1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION AMENDED TRANSCRIPT 2 REGULATION FD ROUNDTABLE 3 PAGES: 1 through 280 4 PLACE: Alexander Hamilton U.S. Customs House 5 Auditorium One Bowling Green 6 New York, New York 7 DATE: Tuesday, April 24, 2001 8 PRESENT: 9 LAURA S. UNGER, ACTING CHAIRMAN Securities and Exchange Commission 10 ISAAC C. HUNT, Jr., COMMISSIONER 11 Securities and Exchange Commission 12 KIPP BEDARD, VP CORPORATE AFFAIRS Micron Technology, Inc. 13 MARTHA DEMSKI, VP/CFO 14 Vical Inc. 15 DANIEL HANN, SENIOR VP/GENERAL COUNSEL Biomet, Inc. 16 DOUG LUSK, DIRECTOR OF INVESTOR RELATIONS 17 Intel Corp. 18 POLLY PEARSON, VP GLOBAL INVESTORS RELATIONS EMC Corp. 19 DAVID SHEDLARZ, EXECUTIVE VP/CFO 20 Pfizer Inc. 21 BINA THOMPSON, VP INVESTOR RELATIONS Colgate-Palmolive Co. 22 JOHN HUBER, ESQ. 23 Latham & Watkins 24 DAVID RUDER, PROFESSOR Northwestern University Law School 25 Diversified Reporting Services, Inc. - (202) 296-9626 2 1 PRESENT: (Continued) 2 DAVID ARMON, PRESIDENT 3 Americas Division, PR Newsire 4 MARK COKER, PRESIDENT BestCalls.com 5 RON INSANA, ANCHOR 6 CNBC 7 FLOYD NORRIS, CHIEF FINANCIAL CORRESPONDENT The New York Times 8 CATHY BARON TAMRAZ, COO 9 Business Wire 10 LOUIS THOMPSON, JR., PRESIDENT/CEO National Investor Relations Institute 11 PATRICIA DORAN WALTERS, SENIOR VP 12 Professional Standards & Advocacy Association for Investment Management and Research 13 DAVID BECKER, GENERAL COUNSEL 14 Securities and Exchange Commission 15 DAVID BERRY, EXECUTIVE VP/DIRECTOR OF RESEARCH Keefe, Bruyette & Woods 16 MICHAEL BLUMSTEIN, MANAGING DIRECTOR/DIRECTOR OF 17 NORTH AMERICA RESEARCH Morgan Stanley 18 H. PERRY BOYLE, DIRECTOR OF EAST COAST RESEARCH 19 Thomas Weisel Partners 20 FRANK FERNANDEZ, SENIOR VP/CHIEF ECONOMIST Securities Industry Association 21 CHUCK HILL, DIRECTOR OF RESEARCH - QUANTITATIVE DATA 22 First Call Corp. 23 STUART KARLE, ASSOCIATE GENERAL COUNSEL Dow Jones & Co. 24 ADAM LASHINSKY, Silicon Valley Columnist 25 TheStreet.com Diversified Reporting Services, Inc. - (202) 296-9626 3 1 PRESENT: (Continued) 2 DONALD LANGEVOORT, PROFESSOR 3 Georgetown University Law School 4 WILLIAM ATKINSON, ACTING CHIEF ECONOMIST Securities and Exchange Commission 5 ALAN CLEVELAND, SPECIAL LEGAL COUNSEL 6 New Hampshire Retirement System 7 TOM GARDNER, CHAIRMAN The Motley Fool 8 GREG HYMOWITZ, PRINCIPAL 9 Entrust Capital 10 GEORGE KIM JOHNSON, GENERAL COUNSEL Public Employees Retirement Association of Colorado 11 JOHN MARKESE, PRESIDENT 12 American Association of Individual Investors 13 ERIC ROITER, SENIOR VP/GENERAL COUNSEL Fidelity Management & Research 14 DAVID MARTIN, DIRECTOR 15 Division of Corporation Finance Securities and Exchange Commission 16 HERBERT WANDER, ESQ. 17 Katten Muchen Zavis 18 19 20 21 22 23 24 25 Diversified Reporting Services, Inc. - (202) 296-9626 4 1 CHAIRMAN UNGER: Good morning to all of 2 you, panelists and the audience. Welcome to the 3 SEC's Roundtable on Regulation Fair Disclosure, 4 which we will refer to as FD and Reg FD throughout 5 the day. 6 Commissioner Hunt and I would like to 7 thank each of the panelists for appearing on this 8 panel and on the consecutive panels this morning and 9 this afternoon and for making today's important 10 event possible. 11 Commissioner Carey regrets not being able 12 to be here today but he has promised that he is 13 going to listen to a replay of the events today. In 14 the spirit of Regulation Fair Disclosure, we have 15 arranged for the first time in the Commission's 16 history for the discussion to be broadcast over the 17 Internet. So good morning to everybody listening 18 from their home or office. 19 As everyone here knows, corporate America 20 has certainly seen change in its disclosure 21 practices with the adoption and implementation of 22 Regulation FD. As the packed house here this 23 morning reflects, there is a keen interest in how FD 24 is affecting investors, information disseminators, 25 analysts and investors. Diversified Reporting Services, Inc. - (202) 296-9626 5 1 My dissent from the Commission vote six 2 months ago to adopt Regulation FD was based on my 3 concern about how the rule would impact the quantity 4 and quality of information available to investors. 5 Today Commissioner Hunt and I are interested in 6 hearing firsthand from the people in the front lines 7 how FD has impacted the flow of information, and 8 what the information landscape looks like since 9 Regulation FD. 10 Holding this public roundtable is part of 11 Commissioner Hunt's and my commitment to monitor 12 Regulation FD. I join today's discussion with no 13 preconceived notion about what the outcome will be, 14 but will listen carefully to each of the panelists 15 and the discussion and will consider all of the 16 points raised. 17 I would like to turn the mike over to 18 Commissioner Hunt, and then I thought it would be 19 helpful for each of the panelists to do a brief 20 introduction of themselves and mention the company 21 they are from. Panelists may make preliminary 22 remarks, although because we have a pretty tight 23 schedule today, you certainly don't have to make a 24 lengthy set of remarks. 25 So, Commissioner Hunt? Diversified Reporting Services, Inc. - (202) 296-9626 6 1 COMMISSIONER HUNT: Good morning, ladies 2 and gentlemen. I want to join with Chairman Unger 3 in welcoming you all to this session on Regulation 4 FD and thank you for taking the time to come to this 5 program today. 6 This, in my view, is a part of what we 7 promised we would do when we promulgated Regulation 8 FD, which is to closely monitor its effects both in 9 terms of scientific analysis of what was going on as 10 well as what can be done and in any other way we 11 can. So this is one of our important early steps to 12 study the consequences intended and unintended of 13 Regulation FD on corporate America and the 14 securities market. 15 I didn't dissent when we promulgated 16 Regulation FD. I figured half of my life was 17 involved in it so there was no point in dissenting 18 from it, but I am glad to see so much interest and I 19 look forward to hearing from the participants today. 20 And, again, thank all of you for coming in and 21 participating in this program. 22 CHAIRMAN UNGER: John, do you want to 23 start? 24 MR. HUBER: My name is John Huber, I am 25 a partner at the firm of Latham & Watkins. I Diversified Reporting Services, Inc. - (202) 296-9626 7 1 practice corporate securities law. In a former 2 life, I was the director of the division of 3 corporation finance at the SEC and wrote a lot of 4 rules. Most of the rules that the people here don't 5 like or comply with every day, I was involved with. 6 I am a commentator on this panel and so, 7 therefore, I will keep my remarks very short. I 8 think that FD is a challenging rule, one that has 9 got different impacts on different companies. And 10 in a survey that the American Bar Association did 11 surveying its members, one of the most interesting 12 results of that survey was that there was a 13 conclusion that FD had bigger impacts on small and 14 midsize companies rather than large companies. 15 I think that that, at least in my 16 practice, is true. And one of the points of 17 reference for that is the question of materiality 18 and how that affects it. But, more importantly, I 19 think making FD workable in this environment and 20 taking some of the pressure points with respect to 21 how FD works would make it a more efficient system 22 and also take less cost in terms of compliance. 23 The critical question from my side is: 24 Is FD a rule of fair disclosure or is it a rule that 25 is designed to provide equal access to information? Diversified Reporting Services, Inc. - (202) 296-9626 8 1 The answer to that one question, really, in my mind 2 goes a long way in terms of how FD should work in 3 the future. 4 MR. HANN: Good morning, my name is Dan 5 Hann, I am senior vice president and general counsel 6 of Biomet. I am also here today representing the 7 Association of Publicly Traded Companies, of which 8 Biomet is a member, and I thank you for having me 9 here. 10 In general, I think Regulation FD is 11 certainly welcome. I can certainly say that I love 12 my mother, apple pie, and I am certainly against 13 selective disclosure. I also thought that FD stood 14 for fewer disclosures, so I am pleased to learn that 15 it is fair disclosure that we are talking about. 16 In general, I think Regulation FD has 17 leveled the playing field. My principal concern 18 would be that we have a lower level playing field. 19 I think there are both qualitative and quantitative 20 issues, and I will hold my remarks until we get into 21 that. 22 Thank you. 23 MS. THOMPSON: Good morning, I am Bina 24 Thompson, I am vice president of investor relations 25 at Colgate-Palmolive Company. Actually, I am also Diversified Reporting Services, Inc. - (202) 296-9626 9 1 here as president of The Investor Relations 2 Association, which is a group of senior IR 3 professionals across the country, from small and 4 large cap companies, that I have been chatting with 5 and polling over the last few weeks, after Laura 6 invited me to speak, to get their views. 7 So as we get into the discussion, I do 8 have some thoughts and I think that probably I will 9 be able to give you their thoughts as well as my 10 own. 11 Mr. SHEDLARZ: Good morning, I am David 12 Shedlarz, I am the executive vice president and 13 chief financial officer of Pfizer. I am also the 14 co-chairman and the principal of Financial Officers 15 of the Business Roundtable. 16 I do have a short statement that I would 17 like to make. I think, most importantly, I would 18 like to thank Acting Chairman Laura Unger and 19 Commissioner Hunt for having this discussion. I 20 think it is critically important especially when we 21 have something as pervasive and as significant as 22 Regulation FD that the SEC does take the opportunity 23 to see how the regulation is taking hold within the 24 industry and what types of things are meeting 25 expectations and what types of things may not be Diversified Reporting Services, Inc. - (202) 296-9626 10 1 meeting expectations and may point to the need for 2 some changes. 3 I think everybody is aware of the fact 4 that Pfizer is a large company with a long tradition 5 of publicly disclosing a great deal of high quality 6 information to all investors, both big and small. I 7 am fond of saying we are competing for investors as 8 we compete for folks we sell our products to. 9 At Pfizer, we believe in giving timely 10 information in an understandable manner to all 11 investors. And it gives us more of an advantage, we 12 believe, in attracting investors. Given that 13 philosophy, what I must admit are the resources to 14 support broad disclosure, Pfizer has not 15 significantly altered its disclosure practices with 16 market professionals and investors after the 17 institution of Regulation FD, with one exception. 18 And that's with respect to direct and indirect 19 guidance as it relates to earnings estimates. 20 I think it is important to give you some 21 background in that regard. For the most part, it 22 hasn't changed the way we practice dealings with 23 analysts and investors. We still have robust 24 quarterly earnings releases pertaining to forecasts 25 and projections. The earnings releases also contain Diversified Reporting Services, Inc. - (202) 296-9626 11 1 an extensive Q&A section which covers our financial 2 and operational performance and other topics of 3 interest to both analysts and investors. For 4 example, in the first quarter of this year, the Q&A 5 section ran to almost 40 questions. 6 We believe this allows all investors to 7 become familiar with important issues that affect 8 our company. And, in addition, as we did before 9 Regulation FD, we invite analysts and the public to 10 an investors conference call that is held the day of 11 our earnings release, at least by means of a 12 webcast. 13 Also, as we did before Regulation FD, we 14 publicly distributed our earnings prior to this 15 rule. So for the most part, Regulation FD has not 16 affected our disclosure practices. One challenge we 17 have faced with Regulation FD is in the area of 18 earnings guidance. We have had a great deal of 19 discussion and some debate at Pfizer as to what and 20 how best we are going to provide ongoing comfort for 21 both the operational and financial outlook of the 22 company. 23 In particular, it is difficult to know 24 exactly when our confirmation of prior publicly made 25 earnings expectations by the company to an analyst Diversified Reporting Services, Inc. - (202) 296-9626 12 1 may be considered material. There is no bright line 2 test, so since it is not clear when our 3 reconfirmation of earnings estimates to an analyst 4 would be deemed material; Pfizer has erred on the 5 side of caution. We, therefore, issue press 6 releases which essentially state that nothing has 7 changed during the course of a quarter. 8 We have felt it prudent on a number of 9 occasions, before executives have spoken with 10 analysts either one-on-one or at conferences, to 11 issue a press release which essentially said nothing 12 has changed. So we have not curtailed the 13 information to analysts and we have not 14 significantly expanded the scope of information 15 disclosed to the public. We are releasing 16 additional earnings guidance. 17 While Regulation FD has not affected the 18 amount of quality information that Pfizer discloses, 19 there has been a fair amount of debate by the 20 industry in terms of connection with Regulation FD. 21 For example, when the Business Roundtable asked its 22 members in September of last year if they thought 23 the final rule would reduce the total amount of 24 information a company would release, 40 percent said 25 they did not expect to reduce the total of Diversified Reporting Services, Inc. - (202) 296-9626 13 1 information, 36 percent did say it was too early to 2 tell. 3 I believe there are three things that 4 would help in terms of Regulation FD that the 5 Commission might consider. One, to provide 6 additional guidance on how to apply this Regulation, 7 particularly more direction on ongoing earnings 8 guidance. 9 Secondly, to provide more information to 10 public companies on how the SEC will enforce 11 Regulation FD, how many cases will you bring, who 12 will you go after. Since there is so much gray area 13 on what is material, will the SEC be second-guessing 14 good corporate citizens? 15 Lastly, I believe companies are looking 16 for forums like this one to both analyze the impact, 17 both intentional an unintentional, in terms of the 18 consequences of Regulation FD. Again, with regard 19 to the last point, I herald the SEC in terms of 20 having this session today to give us all an 21 opportunity to speak about the consequences of 22 Regulation FD, both intentional and desirable, and 23 maybe some that are not intentional. 24 Thank you. 25 MS. PEARSON: Good morning, my name is Diversified Reporting Services, Inc. - (202) 296-9626 14 1 Polly Pearson, I am the vice president of Global 2 Investor Relations, EMC Corporation. 3 EMC is the top performing stock in the 4 last ten calendar years, and it has been my pleasure 5 to run investor relations over the course of that 6 time. Our philosophy at EMC has always been one of 7 inclusive communication with investors of all sizes 8 and all locations, rather than exclusive. So the 9 passage of Reg FD was not a big deal to EMC. 10 Our theory, really, with the passage of 11 the Safe Harbor legislation, that we were active 12 proponents for in the mid '90s, has been to mass 13 market the message. Once we were allowed to make 14 forward looking statements, our belief was that in a 15 supply and demand dynamic, why would you want to 16 diminish the demand for your share? So, share the 17 message with all that would hear it. 18 So our time is spent not so much on if we 19 should share or disclose information, but how we 20 should do it in a palatable manner to the mass 21 market. As we practitioners know, issuing a news 22 release every time somebody smiles or winks or 23 something that someone might consider material, it 24 could be like dropping a bomb on your stock. So our 25 time has been spent on ways to consider sharing Diversified Reporting Services, Inc. - (202) 296-9626 15 1 information, doing things like live webcast 2 conferences posted on EMC's website in real-time, an 3 editorial posted on our website with URL's passed on 4 to journalists and investors asking them to look at 5 them, rich media videocasts. 6 Last year we did our annual meeting with 7 a live interactive rich media videocast to the 8 world, and I felt a little bit like Sue Herrera, 9 saying, "Now I would like to take the next question 10 from John in Bar Harbor," as we very much had an 11 interactive dialogue with remote and in-house 12 investors. It was very successful. 13 Also we have called up wire news 14 services, such as Dow, Reuters, Bloomberg and CNBC, 15 before the market opens, just offering our opinion 16 on something that the market might be very concerned 17 with or consumed with that day, such as "How is 18 business in Europe? XYZ high-tech company just fell 19 off the cliff because their business is bad," where 20 normally we would say, "Our business might have been 21 on track." 22 Prior to FD, we started thinking about 23 "What are better ways we can do this, to mass market 24 the message?" And it has been just a delight as a 25 practitioner, because once we mass marketed the Diversified Reporting Services, Inc. - (202) 296-9626 16 1 message and informed Dow Jones and offered our 2 comments, then our call volume diminished rapidly 3 coming into the company and all investors had the 4 message at very same time. 5 And then, finally, the newest tool that 6 we have been exploring is the idea of issuing an 7 open statement, a statement that is more 8 conversational, and distributing the statement over 9 business wire or other mass market media, instead of 10 issuing a news release that has some of the baggage 11 that goes along with being something that you are 12 trying to hype as newsworthy. Whereas, a statement 13 is more of an open communication with investors and 14 other interested parties. 15 So with that, I very much am in favor of 16 Reg FD, especially the SEC's notice of the word 17 "intent." It is our intent to always have an open, 18 honest, fully-disclosed dialogue with investors. 19 Now, in the high-tech world, in particular, it is 20 very fast-paced, you are moving in real-time. 21 People throw questions at you. Investors or 22 executives respond, but it is always our intent to 23 do the right thing, so I would vote for less 24 regulation and more use of that word "intent." 25 And with that, I will close. Diversified Reporting Services, Inc. - (202) 296-9626 17 1 CHAIRMAN UNGER: Kipp? 2 MR. BEDARD: Good morning, everyone. I 3 would like to thank you for allowing my firm to 4 participate in this Roundtable today. 5 In my role as vice president of corporate 6 affairs of Micron Technology, it is a day-to-day 7 responsibility for me to coordinate information that 8 goes to various public investors, municipal 9 communities, government officials, the media, not 10 only on the corporate business side but also the 11 product side. So most of my comments today will 12 come from the perspective of practical application 13 of Reg FD and what kind of implications it could 14 have on all those various components. 15 So, again, I am glad to be here and I 16 appreciate the opportunity to speak. 17 CHAIRMAN UNGER: Martha? 18 MS. DEMSKI: Thank you. 19 I am Martha Demski, I am the chief 20 financial officer of Vical, which is a San Diego 21 based biotech company. 22 Initially my comments today will 23 represent many of the publicly traded biotech 24 companies in the San Diego area. I am a member of 25 an association called the Association of Bio Science Diversified Reporting Services, Inc. - (202) 296-9626 18 1 Financial Officers and, prior to today's meeting, I 2 have polled several of the public companies in the 3 San Diego area in biotech to get their views on Reg 4 FD, and I will share those views with you today. 5 MR. LUSK: I am Doug Lusk, director of 6 investor relations at Intel. I have been with Intel 7 for about 13 years, the last six years or so in 8 investor relations. 9 Just some brief comments. I think we 10 have a somewhat unique perspective in this. We, 11 since 1996, have been giving forward-looking 12 statements after the passage of Safe Harbor, and 13 pretty explicit forward-looking statements. We 14 really go through the whole P&L, revenue, gross 15 margin percentage, spending, depreciation, tax rate, 16 et cetera. Really, our expectation for the next 17 quarter and sometimes we will give an expectation 18 for the full year for things such as gross margin 19 and capital expenditures. 20 Really, in a nutshell, our IR procedures 21 and policies have changed very little since the 22 passage of Reg FD. One thing we did grapple with 23 was that we still wanted to have one-on-ones with 24 investors and analysts, et cetera. And if we 25 reiterate at that time, could that be construed as Diversified Reporting Services, Inc. - (202) 296-9626 19 1 somehow as being material pieces of information? 2 What we have done is place on the 3 websites for the general public the fact that we 4 will have these meetings, and as long as we have 5 still posted on our website the current 6 expectations, they can rely on those as being 7 current and up to date. And that's really one of 8 the things we have done. 9 We have been webcasting our conference 10 calls for a number of years to people. We are 11 having an analyst meeting here in New York City in a 12 couple of days that will have thousands of people, 13 the general public, listening on webcast. It is 14 important to Intel -- we have approximately 40 15 percent of our shares owned by retail investors, so 16 it is important for us that they hear the same 17 information as our meeting analysts. 18 Thank you. 19 MR. RUDER: My name is David Ruder, I am 20 a Professor of Law at Northwestern University School 21 of Law. I had the privilege of serving as the 22 Chairman of the Securities and Exchange Commission 23 from 1987 to 1989. 24 I would first like to congratulate the 25 Commission on enacting Reg FD. The Commission was Diversified Reporting Services, Inc. - (202) 296-9626 20 1 faced with a problem in relation to the Dirks 2 decision, in which analysts were able to receive 3 selective information from companies and absorb it 4 without running afoul of the insider trading rules. 5 This problem of selective disclosure was 6 one that the Commission had to grapple with, and I 7 think it has done so in a way that will inure to the 8 benefit of the investing public. That's not to say 9 that the rule is perfect, and I think it is a very 10 fine step for the Commission to have this meeting to 11 hear what might be fixed. 12 I expect to hear answers to various 13 questions: Are disclosures increasing or 14 decreasing? Are there more earnings projections 15 being made? Is there more guidance being provided? 16 Is FD too costly, particularly for smaller 17 companies? Does FD meet the problems of disclosure 18 for small cap companies? Is the Commission's 19 materiality standard one which is livable for 20 companies? And are the provisions for making 21 disclosures to the public adequate in light of new 22 technology? 23 These are just a few of the questions, 24 but I am awaiting eagerly to hear the answers from 25 the commentators. Diversified Reporting Services, Inc. - (202) 296-9626 21 1 MR. BECKER: I am David Becker, I am 2 general counsel of the Commission. 3 I think the staff's role here is 4 principally to sit and listen and learn and maybe 5 pose the occasional question. I would add only one 6 to David's list, and that is: What do people mean 7 when they use the word "guidance"? 8 It can mean all sorts of things, and I am 9 interested in what it is that companies do that they 10 refer to as guidance and what is the purpose and the 11 effect of giving guidance? 12 CHAIRMAN UNGER: Thank you to all the 13 panelists. In your introductory remarks, I think 14 you have raised a number of very interesting issues 15 that I hope we have a chance to cover. 16 I thought we could start off with one of 17 the more basic questions, which is, I think most of 18 you have said you haven't really changed your 19 practices substantially as a result of Reg FD, but 20 has it changed how you tell your analysts 21 information and convey the information? 22 Has it changed what you tell them? 23 Does anyone care to respond or shall I 24 call on you? 25 MS. PEARSON: I would say it has not Diversified Reporting Services, Inc. - (202) 296-9626 22 1 changed what we tell investors. If anything, there 2 is a heightened degree of awareness; is that 3 something that is material? But, if anything, we 4 have been open to the same degree before and after. 5 COMMISSIONER HUNT: Somebody on the 6 panel, I think, mentioned -- and somebody outside 7 also mentioned to me -- the ogre of enforcement. 8 Are you concerned about that at all? 9 MR. SHEDLARZ: I think there is some 10 concern in terms of exactly how Regulation FD will 11 be practiced. 12 In part, there are no bright line tests 13 here, so I think in large part the nature of 14 Regulation FD is going to be defined on the basis of 15 practice. I think in terms of guidance, maybe it 16 has to lead to that in terms of how Regulation FD, 17 in fact, will be practiced. 18 I think that will give much greater 19 clarity to those concerned and possibly some of 20 those who are taking a conservative posture, 21 there's a wait-and-see attitude. At Pfizer, we have 22 not changed the nature of our disclosure. 23 It always had been quite robust, it has 24 been done on a frequent basis. In certain respects, 25 that has been demanded by the marketplace. I must Diversified Reporting Services, Inc. - (202) 296-9626 23 1 admit that Pfizer does have the resources to 2 accommodate something like that. And it is 3 long-standing history that we have practiced in such 4 a way in terms of providing robust disclosure to all 5 investors. 6 But I imagine for some this could be an 7 encumbrance. 8 CHAIRMAN UNGER: How many analysts 9 follow Pfizer? 10 MR. SHEDLARZ: There are probably 30 11 analysts that follow Pfizer with an 12 ever-increasingly magnified microscope. 13 CHAIRMAN UNGER: I am curious because I 14 have heard initially, and still from a number of 15 large issuers, that they welcome FD because it sort 16 of made their job and their life a little bit easier 17 in terms of communications. 18 But how about the smaller issuers who are 19 still building a relationship with the analysts, has 20 that encumbered that relationship at all? 21 MS. DEMSKI: Most of my comments will be 22 with respect to several of the biotech companies in 23 the San Diego area on this particular issue. With 24 respect to the smaller companies that are seeking 25 analyst coverage, they may have only one firm Diversified Reporting Services, Inc. - (202) 296-9626 24 1 analyst relationship and are seeking additional 2 analyst coverage, it does pose a problem. 3 And they feel that it has hampered them 4 somewhat in their ability to attract analysts to 5 follow the company. So that is one set of feedback 6 that I have received in regard to Reg FD. 7 COMMISSIONER HUNT: As a follow-up maybe 8 relating to that, do you think that in your 9 experience, that Regulation FD is cost effective for 10 those relatively small companies? 11 MS. DEMSKI: I posed the question of 12 cost to each of the companies that I polled. In 13 each and every instance they said it was a minimal 14 cost issue. 15 With respect to Vical, we had already 16 planned to implement conference calls and webcasts, 17 it just accelerated it by one quarter. So it was a 18 non-event in that regard. And from a cost 19 standpoint, everyone unanimously said it was not an 20 issue. 21 MR. HUBER: If I could just interject, 22 cost is more than just a question of the compliance 23 cost. There is also the cost with respect to 24 training management in terms of keeping them up to 25 speed with respect to developments. The people who Diversified Reporting Services, Inc. - (202) 296-9626 25 1 are senior officials, there is the cost with respect 2 to if you are doing an offering and paying different 3 interest rates for your bonds because of a change 4 due to disclosure. 5 It also a question of cost with respect 6 to market volatility. Have more people seen costs 7 in other areas besides just the compliance cost 8 itself? 9 MS. DEMSKI: I certainly think that with 10 respect to the cost question, many of the companies 11 in San Diego answered from just the bottom line 12 impact with respect to the cost of the conference 13 calls, et cetera. However, one company did indicate 14 that they felt there had been an impact on the 15 volatility of its stock. 16 COMMISSIONER HUNT: FD had an impact on 17 it? 18 MS. DEMSKI: They felt that it did have 19 some impact on volatility. 20 CHAIRMAN UNGER: And how were they able 21 to distinguish between the market conditions that 22 exist perhaps in the six months, coincidentally, 23 some would say, in the six months subsequent to the 24 adoption of FD with their own stock and the release 25 of information? Diversified Reporting Services, Inc. - (202) 296-9626 26 1 MS. DEMSKI: They did not comment on 2 that specifically, but certainly the biotech sector, 3 as well as many other stock issues, have experienced 4 great volatility during the past year. 5 However, in this particular instance, in 6 their response they indicated that they felt it was 7 due to more limited discussions with the analysts 8 and the analysts writing less. 9 COMMISSIONER HUNT: Former Chairman 10 Ruder mentioned that one of the things we are trying 11 to do is deal with the problems in particular that 12 were created by the Dirks case. 13 I would like to know from these 14 panelists, after the issuance of Reg FD, do you 15 treat requests for information from the press and 16 from analysts differently? 17 MR. LUSK: I guess the answer, in all 18 fairness, is no. The press is dealt with through 19 our PR firm, which is a separate organization. I 20 can't speak for them, but clearly we would handle 21 requests separately. 22 Are you saying things like interviews 23 with executives or meetings? 24 COMMISSIONER HUNT: Yes, meetings, 25 interviews. Diversified Reporting Services, Inc. - (202) 296-9626 27 1 MR. LUSK: We balance that. Obviously, 2 executives are very busy people and we have to 3 balance the best return on their time, so we do 4 both, and will continue to do so. 5 Also, getting back to your original 6 question, very little has changed in what we talk 7 about with analysts, investors. I think, in part, 8 because we have for five years issued forward- 9 looking statements and it is really a frame work for 10 the meeting. 11 Our analysts are pretty-well trained, I 12 think, over the last five years and they know when 13 they walk in to a meeting, even if it is a 14 one-on-one, they are not going to get information 15 that is going to be any different from what we put 16 in a press release. That is our expectation. 17 So both sides of the table can go ahead 18 and have a free conversation about other things. We 19 are a fact-based industry, we have lots of different 20 products, two-thirds of our sales are overseas, and 21 we are trying to expand it to do business. There is 22 lots that you can talk about in one-on-ones that 23 does not touch on material information, how the 24 quarter is going. So from our perspective, very 25 little has changed. Diversified Reporting Services, Inc. - (202) 296-9626 28 1 I did talk about some changes in 2 implementation, but I think we have seen very little 3 change in the flow of information. In fact, this is 4 not really because of FD, but in the spirit of it, 5 we are also doing a mid-quarter conference call 6 update now. We just started this quarter where we 7 will open this up to the general public and webcast 8 it also, and give an update about six weeks or so 9 into the quarter, on how business is progressing. 10 MR. RUDER: I am going to assume that 11 all the panelists here would say that "Our 12 disclosure practices were wonderful before and they 13 are wonderful now," but I would like to just 14 follow-up on John Huber's question a little bit. 15 It seems to me that what is going on in 16 some companies is that the legal counsel had 17 insisted that there be a much more structured method 18 of releasing information. That has had, I think, 19 costs of one kind, and certainly for outside 20 counsel's cost if that's where it is coming from, 21 but also more discipline on management and public 22 relations people as to how disclosures are made. 23 I wonder if anybody could comment about 24 what other companies are doing, other than the ones 25 that are here? Diversified Reporting Services, Inc. - (202) 296-9626 29 1 MR. HANN: I think you are correct, it 2 has certainly changed the way companies, I believe, 3 deal with the investment community. We do have 4 legal counsel setting up policies, procedures, best 5 practices, and educating the management team. 6 I would also like to come back to 7 Commissioner Hunt's question and David's comments. 