The past five years of changes in disclosure and what lies ahead.
The SEC launched Regulation Fair Disclosure (Reg FD) on October 23, 2000 and opened a new era of information dissemination by public companies in the US and globally. Less than two years later came the Sarbanes-Oxley Act of 2002, reinforcing the message that we're living in a whole new world of corporate disclosure.
Arthur Levitt, chairman of the SEC from 1993 to 2001 and now senior adviser at the Carlyle Group, says Reg FD exceeded his expectations. 'I thought there would be a lot of resistance, mostly from the brokerage community,' he says. 'And I didn't think the corporate community would be as supportive as it has been. Companies have begun
to respect the principles behind Reg FD rather than merely going along with the rule. They've embraced the underlying philosophy of making relevant information available to everybody at the same time.'
According to Lou Thompson, president and CEO of the National Investor Relations Institute (Niri), which worked with the SEC on Reg FD, the rule eliminated a formerly prevalent fear that the exchange of information between companies and other companies – or between companies and the Street – wasn't as open as it should be.
Fears about the rule itself – that Reg FD would chill the dialogue between companies and the investment community – proved unfounded. Of the more than 2,200 companies represented by Niri's membership, 97 percent still hold one-on-one meetings with investors and analysts. 'After five years, Reg FD is well incorporated into companies' disclosure policies and practices, and IROs are careful to avoid that trap,' Thompson says.
Along with a 2002 investigative report against Motorola, the SEC has made six Reg FD enforcement cases against listed companies: Siebel Systems, Raytheon and Secure Computing in 2002; Siebel Systems again in 2004; Schering-Plough in 2003; and Flowserve in 2005. In an interesting turn of events, federal Judge George Daniels dismissed the most recent SEC case against Siebel Systems on August 31 after deciding the regulator was too aggressive in its interpretation of Reg FD.
Along came Sox
If Levitt was the father of Reg FD, Brian Lane was the architect as head of the SEC's division of corporation finance. He's now a partner at Gibson Dunn & Crutcher.
'One of the toughest issues I'm tackling these days is non-Gaap measures,' Lane says. 'The greatest push-back I have often comes from the head of IR who may feel the SEC is out of control. The argument is that people won't understand the business without these non-Gaap measures and the market will punish the firm.'
In some ways, the Reg FD 'chill' that never materialized instead came with the debate over non-Gaap or pro forma numbers. Lane recalls that in 1999, well before the advent of Sox, SEC officials were speaking about how non-Gaap numbers could be misleading when included in earnings releases and other announcements.
In January 2002 the SEC hit Trump Hotels & Casino Resorts with a cease-and-desist order for announcing a pro forma profit number without revealing that it excluded one-time charges but not one-time gains. 'That was the first benchmark for the regulatory changes that would follow,' Lane says.
Those rule changes came with both Sox in mid-2002 and, in January 2003, Regulation G, which dictates that any non-Gaap number in an earnings release has to be accompanied by – and reconciled to – the closest possible Gaap number.
The debate is still going on. The SEC says non-Gaap measures are misleading to investors because they can make a company's situation look better than it really is. Companies want to be able to come up with alternative measures that better gauge their real performance. 'There will always be this shadow, as there should be, of government authority on IR professionals in deciding what to disclose,' Lane comments.
Beyond the numbers, companies are being strongly urged by the SEC and the exchanges to disclose anything and everything that could affect their performance, from creeping interest rates and high fuel prices to property casualty given the high rate of natural disasters in recent years. 'IROs have to be cognizant of how issues relevant to their company now and in the near future will affect their businesses,' Lane observes. 'Doing a better job on the MD&A involves helping investors understand the trends and uncertainties that are facing the company.'
An IRO needs to be able to ask the senior management team what has it worried and these worries, along with coping tactics, need to be discussed and disclosed to shareholders. In the last few years the SEC has been cracking down on accounting, with few enforcement cases directly affecting IR. Now, says Lane, keep an eye out for pending SEC investigations into disclosure. 'If something isn't disclosed right, your friendly SEC will be happy to teach you the error of your ways,' he concludes.