After the market crash of 1929, many regulators and investors realized that

market manipulators, with their access to nonpublic information, seemed

to undermine two of the key tenets of capitalism and democracy: fair play

and a level playing field. In 1934, Congress created the Securities and Exchange

Commission to establish and enforce rules for the financial exchanges

and companies that would keep the capital markets fair and open.

For the past 70 years, the SEC has regulated the markets and monitored

corporate merger, acquisition, and finance activities to protect investors. All

of these activities enforce the umbrella creed that companies must disclose

any material information, and this disclosure cannot, by statement or omission,

be false or manipulative. Material information is generally defined to

mean anything that would affect the understanding and decision making of

an investor—that is, anything that would cause a rational investor to act.

The declining stock market of 2000, 2001, and 2002, and the unethical

behavior of several investment banks and CEOs, brought several issues to

light and drove the SEC and Congress to create regulations to promote clarity

of information and equal access to that information. Regulation Full Disclosure,

Reg FD, established in 2000 by the SEC, attempted to create a level

playing field for all investors while the Sarbanes-Oxley Act, passed by Congress

in 2002, required transparency and accountability from corporations.

MATERIAL INFORMATION

Corporations must understand and determine what information the investing

public deems to be material. Obvious material information includes fi-

*Note: Readers seeking specifics on securities law should seek advice from securities

professionals. This chapter is provided only to highlight the new rules and regulations

as they pertain to strategic IR and it does not, in any way, constitute an accurate

legal reference.

nancial events (such as earnings news, financial restatements), operational

activities (such as acquisitions, joint ventures, research developments, new

product introductions), management news (such as executive changes, insider

sales), and regulatory announcements (such as new rules, approvals,

and rejections). However, material information is not limited to these items,

so management must be prepared, along with legal and IR, to determine materiality

on an ongoing basis—in other words, which information or events

must be disclosed to the investing public.

According to Section 409 of the Sarbanes-Oxley Act public companies

should disclose “on a rapid and current basis, such additional information

concerning material changes in the financial condition or operations of the

issuer.” As the SEC hones in on improving disclosure, IR must step up to

guide management through the process. IR should develop a disclosure template,

and when in doubt, the company should be conservative and assume

almost any event is material. Along with IR, however, management must

also show some degree of restraint in terms of releasing too much news to

the financial wires. This can come across as promotional and adversely affect

management credibility.

TO ONE AS TO THE MANY

Information is disclosed, buyers and sellers trade on this information, and

the price of the stock, in theory, moves either up or down to a new value

 “Material information” is not defined under federal securities laws,

according to the SEC. Materiality was defined in TSC v. Northway,

Inc. In that case, the court stated, in part, that a fact is material where:

“[T]here is a substantial likelihood that a reasonable shareholder

would consider it important in deciding how to vote. . . . It does not

require proof of a substantial likelihood that disclosure of the omitted

fact would have caused the reasonable shareholder to change his/her

vote. What the standard does contemplate is a showing of a substantial

likelihood that, under all circumstances, the omitted fact would

have assumed actual significance in the deliberations of the reasonable

shareholder. Put another way, there must be substantial likelihood that

the disclosure of the omitted fact would have been viewed by the reasonable

investor as having significantly altered the “total mix” of information

made available.”

that discounts the new information. Therefore, those who have access to

the information in question before others have a distinct trading advantage.

To level the playing field, all participants must receive information

simultaneously, which is what the SEC has attempted to enforce with Reg

FD.

What the last few years brought to light was the fact that although companies

may have been disseminating material information to the markets,

they may have selectively disseminated that information to some and not to

all. Most companies had found that the easiest way to get information out

to investors was through conference calls, one-on-one conversations with

fund managers, or at dinner with sell-side and buy-side analysts. This activity

was standard operating procedure, and the general public was left out in

the cold in the form of delayed information.

PUBLIC TALK

Discrepancies of timing and access also highlighted the confusion about inside

information and insider trading. Inside information is any material

information that has not been disclosed to the public. Having inside information

is not illegal per se, but acting on it is. In fact, at certain times a company

should not immediately disclose material information because that disclosure

would compromise its competitive position and do a disservice to

shareholders. However, if a company decides not to disclose certain information,

then it cannot disclose it to anyone externally. Of course, if the information

is related to a merger or acquisition, management will notify its

investment bankers and the analyst in the sector will likely be “brought over

the wall” to restrict any research activity for a set period.

REGULATION FAIR DISCLOSURE, REG FD

In October 2000, the SEC stepped in to require a timely and even approach

for companies to disclose material information to each and every investor.