8 I think the SEC has a real opportunity for Reg FD to 9 be successful. You want issuers to be comfortable 10 releasing more information, more specific 11 information. There is an incredible interplay here 12 between Reg FD and the Safe Harbor for 13 forward-looking information. 14 And I think one thing the Commission can 15 do is make that harbor deeper and wider, and that 16 will encourage issuers to be more forthcoming. 17 There are uncertainties out there, and no one, no 18 issuer wants to be the test case. 19 MS. THOMPSON: If I could say one thing 20 quickly on your point of the legal department 21 getting involved. Again, I would just like to read 22 a few comments from some of my counterparts at 23 fairly large public companies and also to your 24 point, Commissioner, that by and large the larger 25 cap companies are pretty comfortable and happy in Diversified Reporting Services, Inc. - (202) 296-9626 30 1 dealing with the rule. Again, these are some quotes 2 I would like to throw out for general discussion 3 because I think they refute that view. 4 But talking about the legal question, and 5 these are not my words, "Because the Regulation does 6 not give guidance on this issue and because each 7 general counsel has his or her own interpretation, 8 many IR professionals have been told not to 9 communicate in ways that before the Regulation would 10 have helped keep information flowing. Some have 11 stopped meeting one-on-one with investors, even if 12 earnings are not discussed. While opening up 13 conference calls may have been a positive outcome, I 14 think the overall result has been a decrease in 15 quality and quantity of communication with 16 investors." 17 This is a second viewpoint: "One of the 18 unfortunate consequences in Reg FD is that it has 19 shifted some of the communications impetus to legal, 20 away from investor relations. Although, legal 21 always reviewed investor presentations before Reg 22 FD, today I find legal wanting input as to the 23 actual meeting program I proposed with veto power 24 being given on certain meetings and presentations." 25 That, to me, says that people are being Diversified Reporting Services, Inc. - (202) 296-9626 31 1 muzzled in a sense. 2 And turning then just for a moment, 3 again, these are not all my words. This is relative 4 to earnings guidance: "We cannot contact an analyst 5 who has not updated their numbers on the services," 6 the first call services, "or who is way out of line 7 on the numbers, because we would get caught on Reg 8 FD. Nor can we ask the services to eliminate all 9 estimates, because they will not do that as long as 10 the brokerage analysts are providing earnings 11 estimates. We also now have an issue with the sell 12 side not updating numbers and they leave their 13 not-updated numbers on the public services and then 14 have their own internal numbers that they share with 15 the buy side." So the public numbers are wrong, but 16 they don't update them because they say it is too 17 much trouble. 18 Again, "We were doing a good job opening 19 up conference calls using the Reg and encouraging 20 management to meet with shareholders and analysts 21 more often." 22 To your point, we had a good disclosure 23 policy, and I think we want to say that. 24 "We were issuing press releases for 25 material information and having conference calls Diversified Reporting Services, Inc. - (202) 296-9626 32 1 when big news items hit. Reg FD came in with a way 2 too broad brush and killed the normal give and take 3 of information about how things are going in the 4 business. Why is it wrong for a company to have a 5 dialogue with investors who care enough to ask about 6 current operations? The rule has put a total chill 7 on conversations; in fact, they are now in the 8 freezer. I think this raises serious policy 9 questions, as these folks are the owners of the 10 company. I still think it is absurd for any company 11 to discuss the analysts' outlook that is based on 12 the analysts' faulty premises. Why does it do the 13 market good to have such faulty ideas out there 14 until earnings announcements are made?" 15 All those quotes came from large cap 16 companies. 17 MR. HUBER: If I can just follow-up on a 18 few of those comments, because I think she is 19 raising a very important question that does apply to 20 big companies and small and mid-cap companies as 21 well; that is, the idea of how to conduct 22 one-on-ones, and the idea of how you give the 23 quality of information that companies, I think, want 24 to give, and the analysts surely want to get, into 25 this marketplace in an FD kind of world. Diversified Reporting Services, Inc. - (202) 296-9626 33 1 In the survey that we did, the lawyers' 2 survey, the biggest decline in anything in the 3 impressions that was sought, was the decline in 4 one-on-ones, going from, for the most part, people 5 were doing one-on-ones. 77 percent of the 6 responses, believe that most of their clients have 7 conducted one-on one meetings with analysts. 8 Post-FD the number decreased to 27 percent. 9 One-on-ones have suffered, and I think if 10 you talk to the analysts, if you do a study on 11 analysts, analysts like to ask those questions in 12 one-on-one kind of things that really show that they 13 have done their homework. 14 CHAIRMAN UNGER: I think Bina is talking 15 about something much bigger than that. I think she 16 is talking about the ongoing dialogue the issuer has 17 with its shareholders. 18 One of my concerns was that the web was 19 allowing people to provide more information over the 20 Internet to individual investors, and they were 21 demanding more information and the companies didn't 22 mind providing it. 23 So I wonder how FD has changed that 24 philosophy of free exchange of information. Some 25 people seem to think that companies don't want Diversified Reporting Services, Inc. - (202) 296-9626 34 1 anyone to have the information, but what you say is 2 contrary to that, and it is really more of a concern 3 about legal liability that is holding back the flow 4 of information, not the desire of the issuer to make 5 this information available to all investors. 6 MS. THOMPSON: That's right. 7 CHAIRMAN UNGER: So I wonder if you 8 could maybe pinpoint exactly what it is -- "exactly" 9 may not be possible since those are not your words 10 -- maybe what some of the biggest concerns about FD 11 are? 12 MS. THOMPSON: Fear of ogre. Fear of 13 prosecution, enforcement. 14 MR. BECKER: Let me ask you both a 15 question that can help us evaluate what it is we 16 hear from everybody. We are getting a lot of 17 extremely anecdotal information, and I don't know 18 what we should make of it. 19 Bina, you read quotations from four or 20 five people. I don't know whether there are four or 21 five people out there that might say something else 22 from the same community or what the proportion is. 23 John, you talk about a study that was 24 responded to by 62 lawyers, giving information about 25 what they are hearing from their clients. What Diversified Reporting Services, Inc. - (202) 296-9626 35 1 should we, as a regulator, make of these things? 2 What is the type of evidence that should 3 have a significant impact on how the Commission 4 looks at this? 5 MR. HUBER: Let me just respond about 6 the study. 62 lawyers does not the American Bar 7 Association make. It is not something that I think 8 is statistically pure. The concepts here are all 9 anecdotal. 10 I share the commendation for the 11 Commission to actually have this six months after 12 the rule. It is a major rule that affects every 13 public company 24 hours a day, seven days a week. 14 For the most part, what you are going to hear from 15 all of us is anecdotal. We are still adjusting and 16 experiencing. 17 But I think what Bina was talking about 18 is that there already is this concern with respect 19 to, and I am going to put it, on an anecdotal basis 20 I have seen it as well, the quality question. And 21 the quality question comes in, as I was trying to 22 say before, on the one-on-ones, on the interplay and 23 the background, that sort of thing. 24 And that's really where, I think, one of 25 the big pressure points come in on FD, is not the Diversified Reporting Services, Inc. - (202) 296-9626 36 1 earnings calls, but rather how do you get through 2 the quarter kind of approach. That, I think, is 3 something that I would ask that the panel here, from 4 the standpoint of both big companies and little 5 companies, how do you get through the quarter once 6 you finish that conference call? 7 CHAIRMAN UNGER: In fact, I think Doug 8 talked a little bit about the one-on-ones. And one 9 of the follow-up questions I have -- and I don't 10 want to cut off anyone to have the commentators 11 comment, I really want to hear from the people on 12 the panel because they are here to give their own 13 anecdotes, and that's what it is all about. 14 But you were mentioning that you still 15 have one-on-ones and there were lots of things that 16 could be discussed in the context of those 17 one-on-ones, which seems to contradict a little bit 18 with what this side of the table is saying. So I 19 was wondering if maybe you could share with us, what 20 can you talk about? 21 MR. LUSK: If the purpose of the meeting 22 is to discuss how the quarter is going, quite 23 frankly, I am not sure we would even set up the 24 meeting. 25 We are there, and we use our executives Diversified Reporting Services, Inc. - (202) 296-9626 37 1 to help educate both the sell side and the buy side. 2 We are a very complicated business and we are doing 3 lots of different things, new businesses, et cetera. 4 We have given our best shot at the beginning of the 5 quarter about our expectations, how business is 6 going to be. And, as I said, we give them an update 7 now after we are through. 8 You know, an analyst walks into the 9 meeting with our CFO or someone else and says, "I 10 want to get some more insight on the quarter," it is 11 not going to happen. And I think they know that. 12 They are going to want to talk about 13 probably road maps, how sales are overseas, maybe 14 the various geographies, some of the trends that are 15 going on over there and what success we are having 16 in expanding, for instance, the communications 17 business, et cetera. 18 As I said earlier, we have a lot to talk 19 about and yet, believe me, the analysts still want 20 to have those one-on-ones, even though they know 21 they are not going to get any useful information in 22 terms of how the quarter is progressing. In fact, I 23 think what is going to happen is the analysts are 24 going to go out and have to do their job, which is 25 sort of dig around, talk to mother-board suppliers Diversified Reporting Services, Inc. - (202) 296-9626 38 1 in Taiwan or whatever and try to figure out what is 2 going on in the PC market, et cetera, that way, 3 rather than trying to rely on a tidbit of 4 information from our CFO. 5 COMMISSIONER HUNT: I couldn't agree 6 with you more. I thought that was precisely what 7 was going to happen when we promulgated FD, that the 8 analysts were just going to have to work harder and 9 do their job, and not just sit around and have 10 conversations with the CFO and say, "I've got the 11 scoop." 12 So if it is having that effect, I am 13 personally delighted. 14 Are the lawyers being too conservative, 15 Mr. Huber, do you think? 16 MR. HUBER: I don't think the lawyers 17 are being too conservative. I think, Commissioner, 18 during any period when a rule starts to take effect 19 that there is a transition period where lawyers see 20 how things work to begin with, and then based on 21 that experience, more and more, shall we say, things 22 are acceptable. 23 From my standpoint, one of the things 24 that the Commission should be commended about is 25 having the division of corporate finance interpret Diversified Reporting Services, Inc. - (202) 296-9626 39 1 things and issue Q&As on interpretations. That 2 helps. But the fact of the matter is, from my 3 standpoint, things like publication, dissemination 4 and all questions of notice should be less rigorous 5 and more flexible, because, as a number of people 6 have said on the panel, getting information is what 7 they are about and they shouldn't be penalized for 8 good-faith efforts to get that information out. 9 MR. SHEDLARZ: From Pfizer, we have not 10 curtailed the interface with the business community. 11 It has always been robust. I think the nature of 12 our operational earnings press release is one of the 13 vehicles that allows us to do that on an ongoing 14 basis. 15 Going beyond this, make no doubt about 16 it, this takes a lot of discipline, a lot of 17 practice, and it takes a lot of hard work and time 18 on the part of senior executives to be well aware of 19 what is in the public domain and what is not in the 20 public domain. 21 So I agree with John, the cost in terms 22 of compliance is not necessarily the initial cost of 23 setting things up, it is more on an ongoing basis to 24 have the infrastructure and the discipline and take 25 the time to speak on behalf of the company and be Diversified Reporting Services, Inc. - (202) 296-9626 40 1 well aware of the facts. 2 I can imagine that companies somewhat far 3 afield of these are in some difficulty in getting 4 themselves up to speed, either not having the 5 infrastructure or not practicing in this fashion for 6 some time. I am sympathetic to that, especially 7 with the regulation that does have some gray areas, 8 and in terms of people who have not practiced in 9 this fashion. 10 But at Pfizer, the robustness, the 11 frequency of the communications with the analyst 12 community have not ceased. And in certain respects, 13 they do more homework before they come in to speak 14 to you, especially in these volatile capital market 15 conditions. It is probably a natural consequence. 16 CHAIRMAN UNGER: Do the IR people see a 17 benefit to investors? I mean, are they getting more 18 information? Do the benefits outweigh the burden? 19 MR. BEDARD: I would like to address 20 that, if I could. 21 As a personal investor in a high-tech 22 business and an individual who has been with a 23 high-tech company for 17 years, last fall, quite 24 frankly, I was disappointed to learn how companies 25 hid behind the umbrella of Reg FD. Diversified Reporting Services, Inc. - (202) 296-9626 41 1 At a time when I thought the industry 2 should be leading the information flow, the default 3 was, "Let's stay protected. Let's say less." And I 4 felt that was a real disservice to the individual 5 investor, whose company should fill him in, and, in 6 fact, we had this umbrella to protect ourselves. 7 Number two, I am not sure I agree with 8 the rest of the panel or not, I can't quite tell 9 where everybody sits, but the practical application 10 of this is that not every audience wants the same 11 type of information. It is becoming a real 12 nightmare to try and manage the conference call or 13 webcast that addresses every single audience that is 14 out there. 15 As an example, the international press 16 wants something completely different than the 17 national business press or the national product- 18 related press, even different than the local press. 19 The local governmental officials want something 20 different than the national governmental officials. 21 So to try and push this all into one meeting has 22 been, again, I think, a real disservice which has 23 created even more post-conference and webcast calls 24 with the information professionals put in a 25 situation where they have to decide, "Okay, am I Diversified Reporting Services, Inc. - (202) 296-9626 42 1 raising more information now because this person 2 wants something more specific?" 3 So, to me, what Reg FD has done, it has 4 created an environment where now the information 5 professionals do not take the lead. They feel they 6 are on an island now where they have to decide every 7 single phone call they take, "Where am I, and have I 8 just said something where now I must go and issue a 9 release?" 10 So as a default, I think we tend to hold 11 back and not take the lead in providing information. 12 MS. PEARSON: In order to answer that, 13 do the benefits outweigh the burden, I think 14 individual investors and all investors definitely 15 enjoy their benefits from getting information. 16 But to your point, Kipp, on the quality 17 of information, you do find yourself editing out 18 certain data points or glossing over others 19 designing an announcement. And one thing that 20 wasn't on Bina's list that I would add to that as a 21 risk factor, from my corporate communications 22 standpoint, is that perception is reality, and if 23 the perception is that investors or analysts are not 24 going to get as good information with Reg FD that 25 they did prior to, what it is doing is it is Diversified Reporting Services, Inc. - (202) 296-9626 43 1 throwing them in the arms of the absolute worst 2 spokesperson for good communication about your 3 shares, i.e., a random salesperson for that company. 4 So what we are having happen is sell side 5 analysts might just unearth a random salesperson and 6 ask them how the quarter is or ask them how margins 7 are, or "Hey, did you do much golfing this quarter?" 8 Anything they can do to get a pulse on the quarter. 9 And that elevates volatility. 10 Or sell side might do a survey of 50 11 people and say it represents our whole business, and 12 it is erroneous data based on a subset of the world, 13 whereas if they asked the corporate office, we could 14 give them a much more thoughtful answer. 15 So the perception of reality of Reg FD 16 means corporations might be clamming up; therefore, 17 go find a random employee and have them spill their 18 guts. And it is one of our ongoing biggest 19 challenges is how to train our salespeople, "Don't 20 talk to investors about the company, send them to 21 us." 22 MR. HANN: I would agree with some of 23 Kipp's comments, I believe. 24 I am of the opinion the average press 25 release is now much longer and more detailed, and Diversified Reporting Services, Inc. - (202) 296-9626 44 1 speaking as purely a shareholder, trying to separate 2 the wheat from the chaff in some of these releases 3 is very, very difficult as a shareholder. 4 And then when analysts go to talk to the 5 investment relations people, oftentimes they are 6 merely referred back to the press release, because 7 you don't want to embellish beyond what is in that 8 release, so I think there has been a chilling effect 9 in terms of those relationships with analysts. And 10 as an individual shareholder, I am not sure what has 11 really trickled down to that person has been 12 beneficial. 13 MS. THOMPSON: I want to get back to the 14 point of, I think, a good investor relations program 15 has always been a good disclosure policy, if that 16 was there and was always there. 17 And I think there is this perception that 18 everybody is running around whispering selectively 19 to analysts. I mean, we weren't doing that. We had 20 good disclosure practices in place. 21 To the individual investors, I think if 22 you polled most companies who do webcasts, you will 23 find that they maybe have 250 people on their 24 webcasts at a photo conference call, if that. 25 Probably half of them are actually professional Diversified Reporting Services, Inc. - (202) 296-9626 45 1 investors and another quarter are company employees. 2 So the individuals, that's why we like individual 3 shareholders, they don't care about the quarter. 4 They care about the longer term, they care about the 5 strategy, they are long-term stockholders. 6 So to try to get them involved in this 7 quarterly focus is doing everybody a disservice, in 8 a sense. And they don't care. They don't listen to 9 the calls. 10 CHAIRMAN UNGER: I guess there are two 11 categories of information here we can talk about. 12 One is the earnings management and confirmation 13 process, and the other is general corporate 14 information. 15 Is that the case? Is there some 16 information that is more freely flowing as a result 17 of FD or is it all being curtailed? 18 MR. BEDARD: To me, there is one common 19 theme here, and that is how many data points 20 represent something significant. And with Reg FD 21 basically what has happened is you are less 22 comfortable in a free and open discussion about the 23 first data point because you don't know for sure 24 does that lead to three and four, now we have a new 25 trend we need to talk about. Diversified Reporting Services, Inc. - (202) 296-9626 46 1 So what you have is maybe the information 2 is the same but the timing of the information is now 3 different, which makes it of less quality to the 4 user. It is either way too early, and you say, 5 "Here is this bead of information, you don't know 6 what it means, you guys go figure it out." Or you 7 wait until you absolutely know that that information 8 has now changed and so then you press release it, 9 but then that's way behind the curve. 10 So I think when you say where you are 11 headed, there is a common theme and it has to do 12 with the timing and how that timing represents the 13 quality of information that you are trying to get 14 out. 15 COMMISSIONER HUNT: So you are not just 16 putting out statements on quarter earnings, I hope. 17 MR. BEDARD: No. That is exactly the 18 point, whether it is business trends or earnings, it 19 has those same beads because businesses change all 20 the time, and our challenge, as communication 21 professionals, is when is it enough information that 22 internally, as officers of the company, you want to 23 go and change the perceptions in the market. 24 And, basically, Reg FD has kept us a 25 little bit more tight to the chest, which you have Diversified Reporting Services, Inc. - (202) 296-9626 47 1 allowed, and not addressed any of the other 2 information providers unrelated to corporations, 3 they can put out any information at any point in 4 time. And that puts us in the back seat, trying to 5 respond to information that may or may not be 6 accurate. And now we have to make decisions, okay, 7 do we address this particular rumor or new data 8 point that for some unrelated purpose was put out 9 there or do we sit back and wait? 10 COMMISSIONER HUNT: And you think FD 11 has hampered you in your usual pre-FD response to 12 that kind of data? 13 MR. BEDARD: Well, it is never just one 14 data point that makes you decide, "This is enough of 15 a data point, I am going to go change my direction 16 of business." It is usually several, so when is it 17 in that line of several that you make that decision? 18 And now you are asking us to say to each 19 individual audience that is out there, "We now 20 believe we have enough information to change what it 21 is we are telling you." That is a very difficult 22 position to be in, versus prior to Reg FD, you were 23 at least more comfortable to be able to just chat 24 free-form about what it could mean, "Well, we are 25 not sure, this is the first time we have seen it, Diversified Reporting Services, Inc. - (202) 296-9626 48 1 but to the extent there is some similarity, past 2 business practices may be it will go here, we have 3 also seen it go here," at least we could help people 4 try to interpret the data. 5 Today it is more difficult to do that, 6 because you either want to release it and say, "We 7 have no responsibility for what it means," or you 8 go, "I am going to wait, wait, wait until I 9 absolutely know what it means," and by then, it is 10 typically old and outdated. 11 CHAIRMAN UNGER: So is that a result of 12 the fact that we are now making sense of the 13 information or confirming the data point to a much 14 larger audience? 15 What exactly is it that restrains you? 16 MR. BEDARD: Why is it a bigger 17 challenge? 18 CHAIRMAN UNGER: Yes. 19 MR. BEDARD: It is probably a 20 combination of everything I heard today. In some 21 cases, you have the attorneys breathing down your 22 neck, saying "Now, be careful if you say anything 23 different than what the last public comment was," so 24 you are a little bit apprehensive there. 25 Number two, you have the press maybe who Diversified Reporting Services, Inc. - (202) 296-9626 49 1 wants to grab the very first piece of data that 2 might be changing, "What do you think of it?" 3 I can't say, "Sorry, my attorney is 4 saying now I have to wait until I absolutely know it 5 is true." So you have this push-pull here and 6 practical application makes it very difficult. 7 MR. HUBER: At the risk of defending 8 attorneys, since I am one, it is not just the 9 attorneys, it is the rule. 10 I agree with a large amount of what Kipp 11 says, aside from saying it is the attorneys. A lot 12 of attorneys are wonderful people. 13 CHAIRMAN UNGER: Should we take a poll? 14 MR. HUBER: The point about this rule is 15 if you don't have an adequate publication and you 16 are talking to someone, and you are a senior 17 official talking to an enumerated person, the rule 18 is going to deem whatever you are saying is 19 intentional, that is the first one, if you knew what 20 you were saying when you were saying it. I don't 21 know of very many educated people who would say, 22 "Gee, I didn't mean that," then it is intentional. 23 And if, indeed, it could be considered 24 material, I take Kipp's point one step, two steps, 25 three steps. The three-point conversation, Diversified Reporting Services, Inc. - (202) 296-9626 50 1 particularly in a technology company or any kind of 2 company that people are talking about a product, can 3 result in, "Oh, my goodness, I just gave away 4 something that could be viewed as important." 5 And the mosaic point, Commissioners, I 6 mean, it is best done with 20/20 hindsight, as 7 opposed to, "Gee, what did you say at that meeting," 8 which goes to the question of what the lawyers 9 advise. 10 CHAIRMAN UNGER: But FD only applies to 11 conversations you have with securities 12 professionals. 13 MR. SHEDLARZ: I think part of the 14 problem is that there is in FD a fair amount of gray 15 area, and if you want to take a conservative 16 posture, the lawyer is going to be overbearing in 17 terms of the way which you approach your investment 18 relations activity, and in that particular company, 19 that would be the practice. 20 I think one of the critical things for 21 the SEC is will you be second-guessing good 22 corporate citizens, people who are well-intentioned 23 in terms of what they are trying to communicate. I 24 think if that is done, then the environment will 25 turn quite conservative because I think, given the Diversified Reporting Services, Inc. - (202) 296-9626 51 1 nature and expanse of aspects of Regulation FD, once 2 again, until we see how this is actually practiced 3 by the SEC, which will hopefully be done in a way 4 that is quite even-handed and respectful of the 5 bunches of folks that try to comply with Regulation 6 FD, and if that is done, I think things will work 7 out in time. 8 If it is not, if it is done in a way that 9 puts in jeopardy good corporate citizens, I think 10 you will find quite a different reaction from 11 companies in the investment community. 12 COMMISSIONER HUNT: Let me respond to 13 that, if I may. First of all, at least from my 14 part, and I can only speak for myself, I can't speak 15 for the Chairperson. 16 CHAIRMAN UNGER: Go ahead. 17 COMMISSIONER HUNT: I would like to be 18 very cautious in terms of the way that we enforce 19 this. We did not promulgate this for the purpose of 20 giving the enforcement another arm to use. 21 We promulgated it for an entirely 22 different reason, we tried to establish a level 23 playing field of information for everybody out 24 there. I think we have been very cautious in terms 25 of not trying to leap on the bandwagon of Diversified Reporting Services, Inc. - (202) 296-9626 52 1 enforcement matters right out of the box, which is 2 how people view Regulation FD. 3 I understand that people need time to get 4 accustomed to the new regime and they should be 5 getting accustomed to the new regime without undue 6 fear of the fact of what we are going to try to do. 7 And a follow-up question to what you said 8 is, do you think we should be giving more concrete 9 advice or do you think it is too early for that? 10 CHAIRMAN UNGER: While you think about 11 the answer, I would join Commissioner Hunt's 12 comments, and he does articulate my views on that. 13 In fairness, I think that both David 14 Becker and Dick Walker, who some of you know, I 15 think they have been fairly vocal in their public 16 statements to try to allay some of the concerns that 17 people have. We absolutely don't intend to punish 18 corporate citizens and I think Commissioner Hunt 19 poses a very good question: If the concern about 20 doing what is right is making you not do it at all, 21 how can we give you more comfort about the way to do 22 it right? 23 MR. RUDER: Can I just comment on that? 24 The problem that you have raised with the 25 rule is -- one big problem is the use of the word Diversified Reporting Services, Inc. - (202) 296-9626 53 1 "material." And I think that's what we are talking 2 about here. 3 You are putting corporate America in the 4 decision-making role of having to decide at the time 5 they are making a statement whether what they are 6 saying is material. And the standards for judging 7 materiality, as we all know, are very uncertain. 8 And many lawyers will say to someone, "If the 9 statement is material, it is going to create a lot 10 of problems, so don't make it." 11 And I think the problem that you need to 12 address is whether or not there is some way to 13 address the threshold of materiality for the 14 purposes of this rule that is different than 15 standards in a fraud case. 16 COMMISSIONER HUNT: When we were 17 talking about this rule, we looked at all the 18 standard literature on materiality, the TSC and all 19 the rest of it, and we came at least to a tentative 20 conclusion that we shouldn't. 21 Now, we may be wrong about this, we 22 shouldn't redefine materiality just for this rule. 23 People already knew what materiality meant, what 24 investors want to see before making a decision. 25 Do you think we were wrong in our Diversified Reporting Services, Inc. - (202) 296-9626 54 1 thinking and we should define it for this rule? 2 MR. RUDER: I think you should 3 investigate it. 4 You do know that one of the things you 5 did was to incorporate SAB-99 in this release, so 6 that a staff statement on materiality now has become 7 a Commission statement. And that also raised the 8 boundaries on materiality. 9 I don't have a judgment, except as a 10 former Commission person, I say you should study it 11 and see whether there is something you should do. 12 CHAIRMAN UNGER: Is one of the problems 13 the disconnect, that now we are talking about 14 company officials making the determinations of 15 materiality as they are engaged in dialogue, as 16 opposed to lawyers studying documents filed with the 17 Commission in which they could determine, maybe more 18 objectively, whether it is a material statement? 19 MR. RUDER: But you have a shazam effect 20 in your rule which says the minute it becomes 21 material and you know it is material, now you have 22 24 hours to act. And that puts a big burden on 23 those that are going to decide whether information 24 is material. 25 MR. HUBER: If it was intentional, the Diversified Reporting Services, Inc. - (202) 296-9626 55 1 shazam is you already violated FD unless you had 2 simultaneous publicity of it. 3 Going back to the Commissioner's point, 4 my real comment here is, you are creating a 5 tremendous amount of pressure on people to do 6 exactly what David is talking about with respect to 7 SAB-99 and its synergistic effect with respect to 8 FD. My answer to your question is, as opposed to 9 changing materiality, the incremental approach that 10 I would recommend is take some of the pressure off 11 companies with respect to publication intent and 12 making some statements sort of Safe Harbors in terms 13 of saying, "If you say certain things, it is going 14 to be okay." 15 A lot of the flexibility is not taking 16 prisoners with respect to good-faith attempts at 17 compliance, I think are very important concepts with 18 respect to what the gentleman from Pfizer was 19 talking about, with which I agree. 20 You are trying to encourage this exposure 21 process as opposed to basically saying, "There is a 22 hair trigger here and if you violate that hair 23 trigger, that's a problem." 24 COMMISSIONER HUNT: Well, I am somewhat 25 concerned that in matters of public forum statements Diversified Reporting Services, Inc. - (202) 296-9626 56 1 of staff people and Commission staff, that we don't 2 think this is a hair trigger. There is still some 3 feeling about that, we have to be overly cautious or 4 they are going to get us." And that's very 5 troubling to me because that is not the atmosphere 6 in which this rule was promulgated. 7 CHAIRMAN UNGER: I don't think that is 8 the spirit of the rule. 9 MS. PEARSON: At EMC, they have long 10 trained us, there is no such thing as a complaint 11 without proposing a solution. 