Twenty years ago, Regulation Fair Disclosure fundamentally changed how issuers, investors and bankers interact, elevating the IR profession in the process. Mike Schnitzel reports
If you’ve picked up an issue of IR Magazine or been to an investor relations conference during the last three years, you’ll be aware of the time spent discussing Mifid II. As a profession, we’ve spent countless hours and column inches discussing the lasting effects of the EU’s regulation on corporate access, sell-side compensation and targeting. But Mifid II had a predecessor and this year marks the 20th anniversary of Regulation Fair Disclosure, the US ruling that fundamentally changed banking research, issuers’ disclosures and the nature of investor meetings.
Reg FD enshrined the principle that all investors or potential investors should have access to the same information at the same time. In doing so, it closed back channels and altered cozy relationships that previously existed between banks, executives and investors. It created the template for the investor meetings that are organized today and appointed IR professionals as the internal enforcers of staying onside – only disclosing publicly available information. By this time, investor relations had emerged as a distinct entity, separate from financial communications. But Reg FD suddenly placed IR professionals in the same room as their CEO, CFO and extended management team, outlining what’s been disclosed and how it can be discussed at events and meetings.
Democratizing the flow of information Reg FD democratized the flow of information, according to Mark Aaron, former vice president of investor relations at Tiffany & Co. ‘Reg FD leveled the playing field: communication had to adhere to certain standards and guidelines of what the company had already disclosed,’ he explains.
Aaron says there was a lot of consternation among IR professionals when the regulation was first implemented because they worried that they could never again sit down with investors and share information with them. The legal departments of companies were up in arms and causing IR professionals further headaches because of their worries over what could and could not be disclosed under the new rules.
Many IR professionals thought they could no longer tell investors anything of substance, which Aaron dismisses. ‘I would talk to lots of people about a lot of meaningful things at Tiffany, but it was already disclosed,’ he says. ‘I could deviate from the standard talking points, as long as I wasn’t disclosing anything non-public and material. I wasn’t going to tell anybody anything that other people didn’t know.’
Managing the message Aaron alludes to the notion of ‘managing the message’, a central tenet of investor relations. He points out that if he’s talking to growth or value investors, he knows they have a certain perspective and he will shift the conversation that way, which may lead to a different conversation from one he might have with a hedge fund. ‘But I’m still not going to tell them anything that hasn’t already been publicly disclosed,’ he reiterates.
Carol Murray-Negron, president of Equanimity and former vice president of investor relations at Avon, says sell-side analysts were deeply affected by Reg FD because it gave IR professionals cover not to comment. ‘The analysts did not bug us the way they did before,’ she says. ‘They would previously feel free to call us and bug us about things we couldn’t answer. But after [Reg FD], there was a real drop-off in those kind of queries. People were less casual, and there was more formality in how we managed the information flow.’
Murray-Negron says IR professionals were quickly given the responsibility of knowing what has been disclosed and keeping everyone on track. ‘It wasn’t a major change in the kind of info we made public – it just made it easier for us to say, No comment than it had been before,’ she says.
There were still inconsistencies in the way information was delivered and, Aaron says, some investors tried to find ways around the regulation at first. For example, at conferences, IR officers need to make sure there is an accessible webcast of the CEO or the CFO talking to adhere to Reg FD disclosure rules.
‘But right after these presentations, you go into a breakout session and there are no webcasts,’ Aaron says. ‘That’s where some investors would try to ask probing questions without a large audience. Of course, we knew how to answer it or not answer it. That’s where the CEO, CFO and IRO really needed to be on their toes.’
Onstage with the CEO or CFO at a conference and with people asking questions, the IR officer takes on the ‘traffic cop’ role. ‘I had to know everything that we had disclosed,’ Aaron says.
The Wild West and analyst brain drain Prior to Reg FD, sell-side analysts who had close relationships with management would typically receive information earlier than others, according to Andrew Shore, managing director at Moelis & Company, who describes the days before Reg FD as akin to the Wild West.
‘Those were the days where you literally dialed the IR person or the CEO or CFO and hoped you got the information before another person,’ he recalls. ‘Imagine being the first one to get through to that person on the phone; if you were one of the earliest ones on, the goal was to keep the CFO or CEO tied up. If you were on the phone with that person getting all your questions answered, you had a 20-minute window – or a 40-minute window – where you were the only person with that information.’
