosed "as soon as reasonably practicable" (but in any event within 24 hours), rather than "simultaneously" (which, in the case of unintentional disclosure, is impossible anyway), does not mitigate the practical difficulties of making judgments as to materiality.
Although it is true that dramatic improvements in companies' abilities to transmit information to the marketplace have generated greater demands for information, we question the soundness of the Commission's view that "it is unlikely, given the robust, active capital market, that the flow of information to the market will be significantly chilled" by the adoption of Regulation FD. Indeed, we think it is much more likely that the administrative burdens and practical difficulties of attempting to comply with Regulation FD and the ongoing risks of being second-guessed by the Division of Enforcement and private litigants would lead many companies to curtail their voluntary disclosures to outsiders. The existence of robust, active capital markets reflects issuers' ability to transmit information to the marketplace without undue fear of liability.
Although sensitive to the Commission's concern regarding investor confidence in the fairness and integrity of the securities markets, we note that the rapid and dramatic enhancements of technological capabilities and the voluntary changes in corporate disclosure practices already underway are likely to bolster investor confidence.
The revolutionary scope and character of the present technological transformation make this an especially inopportune time to impose intrusive regulation of companies' voluntary communications with financial analysts, the media and investors generally. Instead the Commission should monitor changes in companies' disclosure practices and continue to influence these developments by encouraging voluntary improvements in those areas of most concern to it.
Quarterly Conference Calls with Analysts
A company is not, and should not be, required to have quarterly conference calls with analysts following the public release of its quarterly or annual results of operations. We believe that such calls can be useful, however, and we urge that the Commission exercise care not to discourage this voluntary practice. Moreover, as noted in the letters of comments from the National Investor Relations Institute ("NIRI") (April 11, 2000) and the Securities Industry Association (April 6, 2000), the number of companies that open their conference calls to allow access to the media and individual investors has grown sharply during the last two years alone. Assuming the Commission wishes to encourage this trend, we believe it should do so by addressing some of the concerns of companies that do not yet provide general access to conference calls with outside financial analysts.
Two primary concerns have been the risk of increased exposure to liability and the risk that changing the composition of the audience would alter the character of the discussion. Traditionally, participation in these conference calls has been limited primarily to professional analysts who closely follow the company and its industry. These analysts have read the company's filings with the Commission and the filings of the company's competitors, as well as much other information, and they are knowledgeable about the company's business and its industry. They tend to ask sophisticated questions, which often involve general or industry-specific analytical concepts and technical jargon. These conference calls provide a fair and relatively efficient way for management to provide analysts equal access to the company's elaboration and explanation of the information in its press release and to respond to questions.
These conference calls are not, and should not become, tutorials for less sophisticated, less knowledgeable investors. The Commission should explicitly confirm that, for all purposes under the Federal securities laws and the Commission's rules, a company has no obligation to provide information, clarification or explanation on the basis that persons participating in the conference call (whether in listen-only mode or otherwise) may not be familiar with any information disclosed in the company's press release and in its prior filings with the Commission or may lack such knowledge and experience as would reasonably be expected of a professional financial analyst. Also, as part of its ongoing education of individual investors, the Commission should point out that analysts conference calls are not town meetings but rather are intended for a rather sophisticated and knowledgeable audience, and should caution investors to approach these calls with this in mind.
Level Playing Field for Analysts
We agree with the Commission that companies should not abuse their informational advantage in dealing with outside analysts. Although the extent to which this may be a real problem (as opposed to the unfounded assertions of a small number of disgruntled analysts) is not clear, we believe the Commission should encourage a public company's management not to discriminate against analysts who adopt a negative view of the company by denying these analysts' reasonable requests for specific information if the information has been or will be provided to other outside analysts.2 We support this position in the interests of fairness and in view of the important role of financial analysts in the flow and processing of information in the marketplace.3 We do not believe, however, that the Commission should go any further than this. For example, we do not think companies should be encouraged to volunteer information simply because another analyst asked for and received the information. Further, companies should not be discouraged from having one-on-one meetings with analysts.
Most important, we do not believe that management's dealings with outside financial analysts should be the subject of new rule-making. Government intervention in this area should be limited to application and enforcement of the anti-fraud provisions of the securities laws and the Commission's anti-fraud rules.
Other Problems with Proposed Regulation FD
Person acting on behalf of an issuer. The proposed definition of "person acting on behalf of an issuer" is inherently vague and overly broad. Applying Regulation FD to all conversations and other communications with outsiders by any employee "while acting within the scope of his or her authority" would go well beyond the concerns discussed in the Release, and would make it virtually impossible for companies to police all activities that might be covered. If Regulation FD were adopted, the communications covered should be expressly limited to those of senior officers (and their surrogates) who are properly authorized and designated to speak to the media, the analyst community and investors.
Eligibility for shelf registration. Eligibility for Form S-3 or F-3 and shelf registration under Rule 415(a)(1)(x) should continue to be based on compliance with the Commission's traditional mandatory disclosure requirements. If Regulation FD were adopted, the Commission should make clear that compliance with Regulation FD would not be a condition to eligibility for short-form registration and continuous or delayed offerings. Without this clarification, the already severe disincentives to providing voluntary disclosures would be even worse.
In conclusion, we urge that proposed Regulation FD not be adopted. We believe it would be much more productive to let companies and the markets adapt to the rapidly expanding technological possibilities unfettered by intrusive new requirements. To the extent that the Commission wishes to influence these developments, we agree with the suggestion made by others that the Commission work with NIRI and other private-sector groups that share the Commission's goals of improving corporate disclosure practices. In this regard, we would be pleased to provide whatever assistance the Commission or its staff believes may be helpful.
We appreciate this opportunity to present our views. If you have any questions or would like to discuss these or related matters, please contact Norman R. Nelson, General Counsel of the New York Clearing House, at 212-612-9205.
Very truly yours,
JEFFREY P. NEUBERT
THE NEW YORK CLEARING HOUSE ASSOCIATION L.L.C.
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 J. Goldschmid, Consultant to the Chairman
Richard A. Levine, Assistant General Counsel
Sharon Zamore, Senior Counsel
Elizabeth Nowicki, Attorney
1 The members of The New York Clearing House Association L.L.C. are The Bank of New York, The Chase Manhattan Bank, Citibank, N.A., Morgan Guaranty Trust Company of New York, Bankers Trust Company, HSBC Bank USA, Fleet Bank National Association and European American Bank. The parent companies of our members issue securities in the public markets, and broker-dealer affiliates of our members employ analysts who issue reports on numerous companies.
2 An exception should be made, however, for analysts who engage in unfounded or otherwise inappropriate personal attacks or who use inappropriately inflammatory language.
3 In the Release, the Commission notes: "With the availability of ... new technologies, issuers can much more easily reach a wide investor audience with their disclosures, and do not need to rely on analysts as heavily as in the past to serve as information intermediaries." This may be true as far as it goes, but we believe it understates the continuing importance of outside financial analysts, because most investors do benefit, and will continue to benefit, from the efforts of outside analysts. Most investors (especially small investors) simply do not have the time (or, in some cases, the experience) to duplicate the research, investigation and analysis performed by highly skilled professionals. Although we strongly favor greater disclosure to the marketplace, we note that substantial increases in available information may in some respects actually increase the importance of intermediation.