Reg. FD and the Law of Unintended Consequences

It used to be in the good old days (some would say bad old days) stock analysts saw a goodly percentage of their job as talking to and cultivating relationships with management. The classic example of this is the analyst I refer to as the “Information Vampire” who would talk to management until they felt they had sucked every last drop of information from them. The thought process was that by building a relationship, the analyst would pick up enough tidbits of information to give them an advantage over the average investor, and because management liked them, they might let the analyst know something important before everyone else, either in a one on one meeting or by being the first phone call they made when news is breaking. On such things careers were built on Wall Street.

Then along came Regulation Fair Disclosure, in which the SEC mandated that if a company is going to say something important, it has to tell everyone at the same time. It doesn’t matter if you are best buddies with the analyst who has followed you through thick or thin or if a portfolio manager had been a loyal shareholder for many years. The reasoning was that the securities markets need to appear to be a level playing field for all concerned, regardless of whether you are a professional money manager with $50 trillion in assets or you are a retail investor looking to buy 100 shares of stock. (This is very much the same type of governmental thinking that gave us the Robinson-Patman Act prohibiting price discrimination between customers, but that’s a subject for another day.) The SEC then proceeded to announce a series of enforcement actions to drive home the point that you can’t just go off and blab to institutional investors. They never actually won a court case on the subject, but they made their point and companies toed the Reg. FD line.

This, of course, did not stop Wall Street’s desire for an information edge. We are, after all, talking about an industry with serious amounts of money at stake. It just meant that the quest for information went elsewhere. Hence today, courtesy of Reg. FD, we have at least two new types of information hunters on the scene.

The first of these is the “Channel Checker”. This is a person who specializes in cultivating a network of industry sources, be they lower level employees of the company, suppliers, customers and competitors. They usually don’t talk to the company very much, if at all. This type of analyst has always been around, but since the advent of Reg. FD have increased in number as they try to supply investors with they type of information edge they can no longer get from the company.

The second type of information provider that has gained more prominence since Reg. FD has been the expert network systems. These are organizations that have created data bases of people with expert knowledge on particular subjects. Then, when an investor needs to get up to speed quickly on a subject, whether it’s current inflationary trends in the footware industry in China or the likelihood of a drug getting through the FDA approval process, there is someone out there, that for a fee, will expound on the subject. (Disclosure: On occasions, I have been retained by expert networks to discuss things about which I have knowledge.)

Companies, of course, don’t like either one of these developments, as they can’t control the information being disclosed or put any spin on the story. In and of themselves, the channel checkers and expert networks are not a bad thing, they are just different sources of information. It’s just that the SEC shouldn’t kid themselves into thinking that Reg. FD has made the information the same for everybody. It just means that professional investors have to redirect their efforts as to how they get it and how they pay for it.