12 So we are kind of working through all of 13 these things, and really one potential solution, 14 recognizing the number of newly-public companies, 15 the number of people who have never dealt with 16 global equity markets that are suddenly finding 17 themselves in this world, the number of attorneys 18 who have never had a whole lot of training in this 19 role, that are suddenly the authority. Perhaps it 20 is one of training. 21 I know the New York Stock Exchange does a 22 great job for the listed stocks. I am sure the 23 NASDAQ does as well. Maybe there should be a 24 section on newly-listed companies, "Here is a 25 section on how do you deal with disclosure, and this Diversified Reporting Services, Inc. - (202) 296-9626 57 1 is the best and most proper way. These are best 2 practice guidelines for you." And then, just have 3 the SEC publish best practice guidelines to take out 4 some of the guess work. 5 If you do agree most companies are 6 disclosing information well today. I think we have 7 all read horror stories about a small cap 8 newly-public company that has done something 9 horrifying, giving the investor relations profession 10 a bad name, but let's just maybe put a little 11 training in at the beginning. 12 COMMISSIONER HUNT: I presume that most 13 companies are trying to be good corporate citizens, 14 just like I presume that most companies are trying 15 to put out adequate financial statements. Now my 16 faith in the latter is sometimes shaken, but I do 17 think most corporations are trying to be good 18 corporate citizens, and I really don't want to do 19 anything -- and one of the reasons we are having 20 this session is because we don't want to do anything 21 -- to restrict the free flow of information. 22 If FD is having that effect, then we have 23 to think hard about how to fix it because that's the 24 last thing we want to do, is to hinder the free flow 25 of information. Diversified Reporting Services, Inc. - (202) 296-9626 58 1 CHAIRMAN UNGER: Speaking of free flow 2 of information, I did want to get at least a little 3 feedback from the panelists about how you can 4 disseminate information. 5 What has been the current practice under 6 FD? Has that changed? Can we make it easier to 7 disseminate information without the shazam effect? 8 MR. BEDARD: I guess that's probably the 9 easiest part, make a conference call and put it out 10 on a press release. 11 MR. LUSK: Yes. 12 CHAIRMAN UNGER: Is that the standard 13 practice? 14 MR. LUSK: Yes. 15 MR. BEDARD: Yes. 16 MS. PEARSON: Although that does take an 17 awful lot of preparation, being a realist, and we 18 want free flow and high-tech. The last conference 19 call we had that I got stats, we had 17,000 people 20 listen to it within the first 24 hours. So my world 21 moves real fast, as I am sure Doug's does and 22 Kipp's. 23 But doing a news release, and we move 24 rapidly, but it does add hours into the process, as 25 does webcasting now, which means a slide creation, Diversified Reporting Services, Inc. - (202) 296-9626 59 1 because slide companies want things 24, 48 hours 2 ahead of time sometimes, so that requires more time 3 when you are broadcasting to as many seats as we 4 are. 5 So the other thing I would like, and I 6 think you have done a great job, Laura, and that is 7 using the word "intent" in getting the information 8 out, not strictly mandating news release, period. 9 But recognizing that, we, as communicators, need 10 many, many tools in order to get the information 11 out, and the best way we think, weighs the 12 information size or impact with the tool. Let us 13 balance that and then make it freely available to 14 anyone that is mildly interested. 15 MR. BEDARD: I think that's a great 16 point. The tools that we use are not always 17 conventional. There are lots of different ways to 18 channel information to prevent something from being 19 a disaster. 20 Maybe there is somebody that started a 21 rumor because they want to short your stock, which 22 could devastate the small investors that are 23 particularly the long fliers, and if you could 24 address that without a press release, you could just 25 get it stopped within the first hour or two. Diversified Reporting Services, Inc. - (202) 296-9626 60 1 What you are really asking us to do, or 2 at least what we tend to feel like we are being 3 asked to do, is, "Wait, wait, wait until it gets 4 material enough where then you can address it." I 5 think that is harmful for everybody and creates much 6 more volatility for a lot of stocks, that kind of 7 action. 8 COMMISSIONER HUNT: I have heard, not 9 just here but in other venues, that a lot of people 10 think that Regulation FD has increased the 11 volatility of stocks. 12 It seems to me, and I want to hear what 13 you have to say, that given the time when the FD was 14 promulgated, it is very hard to know or measure what 15 impact it has as opposed to everything else going 16 on. How can you carve it out? 17 MR. BEDARD: It really is a gut feeling. 18 It is hard to measure statistics on what the impact 19 has been. 20 MR. LUSK: Yes, I think it is almost 21 impossible, especially in light of what has happened 22 in the stock market. 23 As long as I have been at Intel, every 24 quarter we have rumors at IR, we are not going to 25 make our expectations, we are going to beat them, Diversified Reporting Services, Inc. - (202) 296-9626 61 1 you know, rumors out there every single quarter. 2 And I am not sure that will ever go away no matter 3 what we do, quite frankly. 4 It is one of those things that is 5 frustrating for us to sit there and watch as we have 6 our expectations posted or we reiterate our 7 expectations, but rumors are out there and we really 8 can't address them. But I am not so sure how you 9 get away from that. I think that is going to happen 10 no matter what. 11 CHAIRMAN UNGER: Didn't Intel have a 12 very dramatic decrease, temporarily -- 13 MR. LUSK: Oh, yeah. 14 CHAIRMAN UNGER: -- at the initial stage 15 of FD? 16 MR. LUSK: Well, that was just a 17 coincidence. As I said, we have been doing this for 18 about five years and on numerous occasions we have 19 had to come out and issue a press release and have a 20 conference call and say, "We aren't going to make 21 our expectation," or "We are going to beat it." And 22 we have had to do that numerous times over the last 23 five years. 24 In fact, the last quarter we had to do 25 that. And it gets out there all at once. There is Diversified Reporting Services, Inc. - (202) 296-9626 62 1 no talking to the analysts and sort of talking them 2 down. It is just all of a sudden there is a press 3 release on the wire after the market closes, "Intel 4 is not going to make its expectations." And often 5 the case is the stock will drop quite dramatically 6 and we have to talk people through it on a 7 conference call. 8 We have done that several times, yes. 9 MR. SHEDLARZ: One of the things that is 10 clear in this volatile capital markets environment 11 is that enhanced disclosure and an environment in 12 which more disclosure is encouraged, is critically 13 important. 14 And I think, as a number of the panelists 15 have highlighted during the discussion, this is not 16 solely, or even in this environment primarily, about 17 earnings and earnings guidance. In many respects, 18 disclosure about non-financial items that would 19 impact both the short and longer-term position of 20 the company becomes critically important in terms of 21 how a company is perceived and how low the capital 22 market is. And that provides probably a more 23 difficult circumstance in terms of making sure that 24 you live within the confines of Regulation FD. 25 Just the nature of disclosure today, we Diversified Reporting Services, Inc. - (202) 296-9626 63 1 can all appreciate less focus solely on the reported 2 financial results of the company and the increasing 3 extent the investors of the company are demanding a 4 better understanding of what drives the company's 5 performance and all the terms disclosed on those 6 items on an ongoing basis. 7 In the case of Pfizer, what is critically 8 important is what is happening with a new product, 9 which may be sitting with the FDA or may be sitting 10 in research and development. There is no bright 11 line test in terms of what is material and what is 12 not material in that regard. It is a fact and 13 circumstance situation which makes it even more 14 difficult to deal with it. 15 So I don't think any of us deny that it 16 is critically important to have broad-based 17 disclosure. I am sure the SEC is well aware of the 18 fact that living under the confines of that 19 Regulation, dealing with both financial information 20 and basic operation information becomes an 21 increasing challenge. 22 CHAIRMAN UNGER: Going back to the point 23 that Kipp mentioned, that is, using a variety of 24 tools to make an ongoing dissemination of 25 information possible, what kinds of tools are you Diversified Reporting Services, Inc. - (202) 296-9626 64 1 talking about? And do you think FD permits you to 2 do this? 3 MR. BEDARD: I guess maybe I have 4 already been one of the more harsh critics today of 5 Reg FD, and I believe the theme that was stated 6 earlier was the right thing to do when you are 7 trying to promote a better flow of information, more 8 timely, more accurate, what we are all trying to 9 accomplish. 10 The fact is in day-to-day operations that 11 is difficult to do now with the attorneys and 12 everyone else putting pressure back on us, "If you 13 don't know for sure, be careful what you say," so 14 there is this tug of war. That being said, first, 15 some of the others, with the Internet today, 16 information flows instantaneously. Even the SEC 17 itself has changed from a guidance standpoint, it 18 normally was two business days to a week; it was 19 five business days when I first started back in 20 1983, then two days for pretty reasonable 21 dissemination of information. Today, literally, you 22 can make an argument that by the time everybody got 23 involved and got on the Internet at work they've now 24 seen all the information throughout the day, so you 25 are really talking about a six or eight-hour period Diversified Reporting Services, Inc. - (202) 296-9626 65 1 -- maybe two or three hours. So information flows 2 fast. 3 So that being said, just issuing a press 4 release might not be the most efficient way to 5 disseminate information. Some people may not have 6 access to that press release, for example. So we 7 have to use a myriad of dissemination tools to get 8 information out there. One by itself is never 9 enough, I have found. 10 MR. HUBER: The point I would add to 11 what Kipp is saying, is one size doesn't fit all, 12 not just in terms of methods of dissemination but in 13 terms of the companies as well. 14 We have companies who will issue a press 15 release and not have it picked up. We have 16 companies that literally can be pounding the door of 17 a service and still not get the information carried 18 through any service. So the rule says "means 19 reasonably designed to disseminate." I guess my 20 point is for the Commission to literally embrace 21 that concept and have more flexibility with respect 22 to the fact that one size doesn't fit all issuers 23 because diversity is good, and not penalize people 24 for a good-faith effort in trying to get the word 25 out. Diversified Reporting Services, Inc. - (202) 296-9626 66 1 COMMISSIONER HUNT: When we promulgated 2 the rule, we were very conscious of the Fortune 5000 3 companies, we weren't worried about the Fortune 500. 4 We were worried about the Fortune 5000 companies 5 make their information available. Means reasonably 6 designed under the circumstances are substantially 7 different for a Fortune 5000 and a Fortune 500. 8 MR. HUBER: I agree. 9 CHAIRMAN UNGER: Does FD prevent you 10 from using all of the tools that are available that 11 would be effective in disseminating information? 12 MS. PEARSON: It may. I know one piece 13 of dialogue that is going around and around in my 14 company, and we have very friendly shareholder 15 attorneys at my company, we love our attorneys, and 16 that is, in essence, if a tree falls in the forest 17 and no one reports on it, did it actually fall? 18 So when we are at an investment 19 conference and we are speaking freely and it is 20 webcast live and it is being posted on EMC's website 21 within nanoseconds, and there are journalists in the 22 room, and we say something that might have the 23 slightest degree of materiality, depending on the 24 subjective nature of the audience, I would rather 25 not issue a news release afterwards. I feel it is Diversified Reporting Services, Inc. - (202) 296-9626 67 1 out there, there were journalists in there, and I 2 would like to say if the journalists felt it was 3 newsworthy, they are feeling "oohs" and "ahs" and 4 whatever in the room, I would like them to report on 5 it or not report on it, but I would like to feel 6 that that was disclosed in an open environment. 7 CHAIRMAN UNGER: Do you not feel that 8 way now? 9 MS. PEARSON: That's the way we have 10 been practicing, but nothing material in neon has 11 been put forward in these type of events. There is 12 a real subjectivity to what is material in this 13 world, as you know. 14 So I am leery on that, I am uncertain. 15 MR. BEDARD: That takes us back to the 16 original point where as long as you have a press 17 release, a webcast and a conference call, you feel 18 protected. Anything else, you have to swing shy for 19 everything, "Should I press release now? I am not 20 quite sure." It is really an awkward situation. 21 COMMISSIONER HUNT: The problem is it 22 is technology driven. There are so many people who 23 have access to one means of communication and not to 24 others, so to cover your bases, I don't know how you 25 get around not using a mixture of media to get the Diversified Reporting Services, Inc. - (202) 296-9626 68 1 information out. 2 MR. BEDARD: I think Polly makes a good 3 point, too. Even in our own business, in our space 4 in the memory business, the type of information that 5 is deemed material at any point in time changes. 6 In some business it might always be 7 earnings related. A lot of times, in ours it is not 8 earnings related, it is mostly that a change in the 9 direction of the stock price elicits a change in the 10 direction of the inventory. Is industry building it 11 or is it shrinking it? And it could be material at 12 one point in time, where another time, it isn't. 13 So I guess that brings me full circle 14 back to trying to put some definition on whether it 15 is material. Wow, this is really tough to address 16 all the different companies -- 17 COMMISSIONER HUNT: It is hard. 18 MR. BEDARD: It is really hard to do. 19 CHAIRMAN UNGER: We have a very strict 20 timetable here. We have about five minutes left on 21 the panel, so I would like to give you all an 22 opportunity to raise something that maybe didn't 23 come up in the course of the conversation, and we 24 will go around the room, and maybe you could mention 25 if you wanted to change one thing about Regulation Diversified Reporting Services, Inc. - (202) 296-9626 69 1 FD, what would it be. 2 Does anybody want to raise any additional 3 points or topics? 4 MS. PEARSON: I guess I could start. I 5 found that every time there has been a change in our 6 industry, like in most industries and every 7 profession, change is hard. 8 I can remember the discussion on whether 9 we should open our con calls, ten years ago, to 10 individual investors and would that open us up for 11 strike suits and all of this sort of thing. And we 12 said, "It is the right thing to do, let's do it." 13 At Safe Harbor time, "Do we really want 14 to publish and make clear all of our bulletins and 15 guidance," again, the same fear. "It is the right 16 thing to do, let's do it." There have always been 17 tough decisions that you face, web-based 18 communications, "Let's do it." 19 So our philosophy is, "Embrace it, don't 20 fear it." And I am thrilled to have what appears to 21 be such an understanding Commission, and just keep 22 that word "intent" there; know that most companies 23 are operating with very, very good intent and do 24 what you can to protect us from overzealous 25 attorneys on the bad side. Diversified Reporting Services, Inc. - (202) 296-9626 70 1 MR. BEDARD: I guess I will go second. 2 Just for record, I love attorneys, my boss is one. 3 That being said, I think the intent of 4 Reg FD is right on the mark. It only encourages all 5 communication professionals to disseminate 6 information on a timely basis and a free-flow type 7 manner, which is what we are all trying to strive 8 for. And if we can somehow eliminate the fear or 9 the impropriety of coming out in one area. All 10 these decisions could somehow eliminate the need for 11 someone to be in a position of feeling like you have 12 to make a decision based on information that is 13 different for everyone. I am not saying that very 14 well. 15 It is a very difficult decision to 16 determine what is material, it is very difficult to 17 know have you reached the actual level of 18 dissemination that is required by Reg FD. And if we 19 can somehow address those issues, then Reg FD will 20 be a lot farther ahead in trying to, I think, get to 21 the goal of why we are all here, which is fair 22 dissemination of information to all audiences in a 23 high-quality and timely manner. 24 MR. HANN: I will go next. I love 25 attorneys, too. Diversified Reporting Services, Inc. - (202) 296-9626 71 1 Once again, I would applaud the 2 Commission for having this forum today. I think it 3 is very helpful and hopefully everybody can tell in 4 the audience that people are struggling, working 5 hard to comply. And I would echo the statements 6 made thus far that anything the Commission can do to 7 improve and widen these safe harbors, I think, would 8 be very, very helpful and ultimately help meet the 9 effectiveness of Reg FD. 10 Thank you. 11 MS. DEMSKI: My comment is with respect 12 to improvements that would be in the area of 13 providing some guidance so that the small cap 14 companies, in particular, that may be new to the 15 public environment would have some guidance provided 16 to them, because even if you were to poll the 17 attorneys -- and I hate to keep bringing up 18 attorneys here, but within the publicly traded 19 companies in biotech in San Diego, there has been a 20 difference in advice from the respective attorneys. 21 And we talk amongst ourselves and compare 22 notes, and there isn't always consistency on how to 23 handle a given situation, so if a best practice form 24 of guidance could be provided, I think that would 25 help to alleviate some of the confusion and also Diversified Reporting Services, Inc. - (202) 296-9626 72 1 some of the apprehension about dealing with this. 2 MR. SHEDLARZ: I am actually still 3 forming my opinion on attorneys after 25 years. 4 I think there is a common theme in what 5 you are hearing here. I think that most folks are 6 good corporate citizens. I think this puts greater 7 onus on folks at a time when you are seeing very 8 volatile markets and, again, an increase in quantity 9 and quality of information on an ongoing basis. 10 I think the way that this is practiced by 11 the SEC in terms of whatever actions they take and 12 whatever flexibility they show, I think sessions 13 like this will make clear to folks that you are not 14 on a mission in terms of industry. 15 I thank the SEC for holding this session 16 and giving us an opportunity to speak on behalf of 17 some of the concerns that we have with regard to 18 Regulation FD. I think the extent to which you can 19 provide some guidelines would be useful. I know 20 that is difficult, but we are dealing with something 21 as expansive as this, cutting to the core of your 22 communications with a broad base of investors, I 23 think wherever you can provide us some Safe Harbors 24 and bright line tests, I think that will continue to 25 allay people's concerns and probably avoid what Diversified Reporting Services, Inc. - (202) 296-9626 73 1 clearly nobody wants, that is, finding that you have 2 a very cautious atmosphere in terms of disclosure. 3 COMMISSIONER HUNT: Well, in thanking 4 all of you, I just want to say, as we have given you 5 the benefit of the doubt that most people are trying 6 to be good corporate citizens, I hope all of you 7 will give the Commission the benefit of the doubt 8 that we are trying to be good regulatory citizens 9 and are not out to get you. So thank you all. 10 CHAIRMAN UNGER: Did everyone get a 11 chance? 12 MS. THOMPSON: I don't mean to beat a 13 dead horse, but two things, the interpretation of 14 the rule has been a big problem. And, again, and it 15 is anecdotal evidence, as I look around, some people 16 are more hampered than others simply because of the 17 unclearness, perhaps, of the way the rule is 18 promulgated and the interpretation of it. 19 And, secondly, most of us in investor 20 relations do have good disclosure policies. 21 National Investor Relations Institute, Lou Thompson 22 was our CEO, will be on a panel later today, have 23 published standards of good practice for investor 24 relations long before FD was promulgated, that we 25 provide a lot of education to public companies. Diversified Reporting Services, Inc. - (202) 296-9626 74 1 There are a lot of venues out there for IR 2 professionals, either new or seasoned, to learn how 3 to practice good investor relations. 4 I guess there seems to be a feeling that 5 people were not doing that, and I think we really 6 were. 7 MR. HUBER: The one thing I may add is 8 that we appreciate guidelines and good practices and 9 best practices, but please don't put corporate 10 America into square peg, square hole kind of 11 analysis from the SEC. Because the moment the SEC 12 says, "This is the way to do it," it is going to be 13 the kind of thing that people are going to say, 14 "Well, if we want to reach outside of this," if you 15 want cautiousness, again, from your lawyers, if you 16 want to reach outside of that, that is a problem. 17 It is not that the safe harbors are a 18 whole lot better in terms of telling people than 19 not, moreover, more flexibility in this rule, and I 20 would submit to you, it is really the rule, not the 21 lawyers. It is really more flexibility in this rule 22 in terms of getting away from intent and 23 simultaneity and getting you to promptly encouraging 24 disclosure and allowing for a multiplicity of public 25 meetings without penalty. And you will start to see Diversified Reporting Services, Inc. - (202) 296-9626 75 1 more people be more open with respect to this point 2 and stop the chilling. 3 MR. RUDER: Since commentators can 4 comment, I would like to remind all of you that the 5 SEC has, both today through the comments of 6 Commissioner Hunt and Chairman Unger, indicated that 7 the SEC's enforcement posture is not going to be 8 fierce, and your director of the division of 9 enforcement, Dick Walker, gave a speech in October 10 of last year in which he made it very clear that the 11 SEC is going to be very hesitant to bring regulatory 12 actions here. 13 I think that assurance ought to go a long 14 way towards helping the lawyers, God bless them, to 15 be less cautious and less restrictive in their 16 advice to clients. 17 CHAIRMAN UNGER: Well, I am going to 18 beat a dead horse because that is a regulator's 19 prerogative, but I thought it would helpful to just 20 sum up what I think I heard today and tell you what 21 I am going to walk away from this panel thinking 22 about. 23 One is, first, kill all the attorneys. 24 The safe harbor interplay, that is really 25 something -- I worked on the safe harbor Diversified Reporting Services, Inc. - (202) 296-9626 76 1 legislation, so I hadn't really considered the full 2 extent in which we actually have some flexibility to 3 do a little bit more there. So that's something I 4 would like to look at, and I appreciate the 5 conversation about that. 6 Means of dissemination, the tools that we 7 talked about and the fact that we need a variety of 8 ways to communicate a variety of different types of 9 information, I think that is an important point. 10 The guidance. Of course, I knew there 11 was a need for guidance, but then the guidelines are 12 very difficult for us. We are always a little 13 paranoid that if we draw a bright line, people are 14 going to be walking right next to it or outside of 15 it. But we could do more in terms of providing 16 guidance on materiality and perhaps other aspects of 17 the rule. 18 And, then, finally, I thought the notion 19 of best practices was something worth exploring, and 20 we will be having conversations about the SROs, 21 about involving them more because they do have their 22 own rules that are similar to this, actually. 23 Except for the means of disseminating the 24 information, they do have some rules that are along 25 the lines of FD. Diversified Reporting Services, Inc. - (202) 296-9626 77 1 So I appreciate your time and the 2 frankness of the conversation, all of you who have 3 traveled here, and everybody's willingness to 4 participate in what I think has been a very helpful 5 and productive panel. 6 COMMISSIONER HUNT: I want to say not 7 everybody here is against lawyers. And I quote 8 from Shakespeare, "If you want to destroy liberty, 9 first kill all the lawyers." 10 CHAIRMAN UNGER: Thank you. 11 I would like to invite the next panel to 12 come up. 13 (Off the record.) 14 CHAIRMAN UNGER: If people would like to 15 return to their seat, please, we will get back on 16 the schedule. 17 Thank you all. This is also a very 18 exciting panel that we have here and I don't want to 19 have to cut it short because it will cut our 20 lunchtime short, so I want to make sure that the 21 panels have ample time to fully discuss a lot of the 22 issues and perspectives they hold as a result of FD. 23 So I thought, if you don't mind, that we will go 24 around the room starting with Floyd, and give the 25 same kind of introduction we did with the last Diversified Reporting Services, Inc. - (202) 296-9626 78 1 panel. 2 If you want to put up or if there are any 3 specific points that you think we should discuss, I 4 would appreciate that. 5 MR. NORRIS: I want to thank you and the 6 Commission for inviting me to appear today. 7 CHAIRMAN UNGER: And I have been asked 8 by the webcaster that we all speak into the 9 microphone. 10 MR. NORRIS: Regulation FD has enabled 11 me to do a better job. I think it is working very 12 well. The last thing I would want you to think is 13 that I am an uninterested observer. 14 My job is to write news stories and 15 columns about investments, markets and the economy. 16 I often find myself wanting to learn quickly about a 17 company about which I may have known very little 18 before I began working on an article. Being able to 19 listen to a conference call, including those from 20 several months or weeks earlier, is invaluable to 21 me. 22 I want to talk briefly and remind you of 23 how things used to be in the pre-FD days, and more 24 importantly, the pre talk about FD days. Some of 25 the more disingenuous talk leading up to FD argued Diversified Reporting Services, Inc. - (202) 296-9626 79 1 that because there was a lot more disclosure after 2 former Chairman Levitt began talking about the new 3 rule, that there was no need for a rule. I thought 4 that was wrong then; I still think so. 5 I have been in this business for more 6 than two decades. I have been kicked out of road 7 shows that allowed every retail broker who was 8 willing to come listen, on the presumed basis that 9 the brokers were professionals, while I was somebody 10 who might sully the minds of innocent investors with 11 what the companies were saying. 12 I have been lied to by companies more 13 than a few times. I have been refused permission to 14 listen to conference calls. I found myself calling 15 analysts, not seeking their insight or their 16 opinions, just trying to get them to tell me what 17 they had been told by the company. They often felt 18 they had better things to do with their time, and I 19 suspect they did. 20 A few years ago, it was common to read 21 articles in the newspapers and on the wires that 22 went something like this, "American Widget shares 23 fell yesterday after analysts from three," or four 24 or five "Wall Street firms cut their earnings 25 estimates." I used to occasionally call the Diversified Reporting Services, Inc. - (202) 296-9626 80 1 companies and ask what they had told the analysts. 2 Sometimes they would tell me, but often they would 3 sit there and deny they had said anything. 4 In the news room, we would tell jokes 5 about widget analysts all waking up, looking out at 6 the sunrise and simultaneously realizing the widget 7 industry was running into problems. 8 I do think that there are people 9 suffering from FD. I think many Wall Street 10 analysts are going to have trouble adjusting to it. 11 Their role in the past has partially been the role 12 of conveyors of what managements wanted distributed 13 but don't want to announce publicly. That role is 14 going to be reduced, if not eliminated. I think 15 this is going to be a problem for some. 16 It has long seemed to me that many 17 analysts were really too busy to do a very good job 18 anyway. They covered too many companies, they spent 19 an awful lot of their time selling, they spent a lot 20 of time working on investment banking deals in some 21 cases, and they spent some time talking to people 22 like me. That didn't leave a lot of time for really 23 poring over financial statements, talking to 24 competitors and customers and simply thinking about 25 changing trends. Diversified Reporting Services, Inc. - (202) 296-9626 81 1 In recent months, the press, including my 2 newspaper, focused on the conflict of interest 3 problems confronting Wall Street analysts. And I 4 think those problems are real, but I think the 5 bigger problems are a lack of time and the market 6 reality that Wall Street makes so little money from 7 commissions that there is very little incentive to 8 really serve the customers who are paying those 9 commissions with quality analysis. I think FD 10 might, over time, actually improve that situation. 11 Under the old rules, analysts who angered 12 management were sometimes excluded from conference 13 calls, they were certainly excluded from the private 14 conversations that could help their competitors in 15 warning their customers about changes in the 16 company. That is less likely now, and, therefore, 17 we also have a more level playing field for 18 analysts, which I think could be valuable to 19 analysts who are trying to do a good job. 20 Let me also talk about some of the claims 21 made by those who opposed FD. One is that companies 22 will disclose less information. I have seen two 23 polls of companies on this, and I doubt either is 24 scientific. Both came to similar numbers, which was 25 about half of the companies said they were Diversified Reporting Services, Inc. - (202) 296-9626 82 1 disclosing the same amount of information and of the 2 remaining companies who answered the question, about 3 a quarter of them, say about half of the remainder, 4 said they were exposing more, and about half said 5 they were disclosing less. 6 I don't think it is good that they are 7 disclosing less information, but I think the 8 companies that want to disclose information will 9 find ways to do it. There are companies that I am 10 familiar with that will never talk to me or any 11 reporter, and there are companies that will never 12 talk to an analyst. That's their right, they 13 publish their financial statements and that's it. 14 Nothing can make them talk more unless they think it 15 is in their interest to do so. 16 One of the comments that was made earlier 17 by the gentleman from Micron, which puzzled me and I 18 wanted to react to it briefly, was that he felt it 19 was harder to discuss -- he seemed to be indicating 20 that he had to wait until information was material 21 under this rule to discuss it. Now I am unfamiliar 22 with any SEC rule that forbids companies from 23 disclosing information that they believe to be 24 immaterial. Nor does this rule require them to 25 disclose material information. It simply requires Diversified Reporting Services, Inc. - (202) 296-9626 83 1 that if he chooses to disclose material information, 2 he cannot do it on a selective basis, which I have 3 always thought was the law to begin with, or at 4 least should have been the law. 5 Finally, I want to talk briefly about 6 volatility. I don't think anyone knows whether this 7 has affected volatility. I am also hearing now a 8 lot of people blaming the new decimalization trading 9 for the reason we have increased volatility. We had 10 an awful lot of volatility before either of these 11 changes took effect, but if it is producing extra 12 volatility, I think the answer is to do nothing and 13 wait for the markets to learn to cope with it. 14 From block trading in the '60s and the 15 '70s to program trading in the '80s, day trading in 16 the '90s, I have been told that volatility was being 17 horribly enhanced by these new changes and it had to 18 be stopped. Well, traders learn how to adapt to all 19 those changes in the market and if there were 20 traders who didn't learn how to adapt to them, they 21 found other professions. They will learn to adapt 22 to this as well. 23 MR. THOMPSON: I am Lou Thompson, and I 24 represent the National Investor Relations Institute. 