This requirement is called Reg FD, or Regulation Fair Disclosure, and states

that when a public company discloses any material nonpublic information,

the company must make public disclosures of that information simultaneously

and promptly. If the disclosure is selective and unintentional, then it

must be made fully available quickly to correct the situation. The goal is to

prevent selective disclosure and to reduce insider trading liability by preventing

the misappropriation of information. Reg FD is designed to encourage full and fair disclosure, inside and outside the company, and to clarify

and enhance the intent of the existing laws.

Reg FD is an important improvement in the capital markets. It protects

every investor and supports executive compliance by taking any disclosure

leeway out of company hands. Reg FD allows a CEO to take charge of her

story, puts a halt to selective disclosure and pressure from Wall Street, and

gives all shareholders equal opportunity to hear the information first.

This regulation has made the analyst’s job tougher, however. Once in

the business of prying incremental information from management teams

over dinner or in one-on-one meetings or on conference calls, the analyst

now must work with information that is widely disclosed. The opportunities

to get a proprietary scoop are more difficult than ever, which can result

in fewer “research calls” and diluted commissions. Being the “ax”—the

most influential analyst in a given stock—these days is less about a personal

relationship with the CEO and more about traditional research. Incremental

information now comes from customer surveys, channel checks, and a

detailed analysis of the competitive environment. Only the best analysts can

survive in this environment, so the pendulum will ultimately swing back to

where analysts are highly respected.

THE SARBANES-OXLEY ACT

The stock market has no shallow end; everyone must do their homework

and enter at their own risk. Investors are responsible for due diligence, and

though most would like to walk through the company and kick the tires,

only a few institutional investors can. The privilege is certainly not extended

to individuals.

Financial statements and SEC disclosures are the most likely source of

reliable facts and figures. The income statement, balance sheet, and cash

flow statement are critical in this respect. Many investors have always

viewed accounting as a dispassionate science with little room for nuance,

For a thorough explanation of Reg FD and Sarbanes-Oxley, helpful

references include: SEC.gov, Sarbanes-Oxley.com, FASB.gov, the

Public Company Accounting Oversight Board at PCAOBUS.org, and

the American Institute of Certified Public Accountants, at AICPA.org.

but this is not true. When the markets were going up and executives were

challenged by short-term expectations, the lines of this subjective art became

too flexible. The government moved in to improve the transparency

of those numbers as well as increase the accountability of the people

behind them.

FASB, the Financial Accounting Standards Board, is an independent organization

that governs the standards of financial accounting and reporting.

FASB has established uniform guidelines for the preparation of financial reports,

the standard recognized by the SEC, but in 2000 and 2001 some very

serious violations of these accounting principles by several corporate executives

and their auditors were discovered. These violations cost shareholders

billions, and the fallout was extensive. The government decided that the corporate

governance structure, the directors on the board of a company as

well as its management team, needed strict and specific rules to incorporate

into their accounting and reporting procedures.

In 2002 Congress passed the Sarbanes-Oxley Act. The Act created a

new oversight board to which public companies and accounting firms must

answer. Sarbanes-Oxley also tackles many issues of accounting, auditing,

corporate reporting, financial investigations, and relationships with capital

markets. In addition to many heightened demands, the law requires public

companies to engage in a series of checks and balances along each stage of

gathering, documenting, and certifying financial data. Each step of the

process is calculated to improve internal controls, ensure the accuracy and

clarity of financial reports and corporate disclosures, and encourage executives

and directors to meet corporate ethical standards of accountability and

integrity.

Sarbanes-Oxley, in addition, addresses the conflict of interest that results

when analysts recommend stocks of companies with which their firm

has investment banking business. At one time, analysts were in the habit of

showing their reports to companies to check accuracy, which was not necessarily

a terrible thing. Sarbanes-Oxley restricts the practice of prepublication

viewing and also declares periods when analysts cannot write research on

companies with which their firm is actively involved in a transaction, such

as an initial public offering. The Act also requires a strengthening of the Chinese

Wall.

In an attempt to become poster children of the new order, many investment

banks have strict rules that prohibit analysts from even talking to

their investment bankers, and if they do the conversation must be monitored.

In fact, some bankers and analysts will run for cover if a person with

a camera enters a room in which they both happen to be. This short-term

over-compensation will most likely relax slightly in the coming years, but the impact of these new rules and the necessary rebuilding of credibility by

the investment banks almost require them to run a tight ship by any historical

standard.

RISING TO THE OCCASION

Both Reg FD and Sarbanes-Oxley are attempts to level the playing field for

investors through equitable dissemination and transparency of information.

The concepts are great, but the regulators are not perfect. The ultimate fix is

good governance, solid ethics, a balanced compensation package for management,

and a realization that slow and steady wins the race. This approach

mitigates risk and almost ensures a premium valuation given the underlying

fundamentals at any given time.

