The FD Effect

The SEC's new corporate disclosure rule has CFOs saying more and talking less.

Others have gone so far as to blame the new regulation for a record number of negative preannouncements of earnings–nearly 800 in the fourth quarter. Because analysts are less likely to be told on the QT to shade their estimates, companies must go public when their earnings are off-target. Such surprises tend to make stocks move more dramatically.

“Analysts will tell you that companies are much less forthcoming,” says Stuart Kaswell, a senior vice president of the Securities Industry Association (SIA), a trade group in New York and Washington, D.C., for Wall Street firms. “The chill has occurred exactly as we predicted.”

If that can be proven–the SEC and the SIA are conducting research on the effects of FD–such fear-mongering could become the basis for efforts to lobby Levitt’s successor to rescind the new rule. “There is no assurance that the people who lost the battle to stop FD will not try to roll it back,” says Jay Perlman, associate general counsel of The Motley Fool, a Web site for individual investors that has rallied its members in support of FD.


In the meantime, Reg FD has been subtly reshaping the disclosure landscape in ways that will likely be permanent, no matter what happens in Washington. Here’s how.

Guidance. Finance chiefs and IR specialists have found FD to be strangely liberating. Like Diebold, many of the companies contacted by CFO have started to comment in their public disclosures on future quarters. Doing so permits executives to reiterate these projections in conversations with analysts and investors, yet avoid the verbal sparring about the accuracy of the Street’s expectations.

“The more you can release, the more you can talk about that information,” Geswein observes. “Before, analysts would ask us if we were comfortable with their range [on Diebold's estimated earnings]. Now we give them our range.”

Nevertheless, finance chiefs continue to face that dreaded end-of- the-quarter question: How are things going? “Analysts still ask that question constantly, but the safest approach is to say nothing,” says Kevin Michaels, CFO of Powerwave Technologies Inc., an Irvine, California, manufacturer of wireless equipment. “It cuts down on the reasonable flow of information, but the fear is that the most innocuous thing might be construed as a selective disclosure.”

But there is a difference between being more cautious about what is said and using FD as an excuse to clam up. Most notably, Gillette Co.’s board told executives to stop providing short-term forecasts in order to shift investor focus to the company’s long-term strategic goals. In light of FD, the board’s concern, as Gillette president Edward DeGraan put it during a conference call in January, “was moving us off of a quarterly beat and getting too involved in the guidance process.” That Gillette has come in below analyst expectations for several quarters may have also been a factor.

Private Meetings. CFOs say they remain willing to speak privately with analysts and investors, but are scrupulously refraining from saying anything about the current quarter. (FD gives companies 24 hours to put out a public statement if there is an accidental release of market-moving facts to a few.)


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