Outlaw Selective Disclosure? --- Yes, Markets Must be FairWall Street Journal; New York, N.Y.; Aug 10, 2000; By Robert J. Shiller;
Abstract:
It also didn't spring up naturally. The SEC had to be invented, and many details worked out.
The SEC is a peculiarly American invention, now widely admired and copied around the world.
Its intellectual origins lie in the works of a number of influential thinkers who wanted to see
financial markets serve their stated purpose as efficient allocators of capital and as genuine
savings vehicles.In its early years, the SEC sometimes showed hostility towards business. In 1937 Chairman
William O. Douglas (who also later became a Supreme Court justice) spoke of "the exploitation
and dissipation of capital at the hands of what is known as `high finance,'" and referred to
many business people as "financial termites." But, as years wore on, there arose a sense of
cooperation between business and the SEC.It's important for the SEC's regulations to keep pace with the development of information
technology. Part of the motivation for Regulation FD has to do with the advent of the
Internet. Web technology has made the Internet conference call possible. Now, hundreds of
thousands of people can listen in while analysts have their meeting with firms' officers. Firms
can put information immediately up on their Web sites. Firms can electronically file new
material information with the SEC, which in turn will put this up on its Edgar database on the
Web.
Full Text:
Copyright Dow Jones & Company Inc Aug 10, 2000
Today the Securities and Exchange Commission will hold a hearing on Regulation FD. The proposal
would require that when public firms release material information to analysts, they also immediately release
the same information to the public. The regulation would prevent analysts' customers from trading on the
information before others do, an unfair advantage. The proposed regulation is an excellent idea, and ought
to be adopted.Yet it has not been well received by many companies' investor relations officers, who are concerned with
yet another SEC regulation they must follow. They say that the regulation may have a chilling effect on the
dissemination of information. If the risk of making an error subjects them to potential enforcement actions
from the SEC, they might just not be as forthcoming.It's true that the SEC has many regulations and rules that must seem like nuisances. And the complex rules
are often frustratingly ambiguous. In the case of Regulation FD, there is fundamental ambiguity as to the
definition of "material" information. Reasonable people can certainly differ on what kinds of things help
them forecast performance.Indeed, some people question whether there should be any rules against insider trading at all. Is such
trading really unfair? Fairness is a slippery concept. You might say that any securities trading is "unfair"
whenever one party has more information than another, and yet no one proposes a general law against
such trades. It's also true that insider trading could conceivably work toward making market prices more
accurately reflect information, and thus be better signals for the allocation of resources.But slippery as the concept of fairness may seem, it certainly requires rules like Regulation FD. The public
has inferred a promise that they will have equal access to material information, and we must ensure that
this promise is kept.The enormous liquidity and integrity of U.S. financial markets is unsurpassed in the world. Roughly half of
all American adults are owners of stocks, directly or indirectly. The high public involvement is testimony to
public trust in these markets. This trust is a precious thing that cannot be won back quickly if it is ever lost.It also didn't spring up naturally. The SEC had to be invented, and many details worked out. The SEC is a
peculiarly American invention, now widely admired and copied around the world. Its intellectual origins lie
in the works of a number of influential thinkers who wanted to see financial markets serve their stated
purpose as efficient allocators of capital and as genuine savings vehicles.Notable among these thinkers was Louis Brandeis (later a Supreme Court justice), who, in his 1914 book
"Other People's Money," spoke of the central importance of open disclosure of company information to
the public. "But the disclosure must be real. And it must be a disclosure to an investor. It will not suffice to
require merely the filing of a statement of facts with the Commissioner of Corporations or with a score of
other officials, federal and state. That would be almost as ineffective as if the Pure Food Law required a
manufacturer merely to deposit with the Department a statement of ingredients, instead of requiring the
label to tell the story."Brandeis' influential book was one of the factors that ultimately led, 20 years later, to the establishment of
the SEC.In its early years, the SEC sometimes showed hostility towards business. In 1937 Chairman William O.
Douglas (who also later became a Supreme Court justice) spoke of "the exploitation and dissipation of
capital at the hands of what is known as `high finance,'" and referred to many business people as "financial
termites." But, as years wore on, there arose a sense of cooperation between business and the SEC.Now businesses routinely and voluntarily go beyond its requirements.Most large businesses today are in
full compliance with proposed Regulation FD, even before it has been approved.It's important for the SEC's regulations to keep pace with the development of information technology. Part
of the motivation for Regulation FD has to do with the advent of the Internet. Web technology has made
the Internet conference call possible. Now, hundreds of thousands of people can listen in while analysts
have their meeting with firms' officers. Firms can put information immediately up on their Web sites. Firms
can electronically file new material information with the SEC, which in turn will put this up on its Edgar
database on the Web.It is no longer true that the best way for firms to reach large numbers of investors is through the analysts
and their customary communications to investors. The new technology puts us in an entirely different
world.While Regulation FD does not specify a particular method of making information immediately known to
the public, these Web methods are the logical ones we can expect. With Web technology, we can make
new material information known to all investors simultaneously. The new technology shifts the fair dividing
line between private and public information.---
Mr. Shiller is a professor of economics at Yale's International Center of Finance and author of "Irrational
Exuberance" (Princeton University Press, 2000).