25 We have about 5,600 members representing about 2,700 Diversified Reporting Services, Inc. - (202) 296-9626 84 1 public companies, about 48 percent of those listed 2 with NASDAQ, 46 percent with the New York Stock 3 Exchange, and the rest with AMEX. 4 We believe, from the SEC's perspective, 5 that the Commission should be rather pleased with 6 the results of Reg FD in terms of leveling the 7 playing field when it comes to equal access to 8 information. In our view, Reg FD is really bringing 9 an information bonanza to the individual investor. 10 We asked in a recent survey in February, 11 I don't know whether you would call it scientific or 12 not, it was a sample of 577 public companies 13 profiling our membership by market cap, by industry 14 groups, et cetera. And the results are within four 15 percent, three or four percent on accuracy in that 16 survey conducted by an outside research group. 17 We asked in that survey, whether in the 18 context of the entire investment community, they 19 were issuing more, about the same, or less 20 information. 28 percent said more, 48 percent said 21 the same, 24 percent said less. Now while that may 22 appear to be a wash, the fact that individual 23 investors are now provided much greater access to 24 that information means that they are really getting 25 much more than before. Diversified Reporting Services, Inc. - (202) 296-9626 85 1 89 percent are conducting 2 fully-accessible webcast conference calls. Ten 3 percent don't hold conference calls because they are 4 not required to, and half of those have no analyst 5 following. Only one percent said they would 6 continue to hold restricted-access calls. 84 7 percent announced their upcoming quarterly 8 conference calls in a news release, generally a week 9 in advance. 75 percent post a notice on their 10 websites, and 54 percent are using push technology, 11 e-mail push technology, to notify interested 12 investors of their upcoming calls. 13 67 percent are providing earnings 14 guidance in their news release. 89 percent discuss 15 this guidance in their conference calls. 33 percent 16 issue guidance in an SEC filing. 17 Now NIRI, the Exchanges and NASDAQ would 18 like companies to put their material earnings 19 guidance in a news release before discussing it in 20 their conference calls. Now the self-regulatory 21 organizations, however, still do not recognize the 22 fully-accessible conference call as a means for full 23 disclosure, as does the SEC in Reg FD. 24 The New York Stock Exchange recently sent 25 a letter to its listed companies saying they are not Diversified Reporting Services, Inc. - (202) 296-9626 86 1 changing their disclosure requirements to recognize 2 the fully-accessible conference call as a means of 3 full disclosure. In other words, the square peg in 4 the square hole. I mean, it is basically saying, 5 "You must issue a news release as a follow-up." 6 The NIRI survey also shows that 35 7 percent of companies under 500 million market cap 8 are providing no earnings guidance, but only 15 9 percent of mid cap companies and 12 percent of large 10 cap companies are not. Now the Association for 11 Investment Management and Research survey says that 12 the quality of information has declined 13 significantly, and this well may be creating a 14 greater spread in earnings estimates and increased 15 volatility demonstrated by six out of ten 16 respondents to the annual survey. 17 Now, we believe the reluctance to engage 18 in any discussion with analysts who are asking for 19 comment on business trends or information they have 20 gathered in constructing their mosaic is because 21 companies are concerned over whether those 22 discussions may be material. 23 When the SEC listed earnings guidance at 24 the top of the list of items it considers material, 25 and stating in Reg FD release the now famous Diversified Reporting Services, Inc. - (202) 296-9626 87 1 "guidance" paragraph, the name of the game changed 2 considerably. That release says when an issuer 3 official engages in a private discussion with an 4 analyst receiving guidance about earnings, he or she 5 takes on a high degree of risk under Reg FD. 6 That language, in the minds of the 7 lawyers, leaves little doubt about the intent of the 8 SEC's enforcement objectives. And, hopefully, the 9 message you are hearing here today and what David 10 Becker has said in previous speeches, as well as 11 Dick Walker, will cause the lawyers to relax a 12 little bit, but so far we have not seen a lot. 13 The release went on to say, however, that 14 the mosaic is still at work under Reg FD, and that a 15 company official has no liability if he or she were 16 to give an analyst information that the official 17 believes is non-material but happens to be the piece 18 of information that the analyst needs to complete a 19 mosaic and come to a material conclusion. 20 Now, while the SEC feels it probably did 21 nothing in Reg FD to change the definition of 22 materiality, one cannot look at Reg FD without 23 considering the Supreme Court's definition of 24 materiality in Basic versus Levinson, and TSC 25 Industries versus Northway, as well as Staff Diversified Reporting Services, Inc. - (202) 296-9626 88 1 Accounting Bulletin. SAB 99 says that information 2 that moves the stock price may be material as well 3 as qualitative information. Moreover, some 4 securities lawyers have opined that the issue of 5 intent is also brought into the picture in SAB 99. 6 Both NIRI and the AIMR say the questions 7 over materiality may be what is driving the decline 8 in the quality of information. Now, our survey says 9 the percentage that now review analyst earnings 10 models has dropped from to 54 percent from 81 11 percent prior to Reg FD, with the greatest decline 12 among large cap companies which went from 91 percent 13 to 51 percent post Reg FD. 14 Nearly four out of five companies are 15 continuing to hold one-on-ones with analysts and 16 institutional investors to the same extent or 17 greater than before Reg FD; yet, the analysts and 18 the portfolio managers are saying they are getting 19 less information in these forums. 20 And Reg FD, in spite of earlier concerns, 21 seems to be having minimal impact on the composition 22 of a company's sell side coverage or its 23 institutional holdings. Only one of the 577 24 companies in our survey said it lost analyst 25 coverage due to Reg FD, and only five said they Diversified Reporting Services, Inc. - (202) 296-9626 89 1 believe institutional investors sold their stock due 2 to their new disclosure policies attributed to Reg 3 FD. 4 In summary, our concern and that of the 5 AIMR, I think the SIA, the Securities Industry 6 Association, and the American Bar Association, is 7 that placing a regulatory structure based on 8 materiality decisions around a voluntary disclosure 9 process might well result in a chill on the flow of 10 legitimate information, and that may be happening. 11 The playing field has been leveled for 12 the ten to twelve million individual investors, who 13 are largely self-informed and self-directed, and 14 want and deserve more equal access to information, 15 but what about 88 million American investors who own 16 mutual funds, directly or indirectly, and aren't so 17 much concerned about their access to information, 18 but are much more concerned about whether those who 19 are managing their portfolios are getting the best 20 information possible? The evidence suggests that 21 may not be happening, and this problem may be the 22 most significant unintended consequence of Reg FD, 23 the real cost of the new rule. 24 Thank you. 25 CHAIRMAN UNGER: Thank you very much, Diversified Reporting Services, Inc. - (202) 296-9626 90 1 Lou. 2 Cathy, and if you could please speak into 3 the microphone, I have been receiving numerous notes 4 on this. 5 MS. BARON TAMRAZ: I am Cathy Baron 6 Tamraz, chief operating officer for Business Wire. 7 I represent the press release side of the business. 8 I know that in the last discussion there was a lot 9 of talk about press releases versus webcasts and 10 conference calls, et cetera. And I will be mostly 11 speaking about the news release and how the press 12 release services have successfully now migrated onto 13 the Internet and are embracing the technology. 14 As far as Regulation FD, Business Wire 15 believes that it has passed the test and over these 16 past six months it is working as intended. And as 17 primary disseminator of information to corporate 18 America, we have experienced this firsthand. We 19 have seen the flow of news from public companies 20 increase. We have also seen a rise in the pre 21 earnings estimates on webcasts and conference call 22 advisories, and I can get into some stats on that 23 later. 24 Actually, the growth has been 25 exponential, particularly with our partner CCBN, we Diversified Reporting Services, Inc. - (202) 296-9626 91 1 will run about 15,000 webcasts this year. As we see 2 it, the Internet had a lot to do with Regulation FD, 3 basically, to democratize the flow of information to 4 individual investors and consumers and give them 5 direct access to full text news releases that they 6 never had in the past. And, similarly, Reg FD has 7 democratized the disclosure process by making 8 material information directly available to all 9 investors, and it has, thus, provided equal access 10 to market-moving news. 11 And I know there are some nuances that 12 have been discussed and will continue to be 13 discussed about materiality, et cetera. And I think 14 that is something that is important to take a look 15 at. 16 Taking it a step further, Business Wire, 17 I think, did its part to create a level playing 18 field for all investors, and we eliminated the 19 15-minute delay that we had tried to get rid of 20 about a decade prior, but because the process 21 between news distribution and the role of financial 22 media was a pretty complex one, it was a difficult 23 task to accomplish. But Reg FD pretty much gave us 24 the courage to lift that delay, and we took it away 25 in October, and use real-time to anybody that wanted Diversified Reporting Services, Inc. - (202) 296-9626 92 1 to see it. 2 Coupled with that, we and our competitor 3 have successfully migrated onto the Internet. And 4 every news release that is sent out by a service 5 like ours is posted on our website, it is also 6 posted to in excess of 16,000 databases and online 7 services, Yahoo, AOL, other portals, and it lives on 8 in perpetuity, and it is available virtually to 9 everybody. And I think that is something that is 10 really important to remember. 11 And I think today all investors and all 12 companies have real-time access to corporate news 13 and they can reach a very, very large global 14 audience. So I would agree that companies are now 15 providing more earnings guidance to the investment 16 community as a whole and they are doing it on a 17 sustained basis. 18 We took a look at some news wire totals 19 comparing the period October 1 to April 23rd of this 20 year to the period last year, and we saw that 21 earnings guidance releases increased more than 22 tenfold compared to a comparable period a year ago. 23 So that tells you that FD has had some effect on 24 information. 25 And I think companies have adopted an Diversified Reporting Services, Inc. - (202) 296-9626 93 1 open-door policy regarding the conference calls, 2 meaning that the media and the individual investor 3 are included in addition to analysts. Webcast 4 announcements nearly quadrupled in this period, 5 about 11,000 compared to 3,000 the prior year. And 6 the number of teleconference calls nearly tripled, 7 2,000 compared to a little over 600. 8 So I think after an initial period of 9 uncertainty, companies appear to be embracing the 10 spirit of FD and they are making their investor 11 outreach programs more accessible to everybody. 12 I think regarding webcasts, I want to say 13 a word about that. The fact that the SEC recommends 14 that webcasts include a broadly disseminated press 15 release in advance of the events, meant that Reg FD 16 has succeeded in maintaining an orderly information 17 flow. Because you have to get the word out to a 18 service like ours, which is very widely 19 disseminated, that these calls are -- and what 20 events are about to happen. We are talking about a 21 push technology versus a pull technology, two very 22 different types of distribution methods. And a 23 service such as ours does really serve as the 24 information backbone of the financial markets. 25 Business Wire, for example, reaches more than one Diversified Reporting Services, Inc. - (202) 296-9626 94 1 million terminals in the worldwide investment 2 community. 3 I think the role of the news media 4 remains as important as ever because all investors 5 now have access to information real-time. The 6 analysis, context and perspective that bona fide 7 journalism organizations provide is more important 8 than ever, so that role has not been diminished at 9 all. 10 In closing, I think it would be important 11 to say that, from a Business Wire perspective, we 12 would never advise anybody to trade or buy a stock 13 based on a press release alone; you have to take in 14 comprehensive news reports and look at the in-depth 15 assessment before actively trading in one particular 16 company. 17 CHAIRMAN UNGER: Thank you, Cathy. 18 Ron? 19 MR. INSANA: I am Ron Insana with CNBC. 20 It is my personal position and the 21 position of CNBC that we have long felt that any 22 regulation or any piece of legislation that makes 23 the playing fields fairer for individual investors 24 is something that we would wholeheartedly support 25 and we do with respect to Regulation FD. Diversified Reporting Services, Inc. - (202) 296-9626 95 1 I would like to talk about some of the 2 personal concerns that I have about it in a minute. 3 First, though, we have had, in the last several 4 months, two chief executive officers break news on 5 our air with the intent to comply with Regulation 6 FD. They have come on and discussed material 7 earnings guidance that they decided to push on CNBC 8 as a means of disseminating information, and while 9 it is in the early stages to be the vehicle through 10 which many CEOs might deliver that information, we 11 expect that Reg FD will open up a number of 12 opportunities to us to act as a principal 13 disseminator since being in 77 million homes does 14 allow CEOs to reach a broad audience and reach a 15 number of constituents simultaneously, both on the 16 professional side and on the individual investor 17 side as well. 18 That said, some of the things that I have 19 noticed with respect to Regulation FD, and this is 20 more anecdotal than it is scientific, that in the 21 drive to become fair, I am wondering whether or not 22 the market has become slightly less efficient as a 23 consequence. 24 In the older environment, being before 25 Reg FD, there was a dissemination process, though Diversified Reporting Services, Inc. - (202) 296-9626 96 1 informal, that did allow investors some opportunity 2 to move before the bombshell type announcements that 3 you see today, where some corporations might 4 withhold information up until a strategic point and 5 then let the information out, and we see the stocks 6 move dramatically. 7 And while in a bad news environment, 8 analysts, professional money managers and 9 individuals are trapped together and that is much 10 fairer, there is a lot less room for people to sneak 11 out of the stock before the information actually 12 hits the wire. In the old days, with respect to the 13 dissemination flow, you would see a stock move, you 14 would see some discussion of some of the reasons, 15 you would see analysts come out with comments, you 16 would see the company confirm or deny the rumor that 17 was surrounding the stock, and then you would 18 ultimately see a legitimate announcement. 19 In that process, which could take several 20 days, there would opportunities to act. These days, 21 those opportunities seem to be a little bit fewer 22 and farther between, which creates, again, 23 unintended consequences with respect to Regulation 24 FD, and certainly not one that you can principally 25 blame on the regulation, but it does seem from our Diversified Reporting Services, Inc. - (202) 296-9626 97 1 position anecdotally that sometimes that has been 2 the case. 3 In addition, in my conversations with 4 money managers, and particularly hedge fund 5 managers, they have discussed their willingness to 6 find ways to side-step the rule in order to obtain 7 information that would not be available to 8 individual investors anyway, whether they go farther 9 down on the company food chain and talk to people 10 who are not covered by Reg FD, they will, if they 11 are well resourced, find ways to gather information 12 that wouldn't be otherwise available to individual 13 investors. And that is just a consequence, again, 14 of money managers having the time, the inclination 15 and the resources to do sometimes more extensive 16 research than others might. 17 Those are the only things I have noticed 18 so far that make for interesting conversation points 19 when it comes to Regulation FD, and certainly making 20 the playing field more fair and more level is 21 laudable and something that Regulation FD has gone a 22 long way towards accomplishing. 23 But I know Lou has the same concerns as I 24 do with respect to how money managers, who act as 25 intermediaries for individuals, are treated in this Diversified Reporting Services, Inc. - (202) 296-9626 98 1 environment, and that is something that merits 2 further consideration as well. 3 Thank you. 4 CHAIRMAN UNGER: Thank you, Ron. 5 Stuart? 6 MR. KARLE: I am Stuart Karle, I am a 7 lawyer at Dow Jones, and I am on this panel because 8 I am a press lawyer, not a securities lawyer. 9 And one of the things I do, in addition 10 to defending meritless defamation actions, is to 11 deal with people who don't want to give reporters 12 information, whether this is in court or companies 13 who say, "We would love to talk to you, but." 14 Any regulation passed by any government 15 body is always the first refuge of the over-cautious 16 or occasionally, the scoundrel. And so with this 17 regulation, when it went into effect last October, 18 there are companies who in response to an inquiry 19 from a reporter will say, "We would love to talk you 20 but Regulation FD says we can't." And there were 21 even references to that on the panel this morning. 22 That is nonsense. This regulation 23 specifically does not apply to communications with 24 the media, so when companies say that it is because 25 they really do want to talk to the press but for Diversified Reporting Services, Inc. - (202) 296-9626 99 1 reasons having nothing to do with the regulators 2 telling them they can't do that. 3 If Regulation FD didn't exist, some of 4 these companies would generally rely on other 5 regulations to say "We can't talk to you." The 6 quiet period is always expanded to years. These 7 things have always happened. That, I think, leads 8 to two things. One is, and again there was a 9 reference on the panel this morning, that analysts 10 have to work harder to get their information. I 11 think that's a good thing. I think that is part of 12 what was intended by this regulation. 13 The other thing is the press has to work 14 harder, because the press has to make it clear, as 15 Ron has referred to at least in a couple of 16 instances on CNBC, that the press is a far more 17 viable -- always has been in reality, but now 18 legally -- is a far more viable means of 19 distributing material news to the marketplace. 20 And I think the press has to work harder 21 to make that clear, that Regulation FD does not 22 apply to it, the media information will be 23 disseminated broadly into the marketplace, and 24 that's a good thing. The one thing I want to 25 quibble with the statement made earlier is I think Diversified Reporting Services, Inc. - (202) 296-9626 100 1 the fact that there is no longer this run up to 2 news, the price goes up in the stock, the price goes 3 down in the stock, and then after days of 4 discussions on various news programs or be it 5 stories in the Wall Street Journal, the company 6 comes out with an announcement stopping that process 7 and the perception of course is one of the things 8 this regulation is specifically intended to stop. 9 That there is going to be this boom 10 factor where suddenly the news will come out and 11 then the stock will move, and all people have an 12 equal opportunity to respond to it, I think that's 13 what the regulation is directed toward, and I think 14 that is probably a good thing. It is true that 15 people get surprised, but everyone gets surprised 16 equally, and I think what this has been devised for 17 and I think it actually works that way, and the 18 perception of our reporters is that it does. 19 CHAIRMAN UNGER: Thank you. 20 David? 21 MR. ARMON: Good afternoon, I am David 22 Armon, I am the president of PR Newswire Americas. 23 We are in the business of helping the free-flow of 24 information, whether it is text information in the 25 form of a news release, or digital audio information Diversified Reporting Services, Inc. - (202) 296-9626 101 1 like earnings webcasts or IR websites that companies 2 choose to outsource. We distribute that information 3 both to traditional media, like 77 million 4 households that are reached by CNBC and the Wall 5 Street Journal and The New York Times, but also to a 6 lot of the web portals that investors and members of 7 the investing public would access, and that would 8 range from the B-to-B portals all the way to the 9 consumer sites that everyone puts their e-mail on. 10 What has happened with our business is 11 that we have seen a willingness by corporations to 12 -- a speed up of the willingness of corporations to 13 embrace new technologies and not just put out their 14 news in a single format, but to use the webcasts. 15 And another trend recently is to include slides 16 among the webcasts that may have been handouts at 17 their meeting in-house, but now they are actually 18 screening them along with the audio webcast that is 19 going out. 20 There is also a lot of push technology. 21 As Cathy mentioned, there is a difference between 22 the push and the pull, and a lot of shareholders are 23 going to corporate websites and they are entering 24 their e-mail address in and they are saying, "Please 25 alert me when a news release hits the wire," or Diversified Reporting Services, Inc. - (202) 296-9626 102 1 "Please alert me when there is an EDGAR filing," or 2 "Please alert me when a conference call is 3 scheduled." 4 And we have seen millions of those 5 registrants now start to say, "I want to be alerted 6 when there is news." It is not a replacement for 7 the traditional media reach of the wire, but it is 8 an add-on event when you are on the chat room at 9 night playing around and all of you sudden you have 10 mail and you know there is something significant in 11 your portfolio and one of your companies has just 12 put something out. 13 In a similar trend to my competitor, we 14 have noticed that there are earnings projection 15 stories increasing each quarter, since actually 16 before Reg FD hit. In the summer a lot of people 17 realized that it was happening, and we started to 18 see, I think it was at first a 25 percent increase 19 in earnings projection stories, and then a 69 20 percent increase, and then a 78 percent increase in 21 the last quarter. So people are definitely giving 22 mid-quarter guidance through the news releases. 23 We have also incorporated into our 24 webcasting product, and a lot of webcasters will 25 prepare earnings and we have a 400 percent increase Diversified Reporting Services, Inc. - (202) 296-9626 103 1 in webcasts since Reg FD hit. And we have been in 2 that space since 1996, but it was a little bit of a 3 hard push to get companies to try that out before, 4 and now all of a sudden, they are calling us a lot, 5 they want to issue a webcast along with their news 6 release. 7 And we have incorporated a notification 8 of the webcast availability to click on it, you can 9 get access to the real players, the Microsoft media 10 player. And after the webcast, there is another 11 release in case a shazam effect hits, Professor 12 Ruder, and that is if there is any kind of a 13 disclosure during a call, there is an insurance 14 policy that another release could be issued. 15 Frankly, not a lot of clients have taken 16 advantage of that, but we are conscious that our 17 clients don't want to have a financial burden in 18 having to issue release after release after release 19 about their webcast. 20 A couple of other observations from our 21 industry. The length of earnings releases has been 22 substantially increased in the past year, and that 23 is because, yes, they are including a lengthy 24 webcast; yes, they are including a bigger and bigger 25 Safe Harbor paragraph; yes, they are including more Diversified Reporting Services, Inc. - (202) 296-9626 104 1 information about guidance looking on a little bit 2 further. 3 So another observation is that clients 4 used to give us one copy of their earnings release 5 for their fax and e-mail list which would go to 6 analysts, and another copy of the earnings release 7 would go to the media and the websites that 8 consumers access, and the longer one would go on the 9 first call terminals. Clients are more and more 10 telling us that one release is what is to go out for 11 the whole world. And I am sure that is information 12 that you want to know. The only such things that we 13 hear in the newsroom on earnings days now that would 14 differentiate the two releases would be "Change my 15 contact information for the release that goes out to 16 my analyst fax list. Let's put an IR contact on 17 that one versus a media contact" on a consumer 18 story. 19 The other significant change, I think I 20 should mention is the availability of full-text 21 press releases issued by PR Newswire, and I am sure 22 by Business Wire as well, through the Internet 23 environment to PDAs and pagers. And so the question 24 that was raised earlier about small cap issuers and 25 about whether they get play and whether the Diversified Reporting Services, Inc. - (202) 296-9626 105 1 shareholder has access to the information is really 2 addressed through the Internet, through the 3 basically 50 million pagers in a month that come to 4 the PR Newswire copy through the 2,500 web portals 5 that carry us. And if you are a small cap stock, 6 you enter in the ticker symbol, and if you are a 7 shareholder, that news will follow you no matter 8 where you are. So that's a significant shift. 9 The other thing is that disclosure is not 10 only an Internet phenomenon, and I think that this 11 is information, as I mentioned, that Ron and the 12 people on CNBC get the copy and there are plenty of 13 shareholders looking at the screen to watch for 14 breaking news, but just in this market in New York, 15 1010 WINS has business reports at 25 and 55, and so 16 does WBBN with Lynn Walter on the floor of the 17 Chicago Stock Exchange. And these folks are getting 18 live feeds from the press release wires, new news 19 and breaking it as it is coming out, so you don't 20 have to necessarily be next to a web browser to be 21 informed in this market. 22 So that's a nutshell of what we have. I 23 have a lot of statistics that I can talk to you 24 about when we get into the question period. Thank 25 you. Diversified Reporting Services, Inc. - (202) 296-9626 106 1 CHAIRMAN UNGER: Thank you. 2 Mark? 3 MR. COKER: I am Mark Coker, I am 4 president of BestCalls.com. We are a public 5 directory of earnings, conference calls schedules, 6 and events. We help companies disclose and promote 7 their conference calls and then we also help 8 investors gain access to conference calls. We have 9 got about 80,000 registered members for our service 10 and they have subscribed to the service so that they 11 can receive e-mail notifications of the conference 12 call schedules that interest them. When IBM 13 Corporation, for example, posts their conference 14 call schedule on BestCalls, it is automatically 15 e-mailed out to about 12,000 of their investors. 16 The idea for BestCalls came to me back in 17 '97 when I was denied access to an earnings 18 conference call for a company I was a shareholder 19 in, and they denied me access because I was an 20 individual investor and the call was only open to 21 institutional investors. And I felt that wasn't 22 fair. I felt that as an investor I deserved equal 23 access to that information, that I was an owner of 24 that company. 25 Clearly, the company didn't agree with Diversified Reporting Services, Inc. - (202) 296-9626 107 1 me, and as it turned out, most companies at that 2 time did not agree with me. But it gave me the idea 3 for BestCalls, and BestCalls really started as a 4 cause wrapped in website's clothing. And my cause 5 was to work with companies to help them open up 6 their calls. I believe that it is in the company's 7 best interest to do this, and I bring a unique 8 perspective to this situation. 9 In addition to being an individual 10 investor for the last 20 years, I also operate one 11 of Silicon Valley's largest public relations firms, 12 and so I come to it as an individual investor but 13 also as a communications practitioner. And I have 14 always believed that open communications are the 15 best thing for the companies and for the investors. 16 As you might imagine, I have been a 17 tremendous supporter of Regulation FD. I think the 18 is one of the most significant regulations ever 19 adopted by the SEC. I think it impact of Regulation 20 FD transcends our borders. I think we will see it 21 ripple across the globe as global capital markets 22 must compete for investor confidence because fair 23 disclosure is the foundation of investor confidence. 24 One of the interesting things that has 25 happened as a result of Regulation FD, in my Diversified Reporting Services, Inc. - (202) 296-9626 108 1 opinion, is that it has basically collapsed the 2 information dissemination supply chain. The 3 analyst, which was previously the key choke point in 4 the information dissemination equation, has been 5 eliminated as the choke point and they now receive 6 information at the same time as everyone else. 7 And, yes, I do believe that it 8 contributes to volatility, and I would agree with 9 Stuart here, that it is a good thing because when 10 you release market-moving information it is going 11 to cause the market to move one way or another, it 12 can move all at once or slowly. And if it is moving 13 slowly, you don't want to be the last person in line 14 to get that information. 15 When I think about the future of 16 disclosure, I get really excited by this idea of 17 transparency, and Reg FD is going to be a driver for 18 this. I think we are entering the age of the 19 transparent corporation where more information is 20 known about more companies more of the time than 21 ever before, so investors can now make more informed 22 opinions and investment decisions. 23 Contrast this with the key way that 24 investors learned about the companies just ten years 25 ago, or even five years ago where the primary Diversified Reporting Services, Inc. - (202) 296-9626 109 1 information tool was an annual report which came out 2 three or four months after the close of the quarter. 3 So Regulation FD and open conference calls are just 4 a continuation of this trend for more real-time 5 access information and more information. 6 When we launched BestCalls back in March 7 of '99, we found that approximately 80 percent of 8 the public companies who were holding earnings 9 conference calls have a policy excluding individual 10 investors. Today close to 100 percent of the public 11 companies that are holding calls now provide some 12 form of individual investor access. That trend was 13 already starting to take hold prior to Reg FD, Reg 14 FD just accelerated it. 15 So, in summary, I would just say that Reg 16 FD is a boom for companies and for investors, and I 17 look forward to seeing its effects. Thank you. 18 CHAIRMAN UNGER: Thank you. 19 I would just like to say before we get 20 started in the discussion portion, that the schedule 21 says that we will done with this panel right about 22 now. Obviously, we are not done, we are just 23 starting, so we started about 20 minutes late, so if 24 everyone is amenable to continuing 20 minutes to 25 about ten of 1:00, that's what I would like to do. Diversified Reporting Services, Inc. - (202) 296-9626 110 1 Thank you. 2 Well, it is an interesting contrast to 3 hear this panel's views from the last panel's views 4 because I could have sworn that there was less 5 information being disseminated, but now I am 6 thinking there is more. 7 So I was wondering if, maybe we could 8 start with you, Floyd, and if you could quantify, 9 you mentioned FD doesn't cover communications to the 10 press. Does that mean the issuers are giving to the 11 press more when disseminating information? How has 12 that changed the dynamics of your relationships with 13 issuers? 