After the market crash of 1929, many regulators and investors realized that

market manipulators, with their access to nonpublic information, seemed

to undermine two of the key tenets of capitalism and democracy: fair play

and a level playing field. In 1934, Congress created the Securities and Exchange

Commission to establish and enforce rules for the financial exchanges

and companies that would keep the capital markets fair and open.

For the past 70 years, the SEC has regulated the markets and monitored

corporate merger, acquisition, and finance activities to protect investors. All

of these activities enforce the umbrella creed that companies must disclose

any material information, and this disclosure cannot, by statement or omission,

be false or manipulative. Material information is generally defined to

mean anything that would affect the understanding and decision making of

an investor—that is, anything that would cause a rational investor to act.

The declining stock market of 2000, 2001, and 2002, and the unethical

behavior of several investment banks and CEOs, brought several issues to

light and drove the SEC and Congress to create regulations to promote clarity

of information and equal access to that information. Regulation Full Disclosure,

Reg FD, established in 2000 by the SEC, attempted to create a level

playing field for all investors while the Sarbanes-Oxley Act, passed by Congress

in 2002, required transparency and accountability from corporations.

MATERIAL INFORMATION

Corporations must understand and determine what information the investing

public deems to be material. Obvious material information includes fi-

*Note: Readers seeking specifics on securities law should seek advice from securities

professionals. This chapter is provided only to highlight the new rules and regulations

as they pertain to strategic IR and it does not, in any way, constitute an accurate

legal reference.

nancial events (such as earnings news, financial restatements), operational

activities (such as acquisitions, joint ventures, research developments, new

product introductions), management news (such as executive changes, insider

sales), and regulatory announcements (such as new rules, approvals,

and rejections). However, material information is not limited to these items,

so management must be prepared, along with legal and IR, to determine materiality

on an ongoing basis—in other words, which information or events

must be disclosed to the investing public.

According to Section 409 of the Sarbanes-Oxley Act public companies

should disclose “on a rapid and current basis, such additional information

concerning material changes in the financial condition or operations of the

issuer.” As the SEC hones in on improving disclosure, IR must step up to

guide management through the process. IR should develop a disclosure template,

and when in doubt, the company should be conservative and assume

almost any event is material. Along with IR, however, management must

also show some degree of restraint in terms of releasing too much news to

the financial wires. This can come across as promotional and adversely affect

management credibility.

TO ONE AS TO THE MANY

Information is disclosed, buyers and sellers trade on this information, and

the price of the stock, in theory, moves either up or down to a new value

 “Material information” is not defined under federal securities laws,

according to the SEC. Materiality was defined in TSC v. Northway,

Inc. In that case, the court stated, in part, that a fact is material where:

“[T]here is a substantial likelihood that a reasonable shareholder

would consider it important in deciding how to vote. . . . It does not

require proof of a substantial likelihood that disclosure of the omitted

fact would have caused the reasonable shareholder to change his/her

vote. What the standard does contemplate is a showing of a substantial

likelihood that, under all circumstances, the omitted fact would

have assumed actual significance in the deliberations of the reasonable

shareholder. Put another way, there must be substantial likelihood that

the disclosure of the omitted fact would have been viewed by the reasonable

investor as having significantly altered the “total mix” of information

made available.”

that discounts the new information. Therefore, those who have access to

the information in question before others have a distinct trading advantage.

To level the playing field, all participants must receive information

simultaneously, which is what the SEC has attempted to enforce with Reg

FD.

What the last few years brought to light was the fact that although companies

may have been disseminating material information to the markets,

they may have selectively disseminated that information to some and not to

all. Most companies had found that the easiest way to get information out

to investors was through conference calls, one-on-one conversations with

fund managers, or at dinner with sell-side and buy-side analysts. This activity

was standard operating procedure, and the general public was left out in

the cold in the form of delayed information.

PUBLIC TALK

Discrepancies of timing and access also highlighted the confusion about inside

information and insider trading. Inside information is any material

information that has not been disclosed to the public. Having inside information

is not illegal per se, but acting on it is. In fact, at certain times a company

should not immediately disclose material information because that disclosure

would compromise its competitive position and do a disservice to

shareholders. However, if a company decides not to disclose certain information,

then it cannot disclose it to anyone externally. Of course, if the information

is related to a merger or acquisition, management will notify its

investment bankers and the analyst in the sector will likely be “brought over

the wall” to restrict any research activity for a set period.

REGULATION FAIR DISCLOSURE, REG FD

In October 2000, the SEC stepped in to require a timely and even approach

for companies to disclose material information to each and every investor.

