The bank just wasn't sure of exactly what the new ruling, the SEC's Regulation FD, would allow or disallow. The rule says that all "material" corporate information would have to be made available to the general public simultaneously with its distribution to anyone else."We had to pull back a little bit while we tried to understand the implications," says Jay Gould, senior vice president of investor relations at the Chicago-based bank. "The immediate reaction from inside and outside counsel was: 'Let's study the new rule a little bit more.'"
But issues shortly began to become clearer, and Bank One quickly resumed meeting with analysts in "small groups or one-on-one," he says.
The scenario was similar at most banks across the country, as they began seeking to comply with the regulation even before it became effective on Oct. 23.
The regulation allows banks and other publicly traded companies to make as much information about themselves available as often as they want. The SEC insists, though, that important information--the kind that could affect the price of a company's stock--be disseminated broadly and simultaneously.
Not surprisingly, the new rules have not been greeted happily by Wall Street analysts. The impact, says Brock Vandervliet, an analyst at Lehman Brothers, is that he's getting "lower quality guidance" from banks.
And David Berry, head of research at Keefe Bruyette & Woods in New York, says banks are less forthcoming since Reg FD was announced, and that his firm has noticed "a material change in the nature of our conversations with them."
Bank One, along with other banks surveyed by U.S. Banker, are changing the way they disseminate corporate information. They are increasing their use of the Internet and conference calls to let anyone listen in on their discussions with analysts.
Some critics of the measure complain that, for practical reasons, it will force them to report material information only once every quarter. But the SEC says if a bank wants to, it can issue a press release on earnings estimates every day of the year. More likely, though, some observers say, banks will release earnings forecasts and any other information about itself early in the quarterly cycle.
Bank One, for instance, will make its press releases "more robust" and its teleconference calls more informative, says Gould, who is a board member of the National Investor Relations Institute, a trade group for corporate chief financial officers and investor relations specialists.
"You'll see significant communications efforts at the front end of a quarter," he says. "What you say during the second half of a quarter remains uncertain." Gould adds that, overall, Reg FD is "a good thing" because it will provide a level playing field."
Wells Fargo Corp. says it has begun posting visuals from its analyst presentations on its Web site. It has also expanded the narrative portion of its quarterly earnings release to include more information about performance.
Albert Potas, senior vice president for investor relations at Old Kent Bank in Grand Rapids, MI, suggests that some companies "may cut back on the amount of information until they get more comfortable." As for Old Kent, "there will certainly be some behavioral changes," he says. As regards release of information about the company, "it's going to be carefully thought about, but in many cases, there probably won't be much of a change."
At the same time, just about all bankers deny they ever did anything that would have warranted the SEC issuing Regulation FD.
Those questioning the necessity of the rule point to the relatively large amount of information available to all investors with the advent of the Internet, suggesting that companies didn't need a new regulation to prod them to do what they were well on their way to doing.
But, the SEC has been suspicious of companies in general, not just banks.
If publicly traded companies are not giving material information to analysts, why should the press be excluded? If analysts are not given privileged guidance from management, why meet with them privately? Why, after such meetings, do the analysts prepare reports for their clients that often move markets?
"There were too many instances where companies felt that selective disclosure was appropriate and engaged in it," says Anita Klein, senior counsel to the director in the SEC's division of corporation finance. "The Commission felt it needed to make clear that selective disclosure was not acceptable, was not fair, and, with Regulation FD, not legal."
The SEC also cites what it considers to be the too-close relationship between corporations and analysts, viewing it as a threat to the integrity of the markets. The agency refers to "the potential for corporate management to treat material information as a commodity to be used to gain or maintain favor with particular analysts or investors." The agency also notes that past "reports that analysts who publish negative views of an issuer are sometimes excluded by that issuer from calls and meetings to which other analysts are invited."
Whatever the case, analysts are unhappy with the turn of events.
"We didn't need Reg FD," says Stuart Kaswell, a senior vice president at the Securities Industry Association, the main trade group for the Wall Street research firms.
Certainly, the job requirements for analysts have changed, since any in that group who depended heavily on exclusive information from companies will be forced to adopt a different approach. "A lot of analysts who have over-relied on company guidance are probably scratching their heads wondering, 'What do I do now?'" says Bank One's Gould.
"Guidance" given by corporate managers to favored stock analysts can be highly detailed.
"A company would sometimes take you right to EPS in terms of saying to the analyst, 'Well, we are comfortable at 46 cents but not at 45'--something that precise," says Vandervliet, the Lehman Brothers analyst. He believes that the new rule will definitely make it "more difficult to forecast."
Gould says a big surprise in the final rule relates to earnings guidance. The SEC says that it's okay early in a quarter for a company to predict how much it expects to earn that quarter, as long as it makes the information available to everyone at the same time. Then, the company would be allowed to make the same forecast privately to an analyst or a handful of analysts a few days later.
But, under the new rule, the company would not be allowed to reaffirm that prediction to a select few later in the quarter. Gould says the difficulty is that the SEC doesn't say specifically how much time can pass before such reaffirmation would have to be made to the public.
Critics say Reg FD will result in increased volatility in stock prices. The reason: Previously, a company could "prepare" the market for bad news by quietly informing a few favored analysts, who then would discreetly pass the word to their prominent clients. Now that company must tell the whole world at once. When the news is bad, that is akin to dropping a big rock in a still pond.
A notable example of this occurred in September, when Intel issued a press release announcing that earnings estimates would fall short of expectations. The next day the stock lost 20% of its value."We've said for a long time the cure would be worse than the disease," says Kaswell.
He says the rule makes little sense in its guidelines for the way information can be doled out. "You can ask the guys on the loading dock what's going on at their company, but you can't ask the CEO."
Wall Street analysts may not like FD, and bankers may be uncomfortable with it, but it is wildly popular with the smaller investor.
In commenting on the SEC proposal, one such investor wrote: "I can only laugh when I hear investment bankers tell the public that a rule such as this would harm the investment public. The only thing Regulation FD will harm is the unfair advantage the large investment banks have over the rest of us."