14 MR. NORRIS: I was not concerned about 15 it. Dow Jones, of course, as you know, complained 16 about the original version of FD that did not 17 clearly indicate that press releases were not 18 covered, I was not concerned about it at the time. 19 For me, people who wanted to tell me stuff before, 20 did; people who didn't, didn't. 21 Now what has changed is that people who 22 choose to release information, period, have to 23 release it in a way that I can get at it. And to 24 me, that is a wondrous change. Some companies, 25 whenever I wanted information, I could get what I Diversified Reporting Services, Inc. - (202) 296-9626 111 1 wanted; some companies would not talk to me. Some 2 companies still don't talk to me. 3 I wrote a column last week about a 4 company that literally was afraid to talk to me, but 5 I was able to listen to their last two conference 6 calls quite easily, and I learned what they had been 7 saying and informed the coverage tremendously. That 8 would not have been possible pre FD, and to me, that 9 has made a big difference. 10 MR. INSANA: I would agree with Floyd on 11 that. And I think that to the extent that reporters 12 call a CEO and ask material questions, they still 13 have the option of answering or not commenting or 14 not giving us any help at all. I don't think 15 anything has changed in that regard. 16 We will ask CEOs on our air if there is 17 something material taking place, that we, in fact, 18 may know is going on, and they will still decline 19 comment or lead us astray, and there has been no 20 impact. I think we need to break a lot of these 21 things out, though, in constituent parts. The open 22 conference calls are great, they make our lives so 23 much easier. We used to have to lie and say we were 24 analysts and obtain the password to the conference 25 call to get on it so that we could actually listen Diversified Reporting Services, Inc. - (202) 296-9626 112 1 to it -- 2 MR. KARLE: Our reporters never did 3 that. 4 MR. INSANA: Most times we got the 5 password from a Dow Jones reporter. 6 But with respect to the question as to 7 whether or not there is more or less information, 8 when you are looking at these numbers, we have to go 9 back to Economics 101, and all things being equal, 10 clearly the business climate has changed 11 dramatically in the last six to nine months, and 12 that has encouraged some companies to come out and 13 make forward-looking statements because the 14 environment has been altered so drastically that 15 earnings expectations were dropping so quickly, some 16 companies might have been forced to come out and 17 make these statements anyway, just in their own 18 shareholder interest, to step forward and say "The 19 business has changed, we have to let you know." 20 I am not quite sure that at this point we 21 can tell, and I think we heard this in the last 22 panel as well, how much has been the result of the 23 changing economic environment in terms of earnings 24 guidance and how much is the result of Reg FD. 25 MR. THOMPSON: Well, I think there is a Diversified Reporting Services, Inc. - (202) 296-9626 113 1 lot, and I can vouch for this among our members, 2 there is a lot of confusion of what the media 3 carve-out really means. 4 Does it mean that a CEO at, let's say, 5 3:00 a.m. could call the Minneapolis Star and manage 6 his earnings estimates through the Star? I don't 7 think that is what the SEC meant. I mean, the 8 Minneapolis Star's distribution reach is not 9 nationwide. And we have had examples of companies 10 that have called and said that a reporter from the 11 metropolitan area newspaper insisted that the 12 company give them material information that had not 13 been made public. I mean, I am sure the reporter 14 had been working and knew the company was in 15 possession of that information, and said, "You can 16 do this because Reg FD allows you to do that." 17 That is not, I think, what they intended 18 with the media carve-out, unless you can tell us 19 otherwise. Because in your telephonic guidance, the 20 supplemental guidance, one of the points made was 21 that it is not enough to have a reporter sitting in 22 on an analyst meeting, unless, of course, you can be 23 assured that that reporter is going to report what 24 is material and the distribution reach would be like 25 a wire service. Diversified Reporting Services, Inc. - (202) 296-9626 114 1 CHAIRMAN UNGER: Very quickly, can we get 2 an answer to that question about whether or not we 3 intended -- what the carve-out does? 4 MR. BECKER: Well, I think what we 5 intended, I guess we had the view that the press 6 makes things public. And the only concern would be 7 if the particular choice of the press doesn't make 8 things public enough. 9 But in terms of the thing that we were 10 worried about, that is to say, the use of material 11 -- misuse of material non-public information, we 12 didn't see the press as a big concern there. If the 13 folks misused the information, they probably had 14 serious insider trading problems and we saw an 15 enormous public benefit of information getting 16 public by means of disclosure to folks whose job it 17 is to make information public. 18 MR. RUDER: Laura, and others, I think 19 this whole conversation creates a question for the 20 Commission, and that is to identify when information 21 is public for the purpose of this rule. 22 We are seeing technological advances, as 23 we heard today discussions of push technology, which 24 I think is an interesting development and it 25 certainly put the onus on the Commission to Diversified Reporting Services, Inc. - (202) 296-9626 115 1 scrutinize the means of distribution to know if you 2 are up to date as to what is public or not, and your 3 insistence on a press release is something maybe you 4 need to look at. 5 I just have to say one thing to David, I 6 don't think you are going to be involved in insider 7 trading problems when you release material 8 information to the press because that would 9 certainly not be a Dirks problem, as I see it. 10 MR. BECKER: No, it would be the 11 reporter who misuses it. It would be the reporter 12 who trades on it in violation of the rule and 13 misappropriate information. 14 MR. RUDER: If he has gotten it in a 15 confidential way. 16 And one other point that I just made from 17 my lawyer's point of view, there is no obligation to 18 disclose, so the press really can't call a company 19 and say, "You must disclose the information if you 20 have it." So we are still in the situation where, 21 for business reasons or whatever reason, a company 22 can refuse to disclose. 23 MS. BARON: I would like to add 24 something to that, bring up something for 25 discussion. Diversified Reporting Services, Inc. - (202) 296-9626 116 1 I think what is missing here is having 2 the New York Stock Exchange, AMEX and NASDAQ weigh 3 in on this because they put out guidelines for 4 corporations as to what constitutes disclosure and 5 they make some recommendations. And those 6 recommendations have changed over time, particularly 7 NASDAQ. 8 And it used to be that disclosure was 9 made, according to the New York Stock Exchange and 10 the AMEX, when a release appeared in either Dow 11 Jones or Reuters, the service picked up and covered 12 -- actually ran on those wires. But several years 13 ago, NASDAQ made a change to that ruling, and they 14 said, no, at this point, because of the wide reach 15 of news wire services, and I am talking about 16 commercial services, specifically Business Wire and 17 PR Newswire, disclosure is met when it is 18 disseminated over those services. And that's an 19 important change. 20 And, frankly I haven't seen any updated 21 changes from the New York Stock Exchange, but that 22 would be interesting to see, what their view is on 23 that today. And I think that gets to the heart of 24 what action constitutes disclosure. 25 MR. THOMPSON: The New York Stock Diversified Reporting Services, Inc. - (202) 296-9626 117 1 Exchange sent a letter out to listed companies about 2 two to three weeks ago, saying that they were going 3 to continue to require a news release regardless of 4 whether you held a fully-accessible conference call. 5 So if new material information should emerge in the 6 course of the Q&A on a conference call, you are 7 obligated to issue a news release as a follow-up to 8 that. 9 A lot of companies consider that an 10 unnecessary expense, to do that. I mean, a 11 conference call is open for a reason. This 12 regulation really is a wonderful opportunity to look 13 at diverse means of communication, depending upon 14 the market cap size you reach and so on, but the 15 SEC, in a release in a footnote says, in effect, 16 that this rule does not necessarily mean that you or 17 the self-regulatory organizations have to change 18 their requirements, so they are not. 19 Now, NASDAQ, I think, may be moving in 20 this direction, but New York has put its foot down 21 and said, "No, this is the way it is going to be, 22 that it is a one size fits all type of approach to 23 disclosure. You have got the discussion about the 24 digital divide that was a concern when we were 25 discussing the proposed rule. Diversified Reporting Services, Inc. - (202) 296-9626 118 1 I would suggest that the people who are 2 interested in real-time access to information, that 3 most of those have computer access. These were some 4 pieces that were done at Iowa State last year of 500 5 people from the American Association of Individual 6 Investors and 500 from investment clubs. 20 percent 7 of them invested online, about 35 percent used a 8 combination of online and traditional brokers. Of 9 the total sample of a thousand, 84 percent had web 10 access. 11 So to ignore the web as a place where 12 people have the best opportunity to get real-time 13 information, other than, of course, watching Ron on 14 CNBC or CNN, or one of the real-time news 15 dissemination stations, it is where it is. 16 MR. INSANA: And you know the technology 17 has come so far that we have the opportunity to make 18 or deliver real-time earnings announcements on CNBC. 19 The problem, though, is being recognized as the 20 principal disseminator, which the Exchanges have yet 21 to do. We would be able to deliver as much earnings 22 information by text on our screen in real-time, we 23 have the technology to do that. But, again, we need 24 to be recognized as a disseminator in order to make 25 our case to the companies that they go ahead and do Diversified Reporting Services, Inc. - (202) 296-9626 119 1 that. 2 CHAIRMAN UNGER: This is a good 3 follow-up to the conversation that we were having on 4 the last panel about tools that could be used to 5 disseminate different types of information. So I 6 would love to hear any other views of the panelists 7 about what those tools would be and whether FD 8 restricts the use of those tools and how? 9 COMMISSIONER HUNT: And I just want to 10 say, clearly, some of the market moves on 11 dissemination I have noted in light of today's 12 technology, but I think we have to bear in mind that 13 there are some companies that nobody on the web is 14 going to pick up. And for those companies, we still 15 have to have press releases because, you know, they 16 are in, and I don't want insult anybody's city, but 17 if they are in some particular city and the market 18 for securities is only in that city, it is entirely 19 likely that a major national news service or 20 national newspaper is not going to pick it up and 21 that's going to be true, so we just have to aware of 22 a broad range of ways to disseminate information. 23 MR. ARMON: If I can follow up your 24 point, Commissioner, a survey of media receiving PR 25 Newswire copy recently concluded that there are Diversified Reporting Services, Inc. - (202) 296-9626 120 1 still tens of thousands of reporters covering 2 breaking financial news who prefer fax. It is just 3 their work flow and they prefer receiving a fax, and 4 prefer to receive information coming into their 5 local area network within their newsroom as opposed 6 to a web browser. 7 Not everybody has taken this jump, so it 8 is important to cover all media means of 9 transmission, whether it be old wire circuits which 10 come in on satellite dish at The New York Times 11 through intermingling with the AP and Reuters and PR 12 Newswire and Business Wire, as well as faxing to 13 those reporters who prefer to receive that way, and 14 e-mailing to those who prefer that. So I would 15 hesitate to say that the web is the answer for 16 everyone. 17 COMMISSIONER HUNT: I agree with you. 18 MR. NORRIS: I would like to emphasize, 19 I think that while the web is broadly used, it is 20 not universal. Moreover, there was some suggestion 21 when the FD was adopted that a company could simply 22 put information on its website and that would 23 constitute disclosure. 24 And I think the SEC took a negative 25 position on that, and I think they should take a Diversified Reporting Services, Inc. - (202) 296-9626 121 1 negative view on that. There needs to be a 2 dissemination certainly of the fact that information 3 is available in the somewhat untraditional media, so 4 press releases saying, "We had a conference call and 5 you can listen to the conference call this way," 6 strikes me as acceptable. 7 But to simply put it on the web so that 8 those who happen to click into this website in time 9 have the advantage over those who don't happen to 10 click into this website today is, I think, 11 unacceptable. 12 COMMISSIONER HUNT: We were very 13 concerned about -- that's why we talk about digital 14 bar, one, people who didn't have access; and, two, 15 the people who didn't click in on it at the right 16 time. And that is when we will be having a 17 dissemination, when those two things occur. 18 MR. RUDER: But if you don't watch CNBC, 19 you have the same problem. 20 CHAIRMAN UNGER: Perhaps now would be a 21 good time to talk about some of the statistics that 22 you all alluded to in terms of the numbers of people 23 who are listening in on the conference calls. 24 I don't know if you have a way of 25 figuring out the percentage of shareholders that Diversified Reporting Services, Inc. - (202) 296-9626 122 1 would constitute or not. This panel may have more 2 information on that, and I would be interested to 3 hear if anybody has any statistics. 4 MS. BARON TAMRAZ: Not that in-depth, but 5 I do have some quick statistics that I think paint 6 the picture of what is going on. 7 And this is according to our partner at 8 CBN. The number of listeners has gone up almost 300 9 percent. Unfortunately, I don't have the breakouts 10 of who those listeners are, but the appetite is 11 there and people are coming in and listening to 12 these conference calls. 13 CHAIRMAN UNGER: In what time period? 14 MS. BARON: In the last six months, so 15 that is pretty heavy. 16 And the number of webcasts is up 54 17 percent in the last six months, 126 percent in the 18 last year. Again, this is one broadcasting company 19 that intends to do about 15,000 this year. So I 20 would say the universe is probably double that. 21 MR. THOMPSON: We are finding that there 22 are not a lot of individual investors 23 percentage-wise in companies who are listening to 24 the live calls, but there are a number who are 25 listening to the replays when they get home from Diversified Reporting Services, Inc. - (202) 296-9626 123 1 work and so on. It is significantly higher than 2 those who are listening to the live calls, but it is 3 still there. And we recommend that you keep replays 4 up there for at least a week or so, so people have 5 an opportunity to listen to them. 6 Again, this is a wonderful way, but like 7 the SEC and its recommended procedures, we believe 8 that you put your material information that you know 9 you are going to discuss in the news releases, and 10 that really solves the regulatory problem for the 11 SROs, that they will know whether or not to be 12 listening to this as to whether they need to 13 institute a trading halt or not. That's what their 14 real concern is, what mechanism to use. 15 We do not recommend you just hold a 16 conference call and announce new material 17 information without putting it in a news release 18 beforehand. The issue is, should you have to put 19 out a follow-up news release as a result? And that 20 we really consider to be unnecessary. You know, you 21 have the option to do it, but you shouldn't be 22 required to do it. 23 CHAIRMAN UNGER: So that goes back to 24 the question on whether a telephonic call is, in 25 fact, to the public. Diversified Reporting Services, Inc. - (202) 296-9626 124 1 MR. THOMPSON: Well, this presumes a 2 fully-accessible conference call with proper 3 notification and everything, in other words, that 4 complies with what the SEC considers would be a 5 webcast or a telephonic call that constitutes full 6 disclosure. 7 COMMISSIONER HUNT: But wouldn't you 8 also want a time period after the call so that 9 people could have the chance to hear it? 10 MR. THOMPSON: Absolutely. 11 COMMISSIONER HUNT: Obviously some 12 people work during the day and can't be listening to 13 conference calls. 14 MR. THOMPSON: Absolutely. 15 And the other thing we find, and this is 16 even a problem for some of the media, they have 17 sometimes difficulty getting into the conference 18 calls because they have fire walls within their own 19 systems that don't permit them. 20 And there are a lot of investors that 21 work in office environments where they can't use the 22 computer system. 23 MR. NORRIS: And their companies may 24 prefer that they work. 25 MR. INSANA: But there is an issue of Diversified Reporting Services, Inc. - (202) 296-9626 125 1 pure practicality here, I mean, with respect to 2 regulating the time frame for conference calls. Now 3 that we have after-hours trading, again, the 4 advantage will fall disproportionately to those in 5 the financial community if the conference call comes 6 in between four and six o'clock and there is still 7 trading activity going on. 8 Individual investors, like myself, will 9 be at work and unable to access the information in 10 real-time when the stock could be moving. Whereas, 11 a conference call after six or six-thirty, when 12 there has been a sufficient settlement period, 13 would further level the playing field. 14 MR. COKER: I would like to comment a 15 little bit more about this idea of best practices 16 that came up in the previous panel. It is coming up 17 again, Lou has mentioned it a couple of times. 18 I think this is an area where the SEC 19 could provide some additional guidance in terms of 20 what constitutes minimal disclosure of your full 21 disclosure information. 22 I would propose that a press release 23 become part of the standard best practices. Press 24 releases reach a very wide range of investors. I 25 would also suggest, and this is self-serving, that Diversified Reporting Services, Inc. - (202) 296-9626 126 1 as part of that disclosure process, your events were 2 posted in one of the several different calendar 3 directories that are out there, of which we are just 4 one. 5 Another thing that I would propose is 6 that you take a look at the length of time that 7 these events are archived, because currently it is 8 all over the map. Some companies archive their 9 events for a day, some archive them for two years. 10 And it has always kind of boggled my mind that an 11 SEC filing is archived for perpetuity; yet, a 12 webcast might disappear in a day. And I would like 13 to see the SEC encourage the issuers to extend the 14 period of that archiving. 15 And then just one other comment. We were 16 talking a little bit earlier about the number of 17 conference calls that are being broadcast. At 18 BestCalls we have a broadcast to produce the calls 19 that we aggregate from all the different sources. 20 And in the most recent quarter, we listed over 4,300 21 open conference calls. And that compares with 1,300 22 conference calls just a year ago. So we have seen a 23 number of events explode, not only have earnings 24 conference calls opened up, but many companies, such 25 as Intel mentioned earlier, are starting to hold Diversified Reporting Services, Inc. - (202) 296-9626 127 1 interim quarterly events. And I think this is a 2 good trend. 3 Again, we are looking toward increased 4 transparency where companies can take advantage of 5 the communications technology that is out there 6 today to communicate more frequently to their 7 investors. 8 COMMISSIONER HUNT: Do you think that 9 companies are providing you with better information 10 today than before? 11 MR. COKER: My personal opinion, based 12 on observations I have made in conference calls that 13 I attend as well as data that I have seen from Lou 14 Thompson's organization, is that the net effect is 15 that companies are disclosing more information 16 during the conference calls. 17 A year ago it was standard practice for a 18 company to hold an earnings conference call and then 19 do one-on-one calls with the analysts to spoon-feed 20 earnings guidance. Now we are seeing the earnings 21 guidance spoon-feeding happen right on the call, so 22 that companies come in specifically with what their 23 estimated EPS ranges are going to be, what their 24 sequential growth rates are going to be. And we are 25 also seeing that information directly in press Diversified Reporting Services, Inc. - (202) 296-9626 128 1 releases now. 2 MR. ARMON: We have noticed in the 3 conference call listener statistics that the number 4 of listeners actually have declined as companies 5 have obviously narrowed the time that the archive is 6 available. 7 Lou Thompson makes reference to a five 8 day or a week type of a time period that a call 9 should be up after it's webcast. That seems to be 10 the average that we are experiencing now at PR 11 Newswire, while the product that is on the market 12 that we sell in conference calls on the web allows 13 90 days, nobody is taking advantage of that, or very 14 few at this point, so I think Mark's point is true. 15 MR. COKER: I think the problem here are 16 the lawyers. 17 MR. KARLE: As the only lawyer on the 18 panel, I will say in regards to this archiving, it 19 is easy to archive for 60 to 90 days. 20 MR. ARMON: Sure. 21 The average number is in the range of 22 about 120 listeners. If you take all of the large 23 caps and the small caps and lump them together and 24 look at that. We have a New York Stock Exchange 25 automotive company with 240 listens. You heard, I Diversified Reporting Services, Inc. - (202) 296-9626 129 1 think, on the last panel, Colgate said they had 250 2 listeners on a call; yet, you heard the 17,000 3 figure from EMC, so they are kind of all over the 4 board. 5 COMMISSIONER HUNT: But you think 6 there should be a minimum archiving period? 7 MR. COKER: I think there should be 8 because the information disclosed during the 9 conference calls, especially the analysts Q&A, 10 cannot be found anywhere else. You are not going to 11 find it in a press release, a 10-K or a 10-Q. You 12 can't write a 30-page press release. 13 MR. RUDER: That would give the 14 Commission a chance for another rule, a rule which 15 would declare that information that remains on the 16 website is not subject to updating because then it 17 is becoming misleading. 18 MR. COKER: I believe you have an 19 opportunity to extend some of your safe harbor 20 guidance to the conference calls where it becomes 21 clear to the investors that the information that is 22 presented in this archive conference call 23 represented the company's views and opinions at that 24 time and you have no obligation to update it. 25 COMMISSIONER HUNT: That's an Diversified Reporting Services, Inc. - (202) 296-9626 130 1 interesting idea. We could also include the Q&As. 2 MR. COKER: You definitely should 3 because that's what the best information is. 4 CHAIRMAN UNGER: Can I follow-up on one 5 thing that you said, and I think it will be a quick 6 answer. 7 Why is it that you think press releases 8 are the most effective way to reach investors? 9 MR. COKER: Because those press releases 10 reach, as Cathy mentioned, 16,000 to 20,000 11 different news outlets, it reaches the online 12 databases such as Yahoo. Yahoo is an 800-pound 13 gorilla in this space. 14 An interesting thing to look at here is 15 that press releases have become media in their own 16 right over the last ten years. Ten years ago, 17 individual investors never read a press release. 18 Now press releases are written for everyone. And 19 online databases such as Yahoo and Site and 20 Microsoft Money, all of these facilitate instant 21 exchange of information. You can go to Yahoo, such 22 as My Yahoo, which is the service I use, and 23 subscribe to information that interests you. 24 MS. BARON: I also want to add, that 25 with a press release you also have not only the push Diversified Reporting Services, Inc. - (202) 296-9626 131 1 out to the private line networks that includes 2 disclosure media, but we are also posting every news 3 release on our website. 4 Anyone can tap into that and it is free, 5 and that's on a real-time basis. So there is an 6 archive ability there and there is also archiving 7 through all the online services and databases that 8 we are also going into. So a press release can 9 remain alive pretty much in perpetuity. 10 MR. NORRIS: I would like to suggest 11 that the idea, of course, that they need a Safe 12 Harbor, strikes me as odd, you know, any more than 13 the fact that a '98 10-K is now out of date, I don't 14 think really needs disclosure. 15 But there are services which, if the law 16 is clear for them, and I don't know if it is, that 17 will archive and make available conference calls, 18 more or less, forever. I know in the past some of 19 those services had problems with companies claiming 20 copyright violations. And I think that one thing 21 the SEC might consider doing, and I am not sure if 22 it is required, is to make clear that after a 23 conference call, since the conference call is to be 24 publicly disseminated, just as they are not going to 25 stop anyone from making a xerox of the 10-K from Diversified Reporting Services, Inc. - (202) 296-9626 132 1 EDGAR, nor should they stop anyone from 2 disseminating the conference call information as 3 long as they wish to do so with a clear date so that 4 we are not worried about someone claiming that the 5 first quarter 2000 report reflects current 6 information on the company. But there are people 7 who will solve that disclosure problem and sometimes 8 information on a conference call becomes 9 significant later when other information comes out. 10 There was a conference call a few weeks 11 ago in which a CEO expressed his complete outrage 12 that the stock was trading at the current price. It 13 was a ridiculous price, he had no understanding how 14 the market could have marked the stock down to that 15 level. And it subsequently turned out, that a few 16 days before and a few days after, he chose to sell 17 his own stock at that level. 18 CHAIRMAN UNGER: I would say, just 19 briefly, that you could definitely make a case for 20 distinguishing between historical information like 21 SEC filings, and real-time information that's really 22 only as good until the next time you disseminate 23 that real-time information about earnings. 24 But that said, I think we need to start 25 thinking about wrapping up, because we are late in Diversified Reporting Services, Inc. - (202) 296-9626 133 1 our lateness. So I know Commissioner Hunt has 2 another question, and if we could just go around and 3 sort of give you the opportunity to do a 30-second 4 sum-up or make your final point, I would greatly 5 appreciate it. 6 COMMISSIONER HUNT: Are any of you 7 following the Item 9s on the 8-K reports, which is 8 one method of adequate dissemination of the 9 information? 10 Do you follow that on a regular basis? 11 MR. ARMON: One of our partners is Tom 12 Boss with EDGAR Online, and he has indicated to us 13 that there has been a substantial increase in volume 14 there as well since Reg FD. 15 COMMISSIONER HUNT: Well, I think there 16 is an increasing volume because the release, I 17 think, says this is one of the things you can use. 18 And so I would assume that lot of people will say, 19 "If I follow that, I should be getting a lot of 20 material information." 21 MR. ARMON: Right. But it is not 22 real-time, though, and certainly it is not a 23 convenient tool for individual investors to track 24 what is going on with a company. 25 COMMISSIONER HUNT: No, but I think for Diversified Reporting Services, Inc. - (202) 296-9626 134 1 professional news sources it might be useful. 2 MR. THOMPSON: Well, we urge companies 3 -- I would say companies are using the filings for 4 certain items. Furnishing information for Item 9 is 5 really kind of back-up, but to use that as a primary 6 means is a mistake because individual investors are 7 not cruising EDGAR for this. 8 And some companies have, in effect, 9 furnished information under Item 9 in an 8-K, then 10 bad news. Then they hold a conference call because 11 they feel that bad news is going to look a lot worse 12 in a news release, so they file it under Item 9 13 because it is lower profile, but then they will be 14 willing to talk about it in a conference call. It 15 is kind of a misperception of the process, but I 16 will tell you, the investment community gets very 17 upset when they find that a company has put 18 something in an SEC filing that wasn't in the news 19 release where they had real access to it and were 20 given a heads up on it. You will pay a market price 21 for that. 22 MR. KARLE: I think the experience of 23 our reporters is exactly that, that essentially the 24 8-K is a fail safe or safe harbor. That is what 25 they use it for so everything goes in there, but no Diversified Reporting Services, Inc. - (202) 296-9626 135 1 companies really rely on that as a sole means of 2 dissemination. 3 CHAIRMAN UNGER: Floyd, do you want to 4 start? 5 MR. NORRIS: I will pass. 6 MR. THOMPSON: Just very quickly, I will 7 say that the SEC could perhaps give us some more 8 guidance on guidance, if I may say so. And I am not 9 sure that the lawyers are going to completely relax 10 until they see an enforcement case. You have to be 11 careful what you wish for, to see that the SEC is 12 really interested in egregious kinds of cases of 13 selective disclosures, and are not, as David Becker 14 has said numerous times, they are not trying to take 15 enforcement actions on materiality, particularly in 16 these sessions. 17 And the other thing would be to really 18 urge the self-regulatory organizations to try to 19 open their minds. We are in the 21st century with a 20 lot of different means to disseminate information, 21 and to allow companies that opportunity which this 22 Regulation gives them. 23 COMMISSIONER HUNT: I don't know how 24 many times we have to say we are not trying to get 25 everybody under Regulation FD. Diversified Reporting Services, Inc. - (202) 296-9626 136 1 MR. BECKER: It's all those enforcement 2 cases we haven't brought. 3 MS. BARON: If the message from the SEC 4 is that all investors should have equal access to 5 information, then I would say that the regulation is 6 successful and is working. 7 I think change is always difficult for 8 everybody, and there was period of nervousness and 9 maybe over-distribution going on. But I think 10 everybody is settling down and companies, as far as 11 press releases go, are continuing to do what they 12 have always done and are putting the news out pretty 13 much in the same way, with the exception of there 14 being more forecasts on the wire. 15 MR. INSANA: I would agree with Lou and 16 encourage self-regulatory organizations to view 17 different media as a legitimate source of 18 dissemination. But I would also maybe suggest at 19 some point in engaging in a qualitative assessment 20 of Reg FD in addition to just a quantitative one 21 where we look at whether or not there is more or 22 less dissemination but, too, also where can we 23 improve or fine tune the existing regulations so 24 that they work more in the spirit with the rule. 25 MR. KARLE: If anything, Reg FD makes Diversified Reporting Services, Inc. - (202) 296-9626 137 1 journalists and analysts work harder, and that's got 2 to be a good thing. 3 MR. ARMON: It is our goal to reach as 4 many individuals and institutions with a press 5 release when it goes out. If there are any new 6 methods that we should be exploring beyond what are 7 already in place, please let us know. 8 MR. COKER: To borrow a phrase from 9 Martha Stewart, "Regulation FD is good thing." 10 COMMISSIONER HUNT: She said that in 11 K-Mart. 12 MR. COKER: I think Regulation FD has 13 had a tremendously positive impact on our markets. 