April 28, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20549.
Re: Proposed Regulation FD - File No. S7-31-99
Dear Mr. Katz:
Sanford C. Bernstein & Co., Inc. (Bernstein) is pleased to submit this response to Release No. 33-7787 ("Release") concerning proposed Regulation FD.
Bernstein is a dually-registered investment advisor and broker-dealer. The firm was founded in 1967. For more than three decades, Bernstein has had a singular commitment to excellence in investment research. Currently, Bernstein manages over 80 billion dollars of clients' assets. In addition to being one of the preeminent investment-management firms, Bernstein is also a leading independent investment-research firm. We provide in-depth industry and company research as well as portfolio strategy and trading services to large institutional investors, such as mutual funds, pension managers, banks and insurance companies. A number of Bernstein analysts are recognized as leaders in their areas of coverage in polls conducted by acknowledged industry surveys, e.g., Institutional Investor, Greenwich Research and Reuters.
Accordingly, our comments regarding proposed Regulation FD reflect our dual perspective, as an institutional research firm and an institutional investor. In that joint capacity, we employ some 140 research analysts covering thousands of companies all over the world.
As stated in the Release, there is no change in the definition of what constitutes "insider trading". Rather, we are dealing with a rule-created duty to publicize "material" information (1) simultaneously in the case of "intentional" disclosure to "outsiders" and (2) promptly in the case of "non-intentional" disclosure to "outsiders".
The Commission says in the proposing Release: "We do not believe that selective disclosure of material nonpublic information to analysts ... is beneficial to the securities markets." We agree. Under current law, selective disclosure of material inside information is prohibited. And, if, in fact, an issuer inadvertently shares material inside information with an analyst, remedies exist, including the issuer's choice to make a public announcement. Alternatively, under present law, if an issuer determines not to make an announcement for a period of time, during that interval, an information barrier may be placed around the analyst to prevent any illegal trading or tipping of the information to others who may trade. Proposed Regulation FD however, would mandate immediate public disclosure as the only remedy. We are greatly concerned that issuers will refrain from communicating with analysts to avoid this potential liability of mandatory disclosure. As a result, there will be a significant chill on the flow of information between issuers on the one hand and research analysts or institutional investors on the other hand. Let us explain why.
In the case of any written disclosure of information, an issuer, in consultation with counsel, may craft the disclosure carefully, seek to determine whether it includes nonpublic material information and, if so, issue a press release. However, most would agree that when an issuer engages in dialogue with one or more research analysts, we are presented with a very different situation. Management will inevitably receive unanticipated questions. Management may well know the answer but not know whether the information is "material". And as the Commission itself acknowledges, "materiality judgments can be difficult."
Since there are no safe harbors or exceptions, and the issuer would be required to disclose information it thought in retrospect might be material, management is likely to simply decline to answer any questions or even meet with individual analysts for fear of the consequences. This would be the only way to prevent against premature public disclosures that may have grave and negative impact. For example, a hasty, untimely announcement of a pending merger in the final but not complete stages of negotiation is likely to kill most deals.
We believe that the proposal will result in issuers declining to engage in dialogues with individual analysts or small groups of analysts and instead insisting on sessions at regular intervals open to a number of analysts, with listen-only access to the media and the public. These are likely to take on the orchestrated character of a Presidential news conference in which members of the audience are authorized to ask one question, and perhaps a short follow-up question, but not a series of questions in dogged pursuit of the facts. Undoubtedly, the questions from the different participants will not be coordinated or follow in any logical order or comprehensive way. Due to fierce competition among analysts to obtain the best information, they will be reluctant to ask questions in an open session that tip off their competitors as to the direction of their thinking or information that they think would be meaningful. If the questions cannot be asked in private, they may not be asked at all." Is that good for the market?
It hardly needs saying that analysts perform a necessary and very valuable function in the U.S. capital market. But it does need to be said that analysts cannot do their work nearly as well as they do now if they are forced to do their work, at least when it comes to interaction with issuers, collectively - in a pack. Yes, they can elicit some facts, they can eliminate management "spin", they can bring their expertise to the analysis, and they can give the markets rapid guidance as to the significance of new information, thereby mitigating individual knee-jerk reactions to specific information.
But it is also the few analysts operating independently of, and in competition with, each other that can relentlessly pursue an independent line of inquiry and ferret out negative information that management would rather not disclose or would prefer to disclose at a time of its choosing and with its own spin. They can glean information from changes in the level of confidence (sometimes evidenced in subtle ways such as changes in choice of words or tone of voice) over a series of telephone conversations or face-to-face meetings. They can test their hypotheses by comparing information about different issuers in the same industry or sector. This kind of work results in more continuous disclosure, fewer surprises and less volatility. The marketplace itself provides incentives for such diligence, for it is the diligent analysts who acquire an in-depth understanding and get to the market first that under the current system reap the reputational and financial rewards. Leveling the playing field for analysts, as among themselves and vis-a-vis the general public, will undermine the great advantages of the current system.
In summary, we believe that the majority of issuers will curtail the current level of communications with research analysts and institutional investors. This widespread informational "brown-out" will significantly reduce the flow of information to the marketplace in general - a consequence we can't believe the Commission intends. Accordingly, we strongly urge withdrawal of this proposal.
Bernstein very much appreciates this opportunity to present its views. Should you have any questions, please feel free to communicate with Jean Margo Reid, our General Counsel, at (212) 756-4164.
Very truly yours,
Lewis A. Sanders
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