This requirement is called Reg FD, or Regulation Fair Disclosure, and states

that when a public company discloses any material nonpublic information,

the company must make public disclosures of that information simultaneously

and promptly. If the disclosure is selective and unintentional, then it

must be made fully available quickly to correct the situation. The goal is to

prevent selective disclosure and to reduce insider trading liability by preventing

the misappropriation of information. Reg FD is designed to encourage full and fair disclosure, inside and outside the company, and to clarify

and enhance the intent of the existing laws.

Reg FD is an important improvement in the capital markets. It protects

every investor and supports executive compliance by taking any disclosure

leeway out of company hands. Reg FD allows a CEO to take charge of her

story, puts a halt to selective disclosure and pressure from Wall Street, and

gives all shareholders equal opportunity to hear the information first.

This regulation has made the analyst’s job tougher, however. Once in

the business of prying incremental information from management teams

over dinner or in one-on-one meetings or on conference calls, the analyst

now must work with information that is widely disclosed. The opportunities

to get a proprietary scoop are more difficult than ever, which can result

in fewer “research calls” and diluted commissions. Being the “ax”—the

most influential analyst in a given stock—these days is less about a personal

relationship with the CEO and more about traditional research. Incremental

information now comes from customer surveys, channel checks, and a

detailed analysis of the competitive environment. Only the best analysts can

survive in this environment, so the pendulum will ultimately swing back to

where analysts are highly respected.

THE SARBANES-OXLEY ACT

The stock market has no shallow end; everyone must do their homework

and enter at their own risk. Investors are responsible for due diligence, and

though most would like to walk through the company and kick the tires,

only a few institutional investors can. The privilege is certainly not extended

to individuals.

Financial statements and SEC disclosures are the most likely source of

reliable facts and figures. The income statement, balance sheet, and cash

flow statement are critical in this respect. Many investors have always

viewed accounting as a dispassionate science with little room for nuance,

For a thorough explanation of Reg FD and Sarbanes-Oxley, helpful

references include: SEC.gov, Sarbanes-Oxley.com, FASB.gov, the

Public Company Accounting Oversight Board at PCAOBUS.org, and

the American Institute of Certified Public Accountants, at AICPA.org.

but this is not true. When the markets were going up and executives were

challenged by short-term expectations, the lines of this subjective art became

too flexible. The government moved in to improve the transparency

of those numbers as well as increase the accountability of the people

behind them.

FASB, the Financial Accounting Standards Board, is an independent organization

that governs the standards of financial accounting and reporting.

FASB has established uniform guidelines for the preparation of financial reports,

the standard recognized by the SEC, but in 2000 and 2001 some very

serious violations of these accounting principles by several corporate executives

and their auditors were discovered. These violations cost shareholders

billions, and the fallout was extensive. The government decided that the corporate

governance structure, the directors on the board of a company as

well as its management team, needed strict and specific rules to incorporate

into their accounting and reporting procedures.

In 2002 Congress passed the Sarbanes-Oxley Act. The Act created a

new oversight board to which public companies and accounting firms must

answer. Sarbanes-Oxley also tackles many issues of accounting, auditing,

corporate reporting, financial investigations, and relationships with capital

markets. In addition to many heightened demands, the law requires public

companies to engage in a series of checks and balances along each stage of

gathering, documenting, and certifying financial data. Each step of the

process is calculated to improve internal controls, ensure the accuracy and

clarity of financial reports and corporate disclosures, and encourage executives

and directors to meet corporate ethical standards of accountability and

integrity.

Sarbanes-Oxley, in addition, addresses the conflict of interest that results

when analysts recommend stocks of companies with which their firm

has investment banking business. At one time, analysts were in the habit of

showing their reports to companies to check accuracy, which was not necessarily

a terrible thing. Sarbanes-Oxley restricts the practice of prepublication

viewing and also declares periods when analysts cannot write research on

companies with which their firm is actively involved in a transaction, such

as an initial public offering. The Act also requires a strengthening of the Chinese

Wall.

In an attempt to become poster children of the new order, many investment

banks have strict rules that prohibit analysts from even talking to

their investment bankers, and if they do the conversation must be monitored.

In fact, some bankers and analysts will run for cover if a person with

a camera enters a room in which they both happen to be. This short-term

over-compensation will most likely relax slightly in the coming years, but the impact of these new rules and the necessary rebuilding of credibility by

the investment banks almost require them to run a tight ship by any historical

standard.

RISING TO THE OCCASION

Both Reg FD and Sarbanes-Oxley are attempts to level the playing field for

investors through equitable dissemination and transparency of information.

The concepts are great, but the regulators are not perfect. The ultimate fix is

good governance, solid ethics, a balanced compensation package for management,

and a realization that slow and steady wins the race. This approach

mitigates risk and almost ensures a premium valuation given the underlying

fundamentals at any given time.