14 I think that we all still underestimate the impact 15 that it is going to have for decades to come. 16 Yes, there is room for improvement. When 17 I see that a minority of companies, that 23 or 24 18 percent are disclosing less and clamming up, that 19 does concern me. And I would encourage the SEC, 20 through the issuance of recommended best practices 21 to address ways to increase the comfort level for 22 the issuers so that we can see more information 23 disclosed. 24 COMMISSIONER HUNT: Well, I think both 25 of us would urge all of you in the audience to let Diversified Reporting Services, Inc. - (202) 296-9626 138 1 us know of any unintended bad consequences that you 2 see or experience in terms of the operation of FD, 3 so that if it could possibly be corrected, we can do 4 so. 5 CHAIRMAN UNGER: I want to thank this 6 panel's panelists, and say although I thought I was 7 hearing very different things at the outset, I am 8 hearing very much the same things in terms of what 9 the Commission needs to focus on, again, more 10 guidance, best practices -- 11 COMMISSIONER HUNT: No enforcement. 12 CHAIRMAN UNGER: The lawyer thing. 13 Having the answers weigh in perhaps in developing 14 best practices and concerning the tools that we use 15 to further the dissemination. 16 And so I am very appreciative of your 17 points and your information and your willingness to 18 come and share them with the Commission and with the 19 audience. And I thank you very much. And we will 20 save this in perpetuity. 21 (Lunch recess taken.) 22 CHAIRMAN UNGER: We are going to start 23 again. This panel hardly needs any introduction, 24 but we will go around the room the way we have for 25 each of the previous panels and hear from each of Diversified Reporting Services, Inc. - (202) 296-9626 139 1 the panelists for a couple of minutes about their 2 background and maybe a couple of points on Reg FD 3 that they would like to discuss during the course of 4 this panel. Commissioner Hunt will be joining us in 5 a couple of minutes, so he said to go ahead. 6 And I would like people to speak directly 7 into the microphone because the webcasters said that 8 they are having difficulty hearing, or at least the 9 people trying to listen in, so if you could try to 10 speak directly into the microphone, that would be 11 greatly appreciated. And we will just start this 12 initial go-around, say, limit it to a couple of 13 minutes so that we can really have a wholesome 14 dialogue. 15 Thank you. 16 MS. WALTERS: Thank you, Commissioner. 17 My name is Pat Walters, and I am 18 representing the Association for Investment 19 Management & Research, and many people refer to us 20 as AIMR, many people refer to us as AIMR. We answer 21 to all of those names. And we represent 22 approximately 49,000 investment professionals 23 worldwide. We have the chartered financial analyst 24 examination program. This year we have over 86,000 25 candidates for that designation worldwide. Diversified Reporting Services, Inc. - (202) 296-9626 140 1 And we responded through a task force on 2 selective disclosure and analysts' independence to 3 the Commission's original proposal on Regulation FD 4 from a number of different perspectives. We 5 certainly support the Commission's intention with 6 the Regulation; however, we had a number of problems 7 at the time, and we still have problems with the way 8 the Regulation has been implemented. 9 A couple of questions that occurred this 10 morning that I would like to respond to. The first 11 was: Is there more information available in the 12 market post Regulation FD? And I think there are 13 two issues here. The first is, I don't think there 14 is any question that there is more accessibility to 15 information. We did a study that Lou Thompson 16 mentioned this morning, a survey. We surveyed 17 6,100 of our members and about 445 members 18 responded. 19 75 percent of them were from the buy 20 side, and the remainder was from the sell side, and 21 they do admit that there is an increase in both the 22 volume and frequency disclosed by companies. 23 However, the buy side, in particular, believes that 24 the usefulness and specificity of that information 25 has decreased. The sell side is somewhat mixed Diversified Reporting Services, Inc. - (202) 296-9626 141 1 about that. Both the buy side and the sell side 2 believe that candor in terms of communications has 3 decreased. 4 So the question is, yes, more people are 5 getting information, but is it more or less 6 information than was available in the marketplace 7 beforehand? And we believe that it is significantly 8 less information and that the information available 9 isn't as meaningful and as useful as it might have 10 been before. 11 I think one of the things that doesn't 12 come out in some of the discussions we have is the 13 question of what constitutes sufficient information 14 for people to make reasonable investment decisions. 15 We talk a lot about earnings guidance and earnings 16 forecasts, but one simple number is definitely not a 17 basis on which people should make investment 18 decisions for themselves or for others. There is a 19 lot more that goes into analysis and valuation 20 decisions. 21 Something else that was mentioned this 22 morning has to do with how hard analysts work. I 23 know a number of analysts personally, I think they 24 worked very hard before Regulation FD, I think they 25 continue to work just as hard. There are only so Diversified Reporting Services, Inc. - (202) 296-9626 142 1 many hours in the day, I guess, that we can work. 2 Perhaps they have to work differently, I think 3 that's a slightly different characterization of what 4 is going on than perhaps has been mentioned earlier. 5 Analysts' responsibility is to ferret out 6 information, that could be ferreting out information 7 from voluminous annual reports and public documents 8 that are available, it can be talking to management, 9 it can be talking to competitors, it can be talking 10 to suppliers and customers, it can be going to see 11 whether or not the company actually owns real estate 12 that it claims to own. 13 The analysts' competitive advantage 14 relative to others, whether you are talking on the 15 buy or the sell side, is the ability to ferret out 16 particular pieces of data and to put together a 17 mosaic that has been mentioned previously and to 18 form an investment decision and a valuation 19 recommendation based on that information. 20 One of the other things that was 21 mentioned this morning was how important it was to 22 include the question and answer phase of the 23 conference call in any archived piece of 24 information. That tells you that the ability to 25 formulate questions, which by and large is done by Diversified Reporting Services, Inc. - (202) 296-9626 143 1 the investment professional, I suspect, on 2 conference calls, rather than the individual 3 investor, is a part of the information disclosure. 4 And just as journalists do not always want to ask 5 important questions in a public forum like a press 6 conference, neither would the analyst like to 7 necessarily ask their competitive advantage kind of 8 question, whether it looks to material information 9 or not, in a public forum. 10 With respect to their ability to have 11 one-on-one conversations with management prior to 12 Regulation FD, 68 percent of the people responding 13 to our survey on the buy side said that they did 14 have these one-on-one conversations, and 69 percent 15 of them said that their ability to do that 16 decreased. As you might imagine, 90 percent of the 17 sell side said they had such conversations, and 70 18 percent of them said their ability to do that has 19 decreased. 20 CHAIRMAN UNGER: Would you mind summing 21 up? We will have plenty of time to talk about some 22 of these issues. 23 MS. WALTERS: Okay. 24 I think one of the key things that we 25 would like to say is something that has been said Diversified Reporting Services, Inc. - (202) 296-9626 144 1 about a definition, and that has to do with what the 2 definition of materiality is. I think it is 3 important for both the company and the questioner, 4 whether that questioner is an investment 5 professional or an individual investor, to know 6 whether it is reasonable for them to expect the 7 company to answer that kind of question. 8 And then, finally, I would like the 9 Commission to not forget that there are other 10 markets besides the equity markets to which this 11 Regulation applies. Everything that was really 12 addressed this morning had to do with the equity 13 markets. We have not surveyed our members relative 14 to the fixed income markets and some of the other 15 similar types of markets where there is nowhere near 16 the amount of publicly available information for 17 investment professionals, particularly if they are 18 investing on behalf of others in those markets, to 19 do their due diligence, and that very little has 20 been either discussed about the effect on those 21 markets or how people in those markets should react 22 in terms of understanding this Regulation. 23 CHAIRMAN UNGER: Thank you. 24 Adam? 25 MR. LASHINSKY: My name is Adam Diversified Reporting Services, Inc. - (202) 296-9626 145 1 Lashinsky, I am a Silicon Valley columnist with 2 TheStreet.com. And I know that journalists are not 3 supposed to praise public officials in public, but 4 at that risk, I just want to say that I am delighted 5 to be invited here, Chairman Unger, and thank you 6 for having this Roundtable because it is a topic 7 that I have devoted a lot of time to even before Reg 8 FD existed. 9 So as I said, I am delighted to be here 10 to discuss it. And I know there is some confusion 11 as to why I am on this panel, so if you will indulge 12 me, I just want to say that some of my best friends 13 are research analysts. 14 COMMISSIONER HUNT: Not lawyers? 15 MR. LASHINSKY: No, we are moving on to 16 a new demon this afternoon. 17 Bina Thompson at Colgate-Palmolive 18 suggested this morning that Regulation FD has cut 19 down on the give and take between issuers and the 20 financial community, and that essentially, to 21 paraphrase the comments that she made representing 22 large companies, she said there really was no 23 problem. So let me state clearly, you know and I 24 know, there was a problem. 25 It was the problem known as the wink, Diversified Reporting Services, Inc. - (202) 296-9626 146 1 wink, nudge, nudge communication between issuers and 2 investors both on the buy side and on the sell side 3 in terms of selectively disclosing information. 4 Floyd Norris was right when he said that he thought 5 that was against the law. It was against the law 6 but it went on all the time and there was very 7 little done to stop it. 8 Regulation FD has stepped in to 9 significantly slow down the wink, wink, nudge, nudge 10 game. And I think that's a good thing for all 11 investors. There is absolutely nothing in 12 Regulation FD preventing issuers from communicating 13 with investors. They could put out a press release, 14 they can put out long press releases if they like, 15 they can give detailed information on their business 16 operations. They just have to do it for everybody, 17 and if that's how they choose to communicate, so be 18 it. 19 Ron Insana, I think, suggested earlier -- 20 he seemed to suggest that there was something 21 nefarious about fund managers -- I'm sorry, it 22 wasn't Ron Insana, it was one of the panelists on 23 the first panel who suggested there was something 24 wrong with contacting salespeople or going further 25 down in the organization from where Reg FD allows Diversified Reporting Services, Inc. - (202) 296-9626 147 1 communication. 2 I think that's a wonderful thing. That 3 is called doing mosaic analysis. That is called 4 doing your homework. One person in the organization 5 doesn't have the visibility that the chief executive 6 or the head of IR has, that is why the Regulation 7 was written the way it was. So I don't think we 8 have anything to fear from investors doing their 9 research and talking to different people in the 10 organization. 11 Then I would just raise the difficult 12 topic that nobody wants to discuss, and I assume 13 that's why the SEC asked me to be on this panel. 14 Patricia said that an analyst's job is to ferret out 15 information. That's true, but anyone who knows how 16 this business works knows that the sell side equity 17 research analyst has far more jobs than simply 18 ferreting out information. They are there to help 19 the investment banking process. God bless them for 20 it because that's how their employers make money, 21 but until fairly recently the investing public 22 hasn't understood that well. 23 So as I throw it back, I am frustrated 24 that there doesn't seem to be anything that the SEC 25 can do to help the individual investor with this Diversified Reporting Services, Inc. - (202) 296-9626 148 1 problem that they don't know where to get 2 independent research. I say frustrated because I am 3 told that there is no role to play for the SEC here. 4 Having said that, the individual investor needs more 5 protection than the media or the plaintiff bar in 6 battling information in the marketplace put out by 7 people who have conflicts of interest. And I am 8 sure we can argue about that for the rest of the 9 afternoon, if we like. 10 CHAIRMAN UNGER: Well, Michael, what a 11 perfect introduction. 12 MR. BLUMSTEIN: Good afternoon, I am 13 Mike Blumstein, and I am the North American equity 14 research director of Morgan Stanley Dean Witter. I 15 was a sell side analyst for 15 years and have been a 16 research director overseeing our U.S. and Canadian 17 stock and industry research for the past year. We 18 have more than 100 analysts in both the U.S. and 19 Canada combined. 20 I will be pretty short here. Let me tell 21 you first, we have two very strong beliefs. One is 22 that, in part, the underlying and enduring strength 23 of our economy is, in part, a function of our 24 smoothly functioning capital markets, and we don't 25 want to lose sight of that. And, two, I want to Diversified Reporting Services, Inc. - (202) 296-9626 149 1 tell you that we have long believed in research 2 integrity, and research integrity is paramount to 3 the job of what we do in equity research at Morgan 4 Stanley. And we have been in print internally with 5 that to our analysts dating back to 1984. 6 Regarding Reg FD, I will tell you that we 7 think the goals of Reg FD are worthwhile. We are 8 not here to shoot hundreds of holes in Reg FD. Our 9 concerns center on what you might call the 10 execution. We are concerned that there is more 11 noise but less substance and we are also concerned 12 about corporate paranoia, this idea that, "If we 13 don't say anything then we can't really get into 14 trouble." 15 It seems that no company wants to be the 16 first test case, so we fear that in some cases there 17 is less worthwhile information coming out, and while 18 the Regulation specifically said that operating 19 managers should be available to educate analysts, 20 our concern is that they are less available now, not 21 more available. 22 And our concerns really here are that all 23 the uncertainty leads to more volatility in the 24 capital markets and, ultimately, our concern is that 25 more volatility raises the cost of capital for Diversified Reporting Services, Inc. - (202) 296-9626 150 1 everybody and ultimately hampers our economy. And I 2 will leave the rest for Q&A. 3 CHAIRMAN UNGER: Thank you. 4 Charles. 5 MR. HILL: I am Chuck Hill, director of 6 research at First Call, I have been there ten years. 7 First Call is a firm that distributes sell side 8 research selectively to only their individual 9 clients, and in addition, we put together the 10 consensus earnings numbers and recommendations. 11 Prior to coming to First Call, I spent 22 12 years as an analyst, 18 on the sell side, and so I 13 have seen it from a number of different angles. In 14 relation to the comment that Adam made about the 15 wink, wink, nudge, nudge, there were things that are 16 far more flagrant than that. We saw notes in First 17 Call where the analysts were saying the company was 18 calling analysts last night to revise their numbers. 19 Now, there it is in print, folks, the 20 company was initiating selective disclosure. So I 21 think there was a real need for something like FD. 22 And from our point of view, I think the best 23 testimonial is that when FD was about to be 24 introduced in September and early October, there was 25 a lot of grousing in the sell side analyst reports, Diversified Reporting Services, Inc. - (202) 296-9626 151 1 particularly from the banking analysts, so they must 2 have known what was coming. 3 But since FD has been implemented, we see 4 very little grousing except in the banking industry. 5 So I suspect there is some kind of problem there. I 6 don't know if maybe the bank lawyers are more 7 conservative than others or what the reason is, but 8 it does seem that there is some sort of problem in 9 getting information from the banking industry. But 10 outside of that, I think the comments from the 11 analysts about problems getting information have 12 been pretty few and far between since 13 implementation. 14 I would say that given a lot of the 15 comments that have been made lately by pundits in 16 the investment business, that this big increase in 17 warnings from companies was due to FD, I think it is 18 absolutely untrue. Unfortunately, FD was 19 implemented at the worst possible time in terms of 20 being able to measure the impact of it. We are in 21 this radically changing environment here, but we 22 would have gotten, I am sure, a record number of 23 negative pre announcements from companies even if FD 24 hadn't been implemented. It certainly added some to 25 the list, but the ironic thing was where we know it Diversified Reporting Services, Inc. - (202) 296-9626 152 1 added a lot, because in some cases it even said in 2 the release that we are confirming prior guidance as 3 a result of FD, we saw in the fourth quarter and in 4 the first quarter that the number of on-target pre 5 announcements went up less than the negative, so no 6 matter how you slice it, I don't think FD is 7 responsible for this huge increase in warnings. 8 I think what it has led to is an 9 increased number of analysts meetings that are 10 obviously open to the public via webcast or 11 conference call, and in addition, we are seeing a 12 number of them, and, again, some of these were 13 prefaced with "as a result of FD" that they had 14 instituted regularly-scheduled mid-quarter or 15 monthly conference calls to give guidance. 16 Incidentally, in the guidelines that the 17 SEC has put out, one of the issues was, can we 18 confirm things to individual analysts and still be 19 on safe ground in the guidance, the issue about how 20 long had it been since you put out a formal 21 guidance. And I guess it was interpreted as if you 22 were halfway through the quarter, you were on kind 23 of shaky grounds. So, obviously, if companies are 24 going to have regular monthly scheduled calls, that 25 would get around that issue. Diversified Reporting Services, Inc. - (202) 296-9626 153 1 As far as what it is going to do to 2 earnings estimates and volatility, I think, first of 3 all, it is important to differentiate between the 4 current quarter and subsequent periods because it is 5 a very different environment between those two. 6 Even before FD, the current quarter was mainly in 7 the hands of the IR person. When I was the analyst, 8 if I went and talked to the company, they told me 9 what their thinking was for a full year and next 10 year. I took it with a grain of salt, it was just 11 another input. 12 But if they told me the current quarter 13 was going to be such and such, and I was high or 14 low, I had to listen because I figured, hey, they 15 know more about the current quarter certainly than I 16 possibly could since they are looking at the books. 17 But now with the public guidance that they have to 18 give on the quarter, I think it is really in the 19 hands of the IR folks at the companies. 20 That is going to mean -- 21 CHAIRMAN UNGER: Chuck, can we say 22 something to slim down a little? 23 MR. HILL: Less final surprises, higher 24 estimate ranges, and I think it is going to 25 eliminate the purposely low-balling the guidance Diversified Reporting Services, Inc. - (202) 296-9626 154 1 that some companies have been doing in the past. 2 It is one thing if you are doing it on 3 the private calls for the analysts versus putting 4 something out in a public release. 5 On the further out stuff -- 6 CHAIRMAN UNGER: You know what, this is 7 not your only opportunity to talk. I wanted to let 8 people touch on their topics for one or two minutes. 9 MR. HILL: All right, but I think it 10 will lead to better analysis in subsequent -- 11 CHAIRMAN UNGER: I appreciate your 12 comments. I think they are all valid points, but 13 I'd like to hear from David. 14 MR. BERRY: I am David Berry, I am 15 director of research at Keefe, Bruyette & Woods. We 16 are basically a research company in the public 17 financial services industry. 18 Frankly, God's honest truth, this is 19 probably too early to really say whether Reg FD is a 20 good thing or a bad thing. The truth is we can 21 accommodate pretty much anything, but it does seem 22 to me as a working analyst, that practically, it is 23 less disclosure. 24 Well, let me word this in a very careful 25 way. Certainly now information is much more broadly Diversified Reporting Services, Inc. - (202) 296-9626 155 1 disseminated, but it is the incremental information 2 from which we get nuance, from which we develop the 3 mosaic theory, that being inside it is harder to 4 achieve. So in that sense, it is probably making 5 our job a little harder. 6 There are certain kinds of conversations 7 that we are no longer having with companies, 8 conversations like, "So how is the quarter going," 9 so it is especially limited today. 10 It let us free up the rules on late in 11 the quarter, and that's nice, but it also means our 12 estimates are not as good as they used to be. So it 13 seems to us that the opportunities for companies to 14 surprise either with earnings releases or if they 15 choose to create announcements is greater than it 16 used to be. On one level that is good news, I 17 guess, but in another sense it doesn't seem very 18 smart because it means there is less good 19 information in the marketplace. More guess work, 20 less real information, greater propensity for 21 mispricing securities. I am not sure why that is a 22 good thing. 23 There is implicit in all of this some 24 sense that analysts were just sitting around, taking 25 phone calls from managements previously. I wasn't Diversified Reporting Services, Inc. - (202) 296-9626 156 1 doing that, I am not sure what anyone else was 2 doing. There is some sense that if an analyst got 3 information by talking to a supplier of a company or 4 a customer of a company, somehow that is more fair 5 than an analyst simply talking to a CEO or director 6 of investor relations. I find this a peculiar point 7 of view. 8 With respect to this issue of analyst 9 conflicts between analysts' roles as analysts or 10 analysts' roles as people working for an investment 11 banking department, at this point, the Reg FD does 12 nothing to address those conflicts. They are with 13 us or not regardless of Reg FD. 14 So in short, it seems like there is a 15 little less information out there in the 16 marketplace. Yes, the places we do get information, 17 it becomes actually harder to get what you want in a 18 public forum. You have to sit through everyone 19 else's silly and pointless questions, where you 20 could ask your one really penetrating question. 21 And I think the issue is trying to 22 develop independent points of view, all kinds of 23 things, set down like a strip mall, with consistent 24 and streamlined disclosure. And I am not sure it is 25 really doing what we need to do, but, frankly, you Diversified Reporting Services, Inc. - (202) 296-9626 157 1 know, we can live with anything. 2 CHAIRMAN UNGER: Thank you. 3 Frank? 4 MR. FERNANDEZ: My name is Frank 5 Fernandez, I am the director of research with the 6 Securities Industry Association. We represent about 7 700 securities firm that account for 80-some-odd 8 percent of all securities traded in North America. 9 I have been in the financial industry 10 here in New York for 22 years, first as a regulator, 11 also as an asset manager, broker, but principally as 12 an analyst. I promise to be brief, but I would like 13 to make two very general comments. 14 First, a bit of clarification. The SIA 15 has been painted one way on this issue because we 16 have been broadly in opposition to it since it was a 17 twinkle in Mr. Levitt's eye. But SIA has, since the 18 inception of the debate on the issue of selective 19 disclosure and still does today, support the same 20 ends as the Commission. We opposed it largely for 21 the same reasons as you said you voted against it, 22 we had concerns about the impact on the flow of 23 information and the quality, in particular. 24 We do favor a system that provides broad, 25 non-discriminatory dissemination of quality Diversified Reporting Services, Inc. - (202) 296-9626 158 1 information. We believe that the process of 2 increasing information flow and opening access to 3 all investors was already underway prior to Reg FD's 4 adoption. And this is not a disingenuous claim. 5 And it was largely the result of the diffusion of 6 significant inventions and innovations and 7 information and communications technology and the 8 broadening of the investor base in the United 9 States. 10 We also believe that, as was mentioned 11 earlier, that the SEC already had sufficient 12 enforcement powers. Nonetheless, Reg FD has 13 equipped the SEC with additional enforcement tools 14 used in instances where selective disclosure occurs. 15 Our concern then, as now, is that any solution 16 mandated by regulatory fiat is apt to produce 17 unintended consequences. Our hope would be to 18 mitigate those unintended negative consequences that 19 now exist to the greatest extent possible. We want 20 to work constructively with the SEC to improve Reg 21 FD to achieve the goals we all share by examining 22 the definition of material, by limiting collateral 23 liability, and by giving clear guidance to issuers 24 and analysts. 25 The second point I would like to make is Diversified Reporting Services, Inc. - (202) 296-9626 159 1 that we have sought throughout to present a balanced 2 appraisal of the impact of Reg FD and assess its 3 cost and benefits. We have engaged in a study that 4 now has gone on for more than six months. We are 5 now completing, nearing completion of our effort in 6 this regard and we will in the next month be 7 prepared to release our findings. 8 Our preliminary conclusions present, 9 really, very few surprises. The impact of Reg FD 10 appears to produce the unintended consequences we 11 anticipated in our early comment letters to the SEC 12 on this issue. Specifically, it would produce a 13 chilling effect, reducing the quantity to a degree, 14 but more importantly, reducing the quality of 15 information. Specifically, that information now 16 arrives, first, largely devoid of content, context 17 and analysis. 18 Secondly, that it would pose significant 19 costs, costs well in excess of those presupposed by 20 the advocates of this regulation prior to its 21 effectiveness, and costs well in excess of the 22 perceived benefits. 23 And, third, that it could, and I say 24 "could" induce additional volatility in a 25 marketplace already experiencing sustained, high, Diversified Reporting Services, Inc. - (202) 296-9626 160 1 near-record levels of volatility, and that possesses 2 additional cost. 3 CHAIRMAN UNGER: Thank you. 4 Perry? 5 COMMISSIONER HUNT: Can I make a brief 6 comment? 7 CHAIRMAN UNGER: Very brief. 8 COMMISSIONER HUNT: I am glad to see the 9 views of my friends at SIA haven't changed. 10 MR. FERNANDEZ: We are now prepared to 11 substantiate. 12 MR. BOYLE: My name is Perry Boyle, and 13 I am the director of research at Thomas Weisel 14 Partners. Many of you probably haven't heard that 15 name before. We like to think of ourselves as the 16 nation's newest major investment bank, started 17 February 1, 1999. We did almost 500 million in 18 revenues last year, and despite Reg FD, our first 19 quarter was within an inch of our previous record, 20 so this clearly didn't have a bad impact on the 21 financials of investment banks. 22 My take is very similar to the other 23 analysts on this panel. I have to say it is 24 interesting that of the nine people on this panel, 25 only three are practicing analysts, and one is from Diversified Reporting Services, Inc. - (202) 296-9626 161 1 the media. 2 What we see is essentially you get the 3 positive benefit to the public of webcast conference 4 calls that people can join in on -- that is, if a 5 company does have one, many companies don't -- 6 versus the cost of compliance, reduced quality of 7 information flow to the markets, and more 8 volatility. I think you are going to hear that as a 9 consistent refrain from people in the analytical 10 community, that there is more volatility. 11 Reg FD has been positive in that it 12 encouraged companies to share more information with 13 the general public and has made it easier to some 14 degree for an individual investor to keep up with 15 the information flow out of the company via the 16 Internet, press releases and webcasts, but I think 17 it creates a false impression that the individual is 18 now on an equal playing field with the professional. 19 That wasn't the case before, it is not the case 20 after and it will never be the case of an individual 21 being equal with people who spend their full time 22 doing this for a living. 23 COMMISSIONER HUNT: And we never thought 24 it would do that. 25 MR. BOYLE: Okay. Diversified Reporting Services, Inc. - (202) 296-9626 162 1 But I think this has been more costly to 2 the public than has been generally accepted. I 3 think we hear a lot of opinion and hypothesis about 4 this, but I think we need to do more study and 5 analysis about what the costs and what the benefits 6 are. 7 The regulation clearly lacks standards on 8 materiality and time level of projections. Giving 9 just one quarter's projections does nothing to 10 really help analysts come to a decision about a 11 company. 12 We think the SEC should not encourage 13 just fair disclosure, but full disclosure, more 14 information about segment information, off balance 15 sheet items, better financing, and the like. It has 16 been a constant source of amusement to me that the 17 media often gets this wrong and thinks the "F" does 18 stand for "full." We look at who are the winners 19 and who are the losers so far with FD. 20 Well, clearly, the winners include 21 lawyers, the media, storage companies, as was 22 pointed out at the last panel, and good analysts. 23 In general, I think Wall Street wins with Reg FD 24 because volatility is good for people who make 25 markets in securities; it is bad for people who buy Diversified Reporting Services, Inc. - (202) 296-9626 163 1 and sell securities as investors. 2 The losers are the issuers, bad analysts 3 and some investors. I think, ultimately, Reg FD is 4 going to prove to be irrelevant. I kind of agree 5 with David Berry, we can live with anything. Our 6 job is to analyze information. And, frankly, stocks 7 don't move up or down based on Reg FD. 8 And I am done, thanks. 9 CHAIRMAN UNGER: No, the hand motion was 10 to speak into the microphone. 11 MR. BOYLE: I will turn it over to 12 Donald. 13 CHAIRMAN UNGER: Donald? 14 MR. LANGEVOORT: I will be very brief. 15 I am a commentator here, my name is Don 16 Langevoort from Georgetown University Law Center. I 17 am one of the few people on the panel right now who 18 likes Reg FD pretty much. I do think that the 19 demand for high-quality information for reasons well 20 beyond Reg FD is ultimately, after a year or two 21 period, going to drive us into a higher-quality 22 information environment, notwithstanding some of the 23 downside effects of Reg FD. 24 I think the rule should be studied, I 25 think materiality is an interesting issue, but I Diversified Reporting Services, Inc. - (202) 296-9626 164 1 think these are all manageable problems. 2 CHAIRMAN UNGER: Thank you. 3 Bill? 4 MR. ATKINSON: My name is Bill Atkinson, 5 I am acting chief economist with the Securities and 6 Exchange Commission. I am here, I am very 7 interested in the empirical evidence on some of the 8 issues that Frank has raised regarding volatility 9 and will be interested to see the evidence regarding 10 the impact of FD on volatility, and also on how we 11 go about estimating the true cost of FD. 12 CHAIRMAN UNGER: Thank you. 13 In the interest of time, I thought I 14 would just run through what the new timing will be 15 since we have gone so far off schedule. This panel 16 will run until 3:15, so we will get the full hour 17 and fifteen minutes that was allocated, and not a 18 second longer. And then the investor panel will 19 begin as soon as we move the investor individuals up 20 here, hopefully, very close to 3:15, 3:20, and run 21 for the hour to 4:15. 