Once Reg FD was implemented, analysts really had to dig for information, Shore says. Prior to Reg FD, there were typically a few analysts who covered two or three companies, but knew everything about them. Once Reg FD was implemented, the quality of research had to start paying for itself, Shore explains: analysts had to start covering more companies to pay the bills, so now there were analysts who knew about 20 or 30 companies, but they didn’t know as much about them.
‘When banking was no longer able to subsidize research, the older, more tenured, more highly paid analysts immediately went to start hedge funds or do other things,’ Shore says. ‘It was an enormous brain drain. The buy side started to [build out its own] research, so instead of knowing a lot about a few companies, analysts started knowing a little about a lot of companies. And you started competing with the buy side, because your information wasn’t as valuable anymore.’
Terms of engagement As far as meetings and corporate access went, bankers used to have an ‘ace up their sleeve’ of favored analysts, according to Mark Pellegrino, CEO of CorpAxe. Reg FD forced bankers to find a way to stay close to companies as the terms of engagement changed.
‘Reg FD was one of the main catalysts that led to companies wanting stronger relationships with their shareholders,’ Pellegrino points out. ‘As management teams increased their direct interaction with the investment community, these meetings became a necessary component of the investment process for most active money managers, and spawned an entire industry within the broker community known as corporate access.’
As issuers grappled with the new reality of how to communicate consistently to a large and diverse shareholder base, they came to favor participation in larger investor gatherings. ‘We had more small gatherings with major investors before Reg FD rather than the huge investor meetings we tended to have after,’ Murray-Negron says. ‘It wasn’t so much that information changed; it was more a shift in access that made us wary of small group meetings.’
Pellegrino adds that Reg FD went a very long way in terms of democratizing information. ‘Today, it is very hard for portfolio managers to consistently outperform their benchmark, or try to find an information edge,’ he says. ‘I think this is due to the even flow of information available in the market and, in that sense, I think Reg FD has accomplished one of its main objectives.
‘Both investors and their partners in compliance take the exposure to material non-public information (MNPI) extremely seriously. If an investor is somehow accidentally exposed to MNPI, compliance will ringfence that person, and his or her positions, until the company can disclose the information to the broader market. It is a rare occasion, but there are very clear rules to follow in the event that it does. Being on the receiving end of MNPI is not something an investor wants to happen.’
The standardization of disclosure One unintended negative consequence of Reg FD is that it has led to a relatively pro-forma approach to corporate reporting, according to James Naughton, an associate professor in the accounting area at the University of Virginia, Darden School of Business.
‘It lays out a set of rules that [information disclosure] has to be broad and non-discriminatory,’ he explains. ‘So now, all firms basically do the same thing. For the most part, if you do something that’s very different, a law firm is going to [tell you that] the SEC will identify it as a problem.
'So companies just hug each other: there’s this herd mentality when it comes to disclosure. The negative intent is that there is also a mentality of, It’s easier for me to say nothing rather than say the wrong thing. So some firms reduce the information available about them to the market. If there’s less information out there, capital is allocated less efficiently.’
In a study Naughton co-wrote entitled ‘The chilling effect of Regulation FD: Evidence from Twitter’, he notes that there was no accounting for technological changes and their effects on the communication methods firms would be able to use. In the study, the authors question whether we would see a difference in the way social media is used by companies if Reg FD allowed them to use it in the same way individuals do. Naughton says that depends on how Reg FD applies to the different channels of social media.
‘The SEC says you can use Twitter and social media as long as you tell investors you’re going to,’ he says. ‘We saw that once the SEC said it was ok to use Twitter, companies started using Twitter. This shows that Reg FD constrains the flow of information.’ He says the big picture concern is that, on the whole, there might be better information out in public if Reg FD wasn’t constraining what companies wanted to do in terms of communicating through social media.
Overall, IR professionals agree that Reg FD changed IR in a positive way. In the same way that Mifid II has been held up as an instigator for IR teams to play a more active role in their investor targeting, Reg FD put IROs in the room where the disclosure happens.
‘What Reg FD did was to get everybody to focus on the importance of effective, thoughtful, credible communications,’ Aaron said. ‘It forced people to do IR the right way, and doing it the right way can still include a plethora of information to be disclosed thoughtfully and strategically. You just don’t cross the line and start favoring one person over another.’