22 In the spirit of all the talk about 23 lawyers today, we have dropped the lawyer panel. 24 No, we did cut it in half because one of the lawyers 25 could not make it, so we will have one lawyer Diversified Reporting Services, Inc. - (202) 296-9626 165 1 responding to all of the lawyer cracks made today. 2 And so, that will go for about fifteen minutes, from 3 around 4:15 to 4:30, so we can still finish on 4 schedule. 5 I would like to pick up on something that 6 you raised, Michael, in terms of corporate paranoia 7 and the fact that companies would rather say nothing 8 than run the risk of running afoul of Reg FD. In 9 the context of answering that, do analysts receive 10 the same information now that investors receive? I 11 think that was part of the shazam theory that was 12 mentioned earlier, or do you receive different 13 information, and, if so, in what context? 14 MR. BLUMSTEIN: I guess it is hard for 15 me to know what everybody is receiving. I do know 16 that our analysts sometimes feel when they ask a 17 question, all they hear is, "Well, what we said on 18 the last conference call was X." 19 And we do see a reluctance on the part of 20 companies to give some explanation, to give some 21 nuance sometimes. It feels like there is a lot of 22 reliance on the script, like the investor relations 23 person has a script in front of him and regardless 24 of what is asked, just a standard answer is given. 25 And there are two concerns. One, the Diversified Reporting Services, Inc. - (202) 296-9626 166 1 obvious concern of: Do we have sophistication of 2 information? We have a lot of information out 3 there, but do we have depth of information? Are the 4 important nuances less understood? 5 And our longer term concern is, if 6 companies are very reluctant to say much, how do we 7 train the next generation of analysts? The current 8 generation of analysts can probably live with Reg FD 9 because they have the background, they have the 10 knowledge, and they can just push forward, but 11 someone who is becoming a new analyst is really 12 getting into a company and understanding the heart 13 of the company, meeting with the operating managers, 14 understanding the operating units, understanding 15 line by line how the model works, how the P&L works, 16 how it looks on the balance sheet, the cash flow 17 savings. And if companies are reluctant to open 18 themselves up, we wonder how the next generation of 19 analysts will get up to speed. 20 CHAIRMAN UNGER: For the three analysts 21 on the this panel, has Reg FD changed the way you 22 get pertinent information? 23 MR. BOYLE: Absolutely, yes. 24 CHAIRMAN UNGER: In what way? 25 MR. BOYLE: Often companies would give Diversified Reporting Services, Inc. - (202) 296-9626 167 1 more detailed disclosure about further out on the 2 time line. For example, you see right now, it is 3 very interesting to see a lot of press releases have 4 the next quarter, some companies even put the full 5 income statement projection. That's great, but that 6 is only a quarter. And I think that encourages 7 short-term trading around quarterly info. 8 In the old version, pre Reg FD, you 9 wouldn't get companies telling you, "Well, this year 10 we are going to do this, and for next year, we are 11 going to do this," but you could have some give and 12 take on that subject, "Well, what are your 13 assumptions about that?" We don't get any of that 14 anymore. And I think this is what in particular 15 contributes to the volatility. 16 CHAIRMAN UNGER: David? 17 MR. BERRY: It's a very mundane kind of 18 example but I think it gets to the heart of the 19 problem. We follow close to 300 financial services 20 companies and we regularly collect information from 21 them, historically, by mailing out questionnaires, 22 and they fill in an income statement and data sheet. 23 This is not market-moving stuff. This is actually 24 reported results, it is just coming off a database. 25 And an awful lot of companies won't do Diversified Reporting Services, Inc. - (202) 296-9626 168 1 that anymore because it is perceived as a Reg FD 2 violation, so you sit around and wait for the 10-Qs 3 to come out. And I know that seems more fair, but 4 there is a depth and coherence of information that 5 we just don't have on a timely basis at all anymore 6 to assess peer group performance and get a really 7 good sense about what is going on. 8 There are examples of bits and pieces of 9 information that I would think are clearly 10 non-material, not market moving, that you can't get 11 anymore. And, yet, the edge that an analyst has, 12 ultimately, is based on his ability to put 13 information together from a variety of sources, 14 listen for nuance. But there is less information to 15 play with than there was before. 16 MR. FERNANDEZ: I concur. In our 17 surveys and in-depth interviews with both sell side 18 and buy side analysts, we have been told, and this 19 is consistent with the other surveys that have been 20 done, that analysts have found that there is a 21 reduction both with respect to non-material 22 information as well as material information. 23 In response, as expected, as you had 24 anticipated, analysts have relied more heavily on 25 fundamental analysis, trying to construct this using Diversified Reporting Services, Inc. - (202) 296-9626 169 1 a mosaic approach. However, an analysis of issuers 2 with very complex business models, with new 3 companies, with new products and markets, the 4 process of relying solely on external views is much 5 more difficult and it often results in a less than 6 satisfactory result. 7 A number of the analysts have commented 8 that even though they may work harder, that isn't 9 the point. They are just not able to produce the 10 same level of analysis because their access has been 11 reduced. Perhaps not because of anything Reg FD 12 does do and its intention, but just perhaps of the 13 misperceptions of the way it is seen in the 14 marketplace. 15 COMMISSIONER HUNT: Is it your 16 experience that even with clearly non-material 17 information, the companies are reluctant to talk to 18 you? 19 MR. FERNANDEZ: I think what we have 20 seen is -- the point was made earlier, there is a 21 certain segment of people who will use this as an 22 excuse not to talk, when they didn't intend to talk 23 anyway. But we also see that there is a substantial 24 amount of confusion out there. 25 CHAIRMAN UNGER: By the issuer Diversified Reporting Services, Inc. - (202) 296-9626 170 1 community? 2 MR. FERNANDEZ: By the issuer community, 3 yes. 4 MR. BLUMSTEIN: We actually came across 5 one company that just shut down its investor 6 relations department. 7 COMMISSIONER HUNT: Well, if you heard 8 some of the panels this morning, some of the 9 investor relations people were saying that -- well, 10 these obviously were exceptions to the rule -- they 11 always had a superb investor relations department 12 and they continue to have a superb investor 13 relations department. 14 MR. LASHINSKY: I think I will make a 15 prediction, which is, over time issuers will 16 continue to communicate with Wall Street for one 17 simple reason, they want Wall Street's money and 18 they want to communicate their story, they want to 19 tell their story and so they will. 20 It actually would be helpful to hear from 21 the two Commissioners. Intel was very clear about 22 that this morning, they have no problem doing 23 one-on-one meetings with Wall Street, they have no 24 problem arranging meetings for analysts with 25 business unit heads, with heads of marketing and Diversified Reporting Services, Inc. - (202) 296-9626 171 1 such. They just make it clear that there is to be 2 no material information disseminated at those 3 meetings. 4 So that seems to be a model of behavior. 5 Is that acceptable behavior? 6 CHAIRMAN UNGER: Are you asking us 7 questions? 8 MR. BOYLE: He is from the media. 9 CHAIRMAN UNGER: Patricia, I would love 10 to hear -- I want to hear what you have to say right 11 now, but I just don't want to forget what Michael is 12 saying with the one-on-one meetings and the way a 13 new analyst sort of learns the business, so if we 14 could come back to that after your comment. 15 MS. WALTERS: I guess my comment has to 16 do with companies' propensity to disclose or not. 17 It was very interesting that on the first 18 go-around of the company panel, everyone does 19 fabulous disclosure, no one had any problem with Reg 20 FD. By the end of the panel we discovered that, 21 yes, there really were a lot of problems with Reg FD 22 and maybe there really needs to be more guidance 23 about what materiality is or isn't. 24 I've spent most of my career at AIMR, 25 working to improve financial reporting disclosure in Diversified Reporting Services, Inc. - (202) 296-9626 172 1 corporate financial reporting and SEC filings. I 2 have spent hundreds of hours talking with companies 3 about disclosures, lobbying -- I hesitate to use 4 that word -- with FASB to improve financial 5 reporting disclosures and to improve the kinds of 6 requirements that companies have to provide. 7 Companies are never, on my side of the 8 table, saying "That's exactly what we want, let's 9 have more disclosure in our financial report." 10 Companies, by their very nature, want to keep their 11 cards as close to the vest as they can, and to 12 trickle out pieces of information as they think it 13 will be beneficial to them. And that it is good 14 companies and bad companies; it is not just one kind 15 of company or another. It is their natural 16 inclination. 17 And the market had a lot of pressure on 18 them in the past to disclose things. Some of the 19 comments that AIMR members made in our survey were 20 that everything is now essentially boilerplate kind 21 of disclosures, even in conference calls. They are 22 not getting the kinds of nuances that are necessary 23 to put together a mosaic to actually get a feel for 24 the company. So I think that companies saying, "I 25 am a great discloser," I always take that with a Diversified Reporting Services, Inc. - (202) 296-9626 173 1 grain of salt because my experience has been that is 2 not the case. Otherwise, we would have stock 3 options recorded as expenses. 4 MR. BLUMSTEIN: The question is, how do 5 you define good disclosure? Is it leading to 6 another decimal point, going up two decimals instead 7 of one, or is it really giving you a sophisticated 8 understanding as to what is happening in the 9 marketplace and where the company is trying to go? 10 CHAIRMAN UNGER: So what about those 11 one-on-one meetings and other types of communication 12 between the issuer and the analyst? Is that still 13 taking place? 14 MR. BLUMSTEIN: In terms of one-on-one 15 meetings, we are finding that they are limited, that 16 some companies are doing them and some are not. We 17 can't give you generalizations that everybody is 18 doing the same thing. It really does tend to run 19 the gamut. 20 But we have seen companies pull back from 21 doing one-on-one meetings, and that raises with us 22 this issue of, are investors able to really get a 23 nuance of the story as to what is going on, or is 24 everybody being pushed to the least common 25 denominator? Diversified Reporting Services, Inc. - (202) 296-9626 174 1 CHAIRMAN UNGER: What was it, the strip 2 mall? 3 MR. BERRY: I am working on a good 4 metaphor. 5 CHAIRMAN UNGER: All right, we will come 6 back to that at that end. 7 Let me go back. You said at one-on-one 8 meetings it is different. What about the plant 9 tours and the factory tours and all of that? 10 MR. BLUMSTEIN: That has been a little 11 disappointing in that it seemed that in the 12 regulation, you were trying to carve that out. It 13 looked like you were trying to say to companies, 14 "Look, you can do that, this rule is really focused 15 on the investor relations person, the CFO. You 16 know, don't whisper into somebody's ear how the 17 quarter sales are going." 18 It looked like you were trying to say, 19 "Look, it is still okay to make operating managers 20 available to help investors really understand 21 in-depth how a company works and how an industry 22 works." And, unfortunately, what we seem to be 23 finding is that companies, for fear that somebody 24 will violate Reg FD unintentionally or just a 25 general fear of going where they don't want to go, Diversified Reporting Services, Inc. - (202) 296-9626 175 1 that basically they are cutting back on those sorts 2 of opportunities. 3 CHAIRMAN UNGER: Which circles back to 4 what Adam asked, and that is, if you have these 5 one-on-one meetings where there is no material 6 information disclosed, is that okay? 7 I would say, yes, that is okay. 8 MR. BLUMSTEIN: We would argue that the 9 education is already in place. 10 CHAIRMAN UNGER: I think that is part of 11 what is coming out of the dialogue today from what I 12 hear in terms of the panelists. 13 MR. HILL: The one thing that seems to 14 be forgotten in relation to these one-on-one 15 meetings is that there is an out if somebody 16 whispers or whatever some piece of information that 17 you had told them not to disclose. You have 24 18 hours, if it is material, to put something out. 19 You will know if it is material if the 20 stock goes up or down, and you have this capability, 21 which I think puts you in a better-off position than 22 where you were before, because now if you get 23 something out immediately after the incident has 24 happened and can say "Well, we had 24 hours within 25 the SEC guidelines, but we had something out an hour Diversified Reporting Services, Inc. - (202) 296-9626 176 1 after this happened on the plant tour where somebody 2 said something they shouldn't have," I think now if 3 you went to a court case where shareholders were 4 suing, you now have a better piece of information 5 than you did before. 6 And, "Look, we reacted well within the 7 time within the SEC guidelines, and in good faith we 8 have taken care of this problem." So I think it is 9 a plus for the companies if this kind of incident 10 were to occur. 11 COMMISSIONER HUNT: Let me ask you a 12 question: Do you think conference calls and 13 follow-up requests are still helpful? 14 MR. BERRY: Sure. In fact, they are 15 almost, in some respects, in some cases, more 16 important than ever. 17 MR. BOYLE: But, again, one of the 18 things you might encourage is transcripts of the 19 calls. 20 CHAIRMAN UNGER: Why is that? 21 MR. BOYLE: Transcripts of the calls on 22 the websites. It would be much faster to furnish 23 people the information, open up webcasts to people 24 who are hearing impaired. 25 MR. BERRY: Transcripts would be great Diversified Reporting Services, Inc. - (202) 296-9626 177 1 because, frankly, now there are replays and you can 2 go back and there is an hour's worth of stuff you 3 have to slog through to find that little nuance. 4 MR. BOYLE: You kind of want to get past 5 the rereading of the press release to the Q&A. 6 CHAIRMAN UNGER: So you can search the 7 transcripts; is that what you are saying? 8 MR. BOYLE: That would be nice. 9 MR. LASHINSKY: If I may, we didn't 10 start out this way, but as the day has gone on, Reg 11 FD suddenly has come to be responsible for market 12 volatility. 13 CHAIRMAN UNGER: Are you going to ask 14 more questions? 15 MR. LASHINSKY: No, I am going to make 16 an observation. 17 Lots of things contribute to market 18 volatility. Because stocks spike when there is bad 19 news or good news, I am not sure it is the fault of 20 Regulation FD. Hundreds of thousands of mutual 21 funds taking out hundreds of thousands of ads in 22 newspapers and television, and CNBC having fund 23 managers who hype their positions all day long, et 24 cetera, I could go on with the list. All these 25 things contribute to volatility. Diversified Reporting Services, Inc. - (202) 296-9626 178 1 MR. BERRY: Adam, I think what we are 2 looking at here is where the Street, through their 3 own devices, has guessed wrong. And it is surprised 4 by an announcement or a pre announcement, and as I 5 said before, in one respect, that is fair, we all 6 get surprised at the same time. But I think it does 7 contribute to the volatility. 8 And there is also the "gotcha" mentality 9 that the SEC is well aware of, if there is less 10 information out there, little scraps of information 11 that you do get, little monthly filings or 12 intra-quarter reviews, are seized upon and maybe 13 even acted upon, without the benefit of someone 14 really going back and thinking about what they are 15 saying and conceptualizing. 16 So, I mean, there are a lot of things 17 that cause volatility, to be sure, and I don't think 18 I could statistically prove to you that Reg FD has 19 enhanced or permitted or affected it, but I think it 20 has. 21 MR. BOYLE: Well, it is a provable 22 thing. 23 COMMISSIONER HUNT: Well, I think 24 that, as somebody, I think, on this panel said, this 25 has been a very difficult time since the Diversified Reporting Services, Inc. - (202) 296-9626 179 1 promulgation of Reg FD to measure what kind of 2 effect it has on volatility because so many other 3 things are going on in the market. 4 And I don't know how you divorce out what 5 it is caused by. I don't think we have the tools 6 yet to separate out what volatility was caused by FD 7 and what was caused by other things going on in the 8 market at that time. It would have been nice if we 9 had promulgated it when the market was static and 10 nothing was happening, there was no other news in 11 the world. But the world doesn't work that way. 12 Somebody else, I think Mr. Boyle, 13 indicated that one group of people whom he thought 14 FD might help was the good analyst. Well, that's 15 precisely who we wanted it to help. We didn't want 16 it to help the bad, lazy analyst. 17 MR. BOYLE: Why should you care which 18 analysts it really helps, though? 19 COMMISSIONER HUNT: Because our view 20 is that a competent, good analyst dissects, 21 analyzes, puts the information back together and 22 adds great value to the information there for the 23 investing public. 24 That somebody who just parrots what he or 25 she learned from a conversation with the chief Diversified Reporting Services, Inc. - (202) 296-9626 180 1 financial officer is not as valuable as the person 2 who puts a mosaic of information together, analyzes 3 and -- 4 MR. BOYLE: And I disagree with that. 5 But, again, I cannot understand why the 6 SEC cares about analysts at all, one way or the 7 other? I mean, analysts work for their clients. It 8 is not the force of state. 9 COMMISSIONER HUNT: Well, I think, and 10 this is my personal view, that analysts have always 11 added some value to the way the market analyzes 12 information and, certainly, we are not trying to do 13 anything to destroy the function. 14 Some of your colleagues may have thought 15 that, but we were not trying to destroy the function 16 of the analyst. 17 MR. BOYLE: I don't think you have. 18 MR. LASHINSKY: The SEC is interested in 19 the investor who is not your client. That's why the 20 SEC is interested in analysts. 21 MR. BOYLE: What do they have to do with 22 me, that is what I don't understand. If they are 23 not clients, what do they have to do with me? 24 MR. LASHINSKY: If you have an unfair 25 advantage, the SEC is looking out for the investor Diversified Reporting Services, Inc. - (202) 296-9626 181 1 who is not paying you. 2 CHAIRMAN UNGER: I hate to break up this 3 love fest. And, Adam, I think you are taking 4 liberties about speaking for the Commission, but I 5 will take the liberty even further and actually 6 speak for the Commission. 7 I think, really, where this whole thing 8 evolved from is the trading and the lack of 9 authority or the perceived lack of authority that 10 the Commission felt that it had as a result of the 11 Supreme Court case, the Dirks case. And it all 12 started with trading and the unfair advantage that 13 selective disclosure of information to favored 14 clients who were trading on information making 15 profit. 16 MR. BOYLE: That's a great case. 17 CHAIRMAN UNGER: Because what we did was 18 we tried to get at trading and we got at 19 communications. And communications is a much 20 broader subject matter than trading. 21 And as a result, I think there are many 22 good things that can come out of this, and what we 23 are trying to do is find out what those things are 24 and how, if at all, we can work with the existing 25 rule or at least find out what people living with Diversified Reporting Services, Inc. - (202) 296-9626 182 1 the rule's observations are about it. 2 COMMISSIONER HUNT: And we said when 3 we promulgated the rule, we were going to monitor it 4 very closely, we want to see what its unintended 5 consequences -- unforeseen, unintended consequences 6 were. 7 This is part of that process. We are 8 trying to hear from the whole business community as 9 to what their views are on the rule. Since I worked 10 on it so much, obviously, I think it is perfect. 11 But it is not. We may have to change it. But we 12 are trying to hear from all of you to see what 13 changes need to be made. 14 We also said that we would not be 15 reluctant to make radical changes if we found that 16 the rule was seriously bombing the market and the 17 financial community. 18 MS. WALTERS: Can I get back to 19 volatility for a second? 20 COMMISSIONER HUNT: Yes. 21 MS. WALTERS: Since that is where we got 22 off. 23 I think you are absolutely right, 24 Commissioner Hunt, in that there is no way that we 25 can understand the magnitude, if any, of the effect Diversified Reporting Services, Inc. - (202) 296-9626 183 1 of this particular regulation in the current market. 2 And I think it is going to be a while before there 3 is sufficient data for academics to beat it into 4 submission to figure that out. 5 But I think that there have been a number 6 of comments about people's behavior that have been 7 made today that can give us inferences about how to 8 look at certain kinds of tests. One of the comments 9 that one of our surveying members had to say was, 10 "One way that some companies try to comply with Reg 11 FD is to disclose as much information as possible as 12 often as possible, even if the information is 13 tentative or of borderline importance. The market 14 generally assumes initially that any release is 15 material." 16 And I think that really actually plays 17 back into the comments of the gentleman that was 18 actually sitting where Dave Berry is sitting right 19 now, this morning. Kipp, I think his name was. 20 And he explained how they don't really 21 understand when to provide information to the 22 market. Sometimes they provide it very early with 23 some caveat about how they are really not sure where 24 things are going. Other times they are going to 25 wait until they are absolutely sure. And that Diversified Reporting Services, Inc. - (202) 296-9626 184 1 actually plays right into this comment, because if 2 you are never sure whether the company is disclosing 3 a material piece of information or not, until you 4 learn over time, your initial inclination is going 5 to be assuming that it is material. 6 And so I think there is evidence that 7 there is some effect from this regulation on market 8 volatility even though we don't really know what the 9 magnitude of it is relative to other possibilities. 10 COMMISSIONER HUNT: I am certainly not 11 excluding that possibility, don't get me wrong. I 12 just think at this time, in this market, it is just 13 premature. But I don't have a closed mind to the 14 fact that it may be affecting volatility. 15 CHAIRMAN UNGER: I don't think we can 16 statistically measure, but I think we have heard 17 some interesting anecdotes from people's own 18 observations and judgments about whether it is 19 impacting their own company or the companies they 20 follow. 21 And I would be interested to hear if any 22 of the analysts have any notions about whether FD 23 has impacted the volatility of the companies they 24 follow. 25 MR. BOYLE: I think it is just common Diversified Reporting Services, Inc. - (202) 296-9626 185 1 sense. I mean, the company now doesn't want to say 2 anything that they don't want to read in their own 3 press release. And so the AICPA on their website 4 replies to companies, "Consult lawyers." 5 NIRI, on its website, "Limit the number 6 of authorized spokespersons." I mean, more 7 information should contribute to less volatility. 8 MR. FERNANDEZ: If I could, I think that 9 the Commission has some excellent questions here. 10 We have kind of wandered afield. 11 I would like to second what Commissioner 12 Hunt has said about the issue of volatility, and 13 then maybe we can put this to rest and move on to 14 something more substantive, because I think the 15 important issue here is some of the issues about the 16 structure of the reg itself and the differential 17 impact it has had. 18 It has not affected everyone equally, 19 that is why we are getting so many diverse 20 responses. And we have spent a lot of time looking 21 at this buy versus sell, versus issuer, versus 22 large, medium and small. First of all, to put 23 volatility aside for a minute, we have done surveys, 24 as a number of other associations have, and we have 25 said early along that Reg FD would probably increase Diversified Reporting Services, Inc. - (202) 296-9626 186 1 market volatility. 2 So subsequently we posed this question in 3 surveys. And the majority of the respondents in 4 each and every survey had said "Yes, it did." 5 Whether these perceptions are correct or not, and if 6 so, how significant is the contribution of Reg FD to 7 volatility is a much more difficult question to 8 answer. Statistical analysis, at this point, is of 9 little help. There are too many factors that have 10 contributed to volatility in U.S. equity markets 11 that has been sustained at near-record levels for 12 the past two years. 13 It is not insignificant to worry about 14 volatility as huge costs, both for investors and for 15 the market and for market stability. During the 16 past six months, the time that Reg FD has been in 17 effect, volatility has gone even higher and become 18 more broadly based. 19 But while Reg FD may be correlated with 20 higher volatility, that does not prove causation. 21 And you certainly can't prove causation with six 22 months worth of data to examine the markets that are 23 undergoing both significant structural change and a 24 market correction. Now in assessing the cost and 25 benefits of the impact of this regulation, it is Diversified Reporting Services, Inc. - (202) 296-9626 187 1 much more beneficial to ask and examine the manner 2 in which additional volatility may be generated or 3 transmitted in a post FD environment, than it is to 4 try and quantify how much. 5 And we are looking at it. The important 6 issue, I don't even think is how has this changed 7 the role of analysts, but how do you change the way 8 market data and market information is disseminated? 9 If you look at it first you have to come to the 10 conclusion that now the first arrival of information 11 comes from a press release, either an 8-K posting, a 12 straight press release, a webcast. 13 These releases are now compared to the 14 pre FD world, generally void of context, additional 15 content, an analysis that used to accompany these 16 releases. So this added value that had a function 17 is now gone. It did serve as a filtering mechanism, 18 and it included financial advice to investors on how 19 to respond to the arrival of this information. 20 The release now when it arrives produces 21 an immediate price impact which is amplified by the 22 greater uncertainty generated by the absence of 23 context and content. And somewhat later, the 24 analysis that is provided by the financial media and 25 by the sell side and buy side analysts impacts the Diversified Reporting Services, Inc. - (202) 296-9626 188 1 market, and oftentimes it moves the market in a 2 different direction than the original company 3 release or statement. 4 This is why people say it just stands to 5 reason, because of the nature of the dissemination. 6 This brings us back to whom the differential 7 impacts. We find that most of the large firms, the 8 buy and sell side, have not been disaffected by Reg 9 FD. Why? They have the additional resources to 10 bear the cost. The large buy side firms still have 11 the ability and the clout to gain access to the 12 issuers. 13 The larger issuers themselves also can 14 bear the additional costs, and these are not 15 inconsequential. The firms, the issuers that have 16 been most heavily impacted, we find to be those 17 6,000 OTCBB and yellow-sheet type of companies. And 18 even the mid-size companies out there, they can't 19 afford this. They are confused. Sure, "Call a 20 lawyer." How much does an outside counsel cost 21 every time you have a substantive change in your 22 business environment? 23 So when we are looking at this, who has 24 been most advantaged by all of this? The media. We 25 did an investor survey and in the interest of Diversified Reporting Services, Inc. - (202) 296-9626 189 1 supporting the fight against selective disclosure, 2 we provide these results to the SEC staff before we 3 make them public. 4 In this survey, we went out to a large 5 group of individual investors. What we found here 6 is that there are only about 14 percent of the 7 investors that make use of the information that is 8 actively being provided as a result of Reg FD. It 9 is a very small percentage, but this is hardly 10 surprising. 11 We didn't expect people to access 8-Ks, 12 we didn't expect them to make great use of the 13 webcasts or to pore through balance sheets, for that 14 matter. 48 percent of all investors rely on the 15 media, some combination of newspaper, radio, 16 television, magazine. And the remainder are largely 17 those who rely on traditional analysts and brokers 18 for their financial advice, financial planners. 19 Now, the problem with this is that we have now come 20 to a situation where the arrival of raw information 21 is divorced from the analysis, and there is a 22 significant difference. 23 And I am not here to bash the media, I 24 think there are certain elements to the media that 25 are thoughtful, that provide some content and Diversified Reporting Services, Inc. - (202) 296-9626 190 1 analysis to it. Particularly, I will mention the 2 television media, it is much poorer, the type of 3 flow of information than we had in the past. And 4 they are what impacts people first. 5 It could also be argued that the need for 6 brevity, the sound byte world could benefit more 7 from providing information rather than analysis or 8 financial advice. It also disadvantages individual 9 investors whom rely principally on this medium. You 10 may have leveled the playing field in terms of the 11 provision of the access information, but it is like 12 Yogi Berra said, "If people don't want to go to the 13 ballpark, you can't stop them." 14 Now behaviorists point out that the 15 individual investor is already besieged by the 16 ubiquity of information flows and they increasingly 17 resort to mental shortcuts, which tend to accentuate 18 overreaction and underreaction to recent price moves 19 and the arrival of new information. To cope with 20 this information overload, investors increasingly 21 respond more to how information is presented or 22 framed than the content or the underlying 23 significance of the information itself. We are 24 encouraging short termism. 25 Closely related to this framing is Diversified Reporting Services, Inc. - (202) 296-9626 191 1 anchoring, which says that in the absence of better 2 information or the lag until analysis is provided 3 after the release of new information, that what you 4 have, the current information is the correct one. 5 The more you face too much conflicting information, 6 investors assume current prices are correct. So 7 each new high or new low is anchored by its 8 proximity to the last observation, and more distant 9 history becomes irrelevant. So increasingly a 10 disproportionate weight is given to recent moves and 11 extrapolation of recent trends becomes the dominant 12 insight. 13 I think what this is doing is leading to 14 a less-informed, more-superficial investment 15 decision process to the detriment of the very 16 individual investors who Reg FD was designed to 17 empower. 18 COMMISSIONER HUNT: I think that's a 19 thoughtful articulation of the SIA's position. 20 And, again, I tend to agree with you, Mr. 21 Fernandez, that one could clearly argue that there 22 is an information overload for the unsophisticated 23 investor with all of the broadcasts and TV programs, 24 but that still doesn't deter me from thinking that 25 if you give equal access to the information, the Diversified Reporting Services, Inc. - (202) 296-9626 192 1 analysts can still do their jobs, the sophisticated 2 individual investor or small investor who is able to 3 use and analyze that information is able to do it, 4 and I think there clearly will be some people, as 5 you posit, who pick this information and are going 6 to use the shortest term, most recent -- I don't 7 know how you can humanly avoid that, but I still 8 think that making the information equally available 9 is something for this Commission to strive to do. 10 MR. FERNANDEZ: I agree with you 11 wholeheartedly. And I think that is why the issue 12 that we should be addressing here isn't the issue of 13 volatility, it isn't even the differential impact. 14 It is how can we make these better? 15 I think consistently on the first three 16 panels, we have heard that there are several things 17 that need to be done: Define materiality a little 18 better, provide some guidance, limit collateral 19 liability. Why don't we address these now? 20 To me, I have a problem with the 21 materiality standards. To me, it is a "gotcha" 22 standard. It is a "gotcha" standard in the sense of 23 how do you determine what is material. If it has a 24 price impact, you can only determine that at the 25 close. And until you go out and proceed on Diversified Reporting Services, Inc. - (202) 296-9626 193 1 enforcing egregious situations, nobody really has a 2 good understanding, and it is a terrible way to 3 proceed in terms of defining a Regulation and 4 fleshing it out on the basis of enforcement actions. 5 COMMISSIONER HUNT: We are not going to 6 define this rule through enforcement actions, I 7 don't know how many times we have to say that. 8 We may have to define materiality more 9 narrowly or in a finer way. That's something we 10 probably need to think about, but we are not going 11 to define this rule through enforcement actions. 12 Enforcement doesn't even want us to do that. 13 MR. BLUMSTEIN: But you folks have been 14 out asking analysts questions about who told you 15 what, when. 16 COMMISSIONER HUNT: Have you seen an 17 action that the Commission has brought? 18 MR. FERNANDEZ: On the first two panels, 19 it was stated here that people are waiting to see 20 the definition provided through the enforcement 21 actions. 22 CHAIRMAN UNGER: Commissioner, you and 23 Frank are discussing information, and you say yes, 24 there will be value added by analysts, but investors 25 have the information at the same time. But that's Diversified Reporting Services, Inc. - (202) 296-9626 194 1 only true if the information out there is still 2 coming and it is still valuable information. 3 And that is one thing that I don't feel 4 like I have gotten a good grasp on yet. 5 COMMISSIONER HUNT: Certainly we have 6 heard some talk today, Madam Chair, about -- 7 although less than I thought we would hear -- on the 8 chilling effect of Regulation FD. 9 People have talked about maybe the 10 quality, I don't think many people have complained 11 about the quantity of information that is out there. 12 But, clearly, if the chilling effect is there, as 13 maybe you are positing, maybe that is something that 14 the Commission or staff will have to look at 15 further. And I am not closing my mind to it at all, 16 I just think it is something we need data on, have 17 more talks like this. 18 It may turn out that unintended 19 consequence is occurring, I just want to see all the 20 data so that we can make a reasonable decision on 21 whether that is true or not. 22 CHAIRMAN UNGER: Let's gather it now. 23 MR. BLUMSTEIN: I am not trying to 24 debate it, I think you are focused on the right 25 thing, which is, are companies really helping to Diversified Reporting Services, Inc. - (202) 296-9626 195 1 understand their businesses? They are overwhelming 2 us with numbers out five decimal places, but when it 3 is time to really give analysts a sophisticated 4 understanding of their strategy and industry 5 dynamics, that's our fear. 6 That's where companies are saying, "We 7 are afraid to talk about that now. We will just 8 read you the last press release," and that's it. 9 COMMISSIONER HUNT: I think some 10 off-the-record comments I have heard today is that 11 all these people who were going to chill have been 12 giving very conservative advice up until now, but as 13 they get more comfortable with the rule, perhaps 14 they will loosen up a bit and their clients will 15 feel more free to have more wholesome discussions. 16 But it may take a while for that to work out. 17 CHAIRMAN UNGER: I would like to know if 18 you have any views about what we can do about it? 19 MR. BLUMSTEIN: I think it is what you 20 have already heard today, for the rule to be clearer 21 to issuers as to what is allowed and what is not 22 allowed. 23 My fear is that they don't understand 24 what is allowed and they see enforcement officers 25 out asking a lot of questions about who said what to Diversified Reporting Services, Inc. - (202) 296-9626 196 1 whom, and the reaction is, "Let's just clam up, we 2 can't get in trouble if we clam up." 3 COMMISSIONER HUNT: But I hope you have 4 heard in our public statements and public comments 5 that there is no intention to be Draconian about 6 honest mistakes that issuers make. There is no 7 sense of, "Well, you thought you were being honest 8 and fair, but you made a mistake, we are going to 9 haul you up, and do whatever Draconian thing we can 10 do to you in federal court." That has not been our 11 attitude. 12 MR. BLUMSTEIN: I hear you, I am not 13 sure the issuers do. 14 CHAIRMAN UNGER: I am afraid this is the 15 wrong panel. 16 MR. FERNANDEZ: Right. It is the 17 issuers. And I think they need to understand that. 18 And I know you have said this, and I have followed 19 your statements, but for some reason there is -- 20 COMMISSIONER HUNT: Maybe we need to 21 abolish the Enforcement Division? 22 CHAIRMAN UNGER: In the short term, what 23 can we do? Obviously, we are trying to convey a 24 sense that we don't intend to enforce the rule 25 before we make clear what the rule is, but I don't Diversified Reporting Services, Inc. - (202) 296-9626 197 1 know how we get to that point. And in terms of what 2 information you need to perform -- 3 MR. BLUMSTEIN: How about some examples 4 of what is okay? We have heard instances, for 5 example, of a company who will say, "We were going 6 to give a plant tour to really show you how we make 7 the goods, et cetera, so that you really understand 8 the efficiencies of what we are trying to create, 9 what our competitive edge is. But we are nervous 10 about Reg FD, so we are not going to do that." So 11 maybe, you know, there is a list of what is sort of 12 not allowed. Maybe a little bit more of a list that 13 says what is okay. 14 MR. HILL: I think that not only should 15 we be saying what is okay, but encouraging companies 16 to do it and say they have a duty, really, to make 17 these kinds of meetings available to the 18 professional investment community. 19 COMMISSIONER HUNT: Well, many people 20 have talked about best practices this morning, I 21 think that might be a good idea. 22 I think we need to sit down with the 23 staff and see if we can devise some reasonable and 24 sensible set of best practices, some more wholesome 25 guidance. I think we are going to think very hard Diversified Reporting Services, Inc. - (202) 296-9626 198 1 to define "materiality" better. 2 We made a conscious decision not to 3 create a new definition because there is so much 4 literature out there on materiality, but there has 5 been a lot of talk today that maybe in this context 6 there needs to be a better definition of 7 materiality. 8 Again, you know, this is six months. We 9 may have a long way to go, we may have to do some 10 revisions. Nobody thinks it is written in stone, so 11 we are thinking about it all the time, how we are 12 going to try and improve it. 13 MR. HILL: I do think one improvement 14 that can be made is that if you are going to put 15 something out only in the 8-K or on the web, that it 16 be accompanied by a press release. 17 We have seen some situations where Friday 18 evening, after the market close, it slips out an 8-K 19 or whatever. And individual investors, in 20 particular, don't have access to the 8-K readily. 21 COMMISSIONER HUNT: I have learned a lot 22 from this panel. 23 CHAIRMAN UNGER: One thing I wanted hear 24 from the analysts, there has been some mention of 25 the adverse impact or disadvantage to small and mid Diversified Reporting Services, Inc. - (202) 296-9626 199 1 cap companies, and I was wondering if any of the 2 analysts here today have dropped coverage of any of 3 the companies as a result of that. 4 MR. BOYLE: No. 5 MR. BLUMSTEIN: No. 6 MR. BERRY: No. 7 COMMISSIONER HUNT: But you do have a 8 sense the Pfizers and the Intels of the world have 9 not been negatively impacted by this, but there is a 10 perception, at least, or a feeling that the smaller 11 cap companies may find this more difficult? 12 CHAIRMAN UNGER: I should probably ask 13 the foundation question: Do any of you cover small 14 and mid cap companies? 15 MR. BOYLE: Yes. 16 MR. BERRY: We have situations where a 17 company might be followed by us and two other firms, 18 you know, it is a pretty narrow crowd there. And 19 under the current regime, we have full-scale 20 conference calls and there is an awful lot of 21 apparatus. It seems silly. 22 Again, I understand what we are trying to 23 accomplish, but it seems like we are going through 24 hoops, getting ourselves involved and it doesn't 25 seem very practical. We are playing to a very small Diversified Reporting Services, Inc. - (202) 296-9626 200 1 audience here, and I think the costs of setting this 2 up probably are not -- 3 MR. BOYLE: It is just another 4 regulatory expense for the small companies. 5 COMMISSIONER HUNT: We were very aware 6 of the possibility that the operation of FD -- we 7 went through a lot of iterations of this rule before 8 we promulgated the final rule. We were very 9 conscious of the fact that there might be more 10 impact on the smaller companies than we wanted. 11 We, I think, always had the supposition 12 that the big boys could take care of themselves on 13 Wall Street, and it wouldn't be the end of western 14 civilization as we know it for the General Motors 15 and IBMs of the world, so we were concerned about 16 the smaller companies. And we continue to be 17 concerned and to monitor how it affects the smaller 18 companies where most of the jobs are created and all 19 that. And if it has to be modified, it has to be 20 modified. 21 MR. BLUMSTEIN: You have to be careful 22 in making a generalization about big companies, it 23 hasn't made any difference; and small companies, it 24 made a difference. I think we have to be careful 25 about using generalizations, I think we probably Diversified Reporting Services, Inc. - (202) 296-9626 201 1 could come up with for you instances of big 2 companies cutting back on their disclosure. 3 COMMISSIONER HUNT: To the extent, we 4 have some of those people who are going to chill. 5 I am sure that is true. 6 CHAIRMAN UNGER: We have ten minutes 7 remaining on this panel, and I really would like to 8 give each of the panelists a minute and a half -- we 9 will start this way -- to sum up or to make any 10 points that haven't been raised that you think are 11 important, typically, if it deals or addresses how 12 we can change, fix, rescind Regulation FD, whatever 13 your views are on that, I would appreciate it. 14 MR. LANGEVOORT: Let me speak very 15 quickly. 16 My guess is six months is far too short 17 for the adjustment period. What I do think would be 18 helpful in the next year to help the comfort level, 19 especially for smaller companies, is for the 20 Commission to give additional guidance that ties the 21 notions of materiality with intent. That looks at 22 Reg FD as dealing with purposeful, selective 23 disclosure, and bring together guidance in that 24 area, gets away from inadvertence, the marginal 25 materiality, those kind of things. Diversified Reporting Services, Inc. - (202) 296-9626 202 1 MR. BOYLE: I agree. I think it is too 2 soon to judge. 3 I think that from PR's standpoint it is 4 pretty popular in the individual investor market, so 5 I don't think you can rescind it actually. And I 6 think the fundamental basis behind it appeals to 7 almost everybody in the market, fairness. How can 8 you object to fairness? 9 And I would encourage the Commission to 10 focus on the fullness of disclosures going forward, 11 and that is a very long conversation. 12 MR. FERNANDEZ: I think we are going to 13 continue to work trying to flush out these issues. 14 We do acknowledge that there is differential impact 15 even amongst large firms. But it does seem to have 16 disadvantaged small and medium-sized companies, 17 particularly those issuers who were served by our 18 own small and mid-sized firms. 19 They generally tend to service those 20 within their geographic or regional area. They tend 21 to only have one or two analysts covering them. And 22 you don't see the dropping of coverage, what you see 23 is the issuer falling silent. That the firm has to 24 work harder, the small regional firm. And so I 25 think this, unintentionally, is leading to an Diversified Reporting Services, Inc. - (202) 296-9626 203 1 additional concentration and a disadvantage of those 2 probably who needed the levelling of the playing 3 field as much as anybody. 4 I guess the other point I would like to 5 make is to think about this and less about the 6 short-term impact, because it is true, we will learn 7 to live with this one way or another. But we need 8 to think about the long-term implications, both the 9 change and the dissemination process. And the 10 larger issue about how market data is treated. This 11 is one more market data and its dissemination. 12 Very little was made about the 13 simultaneous end of the 15-Minute Rule, which used 14 to give the financial media time to sit back and 15 write something thoughtful and get it in front of 16 the editor. It is a race to the post just to blurt 17 out something. We have had enough studies out there 18 about the cost of living, about uninformed 19 decision-making, and that, I think, is what concerns 20 me most, is that we have changed the landscape 21 broadly for a long, long time to come, without 22 understanding the consequences. 23 MR. BERRY: The concern really is that 24 fair disclosure will obviously mean less disclosure. 25 We have talked about having some mass market Diversified Reporting Services, Inc. - (202) 296-9626 204 1 information being very well disseminated at the 2 expense of more nuanced information, particular 3 lines of questioning individual analysts might like 4 to do, and losing the forum to do that. 5 And I think the markets, in the 6 aggregate, are missing something as a result. The 7 practical matter is there is a range of 8 conversations, disclosure practices from company to 9 company, pre FD, and there still is. So we all 10 learn to adjust to various degrees of helpfulness or 11 lack thereof from the companies. You can get used 12 to anything, I suppose. 13 I think what would be most helpful is 14 just to try to conserve having nuanced conversations 15 about the business, the things that would not be 16 deemed material but that can help you develop 17 confidence and understanding and textualize 18 information that comes out subsequently and the 19 context and the nuance of that so that the analysts 20 can analyze that. 21 CHAIRMAN UNGER: Thank you, David. 22 Chuck? 23 MR. HILL: Being a good capitalist, I 24 think competition in the marketplace is a good 25 thing. I think that will help alleviate some of the Diversified Reporting Services, Inc. - (202) 296-9626 205 1 problems in the sense that there are some companies 2 out there that are successfully working within the 3 frame work of FD and still communicating well with 4 the investment community. 5 And I think as other companies see that 6 they are getting more attention by doing this, many 7 of those will follow the line. We will never get 8 all of them. We didn't before FD, they communicated 9 properly. But we think we are off to a good start. 10 CHAIRMAN UNGER: Thank you, Chuck. 11 Michael? 12 MR. BLUMSTEIN: I think you heard the 13 others say, and maybe I will put it a little 14 differently, let's not confuse that noise with 15 substance. And we really do need a better 16 understanding of materiality. 17 And I just do want to emphasize the point 18 again, that you do have to remain focused on the 19 long-term education of the next generation of 20 analysts. We do believe that analysts have long 21 been part of the grease that make our markets work 22 so well. 23 CHAIRMAN UNGER: Thank you. 24 Adam? 25 MR. LASHINSKY: A system had arisen Diversified Reporting Services, Inc. - (202) 296-9626 206 1 where the public trust was being violated. I think 2 we've lost sight of the fact that there are costs 3 associated with being an issuer, but there are 4 benefits as well. Namely, the ability to raise 5 money in the public markets. So FD is working well 6 in that it has put a serious stop to selective 7 disclosure. 8 An observation: I find the SIA's claim 9 that information overload or uninformed 10 decision-making began in October 2000 to be an 11 interesting one. I know you didn't say that -- 12 MR. FERNANDEZ: I didn't say anything 13 like that. 14 MR. LASHINSKY: The point is that, that 15 phenomenon predates Regulation FD by a lot. 16 Before FD, the SEC was behind the curve 17 on the sorts of practices that were hurting the 18 public investor. That situation remains in the case 19 of IPO road shows which Regulation FD doesn't touch 20 on. And I think this regulation is taking a huge 21 step forward in stopping that type of behavior. 22 CHAIRMAN UNGER: Thank you. 23 Patricia? 24 MS. WALTERS: To end on an upbeat note, 25 if there is such a one, I think the caution for the Diversified Reporting Services, Inc. - (202) 296-9626 207 1 Commission is to not equate better access with 2 better disclosure. 3 Certainly, the changes in openness of 4 conference calls and the increases in webcasts have 5 helped both the investment community as well as the 6 individual investor. There certainly are subsets of 7 the investment community that are happier under Reg 8 FD than previously, some smaller buy side firms 9 would not have had any easier access to conference 10 calls than individual investors, and those that I 11 have spoken to are very happy under the current 12 environment. 13 There are others who are more 14 quantitative in their focus on analysis, heavy 15 reliance on databases. And their comment is they 16 know that the databases have got all the available 17 information in. 18 On the other hand, I think that also we 19 should be looking at the access and the comments 20 that have been made today about the numbers of 21 people listening to conference calls. I am not as 22 worried about educating new generations of analysts 23 as I am about educating the hordes of investors who 24 are listening on conference calls and to webcasts. 25 And my suspicion, and we will only find this over Diversified Reporting Services, Inc. - (202) 296-9626 208 1 time as we see whether or not these numbers are 2 maintained, is that people who are currently 3 participating seem to believe that they are going to 4 get one of these tidbits of information that 5 Commissioner Hunt said this morning, that would have 6 analysts racing out to trade. 7 Conference calls are not quite as 8 entertaining as CNBC, and over time, investors will 9 learn -- hopefully, not to their detriment, by 10 trading on what they might consider to be material 11 information when it actually wasn't, that there 12 needs to be, and I don't know whether the Commission 13 is the appropriate body to undertake this, but some 14 education of investors that earnings guidance, 15 earnings forecasts, whether it comes from an 16 analyst, whether it comes from a company, is not how 17 one makes investment decisions. 18 In some sense, that's the challenge I 19 think that the Commission faces, in having opened 20 up, whether it is too sophisticated or 21 unsophisticated knowledge for unknowledgeable 22 investors, this wealth of information. 23 So I disagree with Adam. I think there 24 is a responsibility when you provide people with all 25 this extra information to teach them how to use it. Diversified Reporting Services, Inc. - (202) 296-9626 209 1 COMMISSIONER HUNT: Thank you all. 2 CHAIRMAN UNGER: I would like to thank 3 this panel, as with other panels, but even more so 4 because we never really heard from the analysts 5 before, so I do really appreciate you coming and 6 joining us today. 7 As you know, the Commission has had a 8 long-standing respect for the role that analysts 9 play in ferreting out information and it will 10 continue with that respect. And we appreciate your 11 input into a rule that very much impacts the way you 12 do business. 13 Again, I think to recap what we have 14 talked about, and I am hearing the same things again 15 and again from the panelists, which is very helpful. 16 Of course, the really big things, like materiality, 17 guidance, and for best practices and for safe 18 harbors. But it is important that we hear from each 19 of the panelists with their own perspectives. It is 20 helpful to us in terms of identifying what we need 21 to take a look at. 22 So, thank you. 23 CHAIRMAN UNGER: Thank you. 24 (Recess taken.) 25 (Whereupon, at this time, Commissioner Diversified Reporting Services, Inc. - (202) 296-9626 210 1 Hunt left the Roundtable discussion.) 2 CHAIRMAN UNGER: I have been joined by 3 the Division of Corporation Finance Director. 4 Commissioner Hunt had to go and he didn't want me to 5 sit up here all by myself, so David Martin has been 6 kind enough to join me. 7 And this time I think we will start from 8 this direction with Tom, and just give a brief 9 opening comment or two. 10 MR. GARDNER: I am Tom Gardner, 11 co-founder of the The Motley Fool, an on-line site 12 that aspires to provide information and a framework 13 and a platform for analysis to individual investors 14 and people who are not yet investing in the stock 15 market but are learning to invest and paying down 16 their credit card debt on a regular basis. 17 So our service runs more broad than just 18 the securities markets, but we have a particular 19 interest in Regulation FD because we have a very 20 strong commitment to maintaining the public nature 21 of public markets. And I think what is at issue 22 here, the simple question we can ask ourselves is, 23 is this a public market or a series of private 24 markets and what are the differences between the 25 two? Diversified Reporting Services, Inc. - (202) 296-9626 211 1 So, hopefully, I will add some value to 2 this afternoon's conversation. 3 MR. MARKESE: I am John Markese, I am 4 president of the American Association of Individual 5 Investors. We are non-profit, educational, we have 6 been around since about 1978, and we probably have 7 over a million members over the years. We like to 8 think through all the AAI journals in doctors' 9 offices and dentists' offices around the globe, I 10 think we have touched billions. At least I would 11 like to think that. 12 We are here to educate. I haven't met an 13 individual investor yet who isn't delighted with 14 Regulation FD, unless their day job is corporate 15 insider or analyst. We meet quite a few new 16 investors who were shocked to find out that there 17 wasn't a Regulation FD until recently. So I am all 18 for it. 19 And the two reasons we used to hear about 20 why we didn't have it was, "It just can't be done." 21 Well, technology has overcome that question. And 22 the second one was, "Well, individual investors 23 simply won't understand, they need analysts to tell 24 them what to think and to make decisions." 25 I have listened to quite a few of the Diversified Reporting Services, Inc. - (202) 296-9626 212 1 panels, and I think most of the analysts are 2 underselling the intelligence of the individual 3 investor. And I am sure Tom would agree that a lot 4 of them, in the words of the The Motley Fool, are 5 foolish, meaning bright and interested in the 6 information. 7 And they want valuable information. And 8 valuable information is information that comes 9 meeting timeliness. So I can't argue against 10 financial disclosure in any way, other than we 11 should have had it sooner. A couple of points that 12 I think I would like to make that I would like to 13 see discussed. One is the whole idea of 14 materiality. And I think we have discussed it to 15 death, and, frankly, we can chase this one around 16 the block forever. We all know what it is, it is 17 just hard to define. And I don't think that is 18 going to be fruitful. 19 Making a special definition of 20 materiality for Regulation FD, I think, is a waste 21 of resources and effort. That would be, I guess, my 22 major point. 23 And, secondly, in terms of disclosure, 24 individual investors now have more information than 25 they ever had, not less. And I think the analysts Diversified Reporting Services, Inc. - (202) 296-9626 213 1 are telling you that they have less. That is simply 2 not true. And, remember, because the analysts get 3 the information and it is perhaps an inside or 4 non-public event disseminated to the public, that 5 doesn't make it even quality information then. You 6 simply have to pick the right analyst also, it is 7 like picking the right stocks. 8 So I think we are far further ahead as 9 far as the individual investor, and I would like to 10 see us not go back. I would suggest the safe 11 harbor. For instance, let's consider if it is a 12 public forum that has been announced, that is being 13 webcast, it had a scheduled time and something was 14 said that is of a material nature, however we define 15 that, then that's fine, it is out in the public 16 environment. 17 So we can do things, I think I heard best 18 practices. I think that is great idea. So I am all 19 for Reg FD and I would like to see us fine tune it, 20 but not much more. 21 CHAIRMAN UNGER: Thank you. 22 George? 23 MR. JOHNSON: I am George Kim Johnson, 24 general counsel to Colorado Public Employees 25 Retirement Association. We represent investments on Diversified Reporting Services, Inc. - (202) 296-9626 214 1 behalf of about 250,000 public employees in the 2 State of Colorado, and manage about $30 billion of 3 their money. About 70 percent of that market value 4 is in equity securities and a large bulk of that is 5 passively managed. Most of the rest is managed by 6 in-house portfolio managers. 7 Because we are a retirement plan and our 8 investment strategy is liability driven, we take a 9 very long-term view. I think in some ways we may 10 be, as institutional investors of public retirement 11 funds, somewhat unique in that regard. We have some 12 experience with the regulation in Colorado, but I 13 have also talked to some of my colleagues and others 14 at public retirement funds and some other sources. 15 And basically we have, I think, four observations to 16 share. 17 First, from our portfolio managers' 18 standpoint, they have noticed a difference in the 19 information supplied to them by many companies, but 20 the difference is not so great that -- they are 21 still capable of doing their job and doing it well. 22 They attribute most of the change to uncertainty on 23 the part of the companies who are providing 24 information. Their view is that likely, over time, 25 through whatever mechanism, however it may be Diversified Reporting Services, Inc. - (202) 296-9626 215 1 accomplished, that the uncertainties will be reduced 2 and they do not see a long-term issue. 3 Some institutional investors who have 4 direct meetings with corporate management on 5 governance issues were concerned that this might 6 have a chilling effect. In talking to the 7 California Public Employees Retirement Association, 8 since the effective date, they have had 18 meetings 9 with companies, the topic has only come up in two of 10 the meetings and it was resolved to everybody's 11 satisfaction before the meeting was started. So 12 this has turned out not to be a significant problem. 13 In talking with corporate counsel, again, 14 we hear the word "uncertainty." It is not that we 15 have found them unwilling to provide accurate, 16 timely, complete information; they just don't feel 17 that they know what the rules are. 18 From the enforcement side, we in the 19 public pension fund area receive almost daily 20 communications from members of the plaintiffs' bar 21 in the way of securities class actions, offering to 22 do their job as private enforcers. We have had no 23 calls to date offering to bring an action against a 24 company for failing to comply with Regulation FD. 25 So at least one group of enforcers does not see that Diversified Reporting Services, Inc. - (202) 296-9626 216 1 there is any problem in that area. 2 I think to sum it up, our view is that in 3 the short term, we think that the uncertainty is 4 going to produce some differences in the way that 5 information is supplied to the analysts or the 6 portfolio managers, but we believe in the long term, 7 the implementation of the regulation does provide 8 both a broader and more comprehensive base of 9 information for the market. 10 And, secondly, if, particularly on the 11 individual investor side, if there is a perception 12 of fairness in the market, fairer access to capital 13 is not limited or affected by special access on the 14 part of large investors, that this will be to the 15 good of the market. And so if, indeed, the 16 uncertainty issues can be resolved, we see no 17 particular problems with this. 18 CHAIRMAN UNGER: Thank you. 19 Greg? 20 MR. HYMOWITZ: My name is Greg Hymowitz, 21 I am the founder of Entrust Capital, we manage 22 roughly a billion and a half dollars in public 23 equity markets for individual investors. 24 I guess I am sitting next to a bunch of 25 lawyers, so I still feel a little comfortable Diversified Reporting Services, Inc. - (202) 296-9626 217 1 because I used to be a lawyer, but then I went into 2 the investment business, and I guess I wear many 3 hats because I was listening to the last panel and 4 they talked a lot about CNBC and the commentators 5 and what happens on the television and radio 6 networks, and I also wear that hat, too. 7 Hopefully, I guess, I will bring the 8 perspective of what it is really like to live with 9 FD on the front lines as an investor, as someone who 10 is speaking to companies every day, someone who is 11 dealing with the IR professionals every day, someone 12 who is going to one-on-one meetings, someone who is 13 taking factory tours. A lot of the issues that you 14 talked about earlier, I think clearly FD has changed 15 the dynamics between the institutional investor, 16 like myself, who is managing money on behalf of the 17 individual whose whole purpose, whose whole job is 18 to ferret out value added information for his 19 clients in order to make wise investment decisions. 20 So, hopefully, I will be able to bring a 21 perspective throughout this hour on what it is 22 really like to live with this thing on the front 23 lines. 24 CHAIRMAN UNGER: Thank you. 25 Alan? Diversified Reporting Services, Inc. - (202) 296-9626 218 1 MR. CLEVELAND: I am Alan Cleveland, I 2 am outside legal counsel for the New Hampshire 3 Retirement System, also a public pension fund. We 4 are an old fund, we are invested in public 5 securities, our culture and our charter is that of 6 transparency, disclosure and accountability. And we 7 expect to find that in our markets as well as in the 8 companies in which we invest. 9 We are in favor of Regulation FD because 10 the objective, and I don't think anybody can object 11 to the purpose of Regulation FD, which in point of 12 fact is to make markets more transparent, more 13 accountable and fair. 14 We are in favor of Regulation FD for the 15 same reason that we testified in support of the 16 independent auditor rules that the SEC promulgated 17 recently, and that is a concern of managed earnings. 18 Managed earnings is the theme of this market, and 19 for a long time it was warned that the chickens 20 would come home to roost with managed earnings, and 21 the chickens are coming home to roost now. 22 The environment is such at this point 23 that we think it is difficult, if not absolutely 24 impossible, to gauge the effect of Regulation FD in 25 a sharp bear market we are seeing now. It is not Diversified Reporting Services, Inc. - (202) 296-9626 219 1 surprising that companies are talking to their 2 lawyers a lot more now as to what disclosure they 3 ought to be getting or not getting. I think a lot 4 of that is motivated not so much by Regulation FD as 5 a deep concern for the deterioration of the business 6 models. 7 I think if Regulation FD had been 8 promulgated in October of 1997, we wouldn't have 9 near the angst that we are have having now. And I 10 echo what Kim Johnson stated, as a lawyer, we have 11 given very little, if any, attention to Regulation 12 FD as imposing any liability on the companies who 13 are with us. We think that, for the most part, it 14 is more offering guidelines to companies and 15 analysts than it does have any sanctions attached to 16 it. 17 We have received no inquiries from 18 plaintiffs' lawyers eagerly waiting on the sidelines 19 to bring actions against companies or analysts. It 20 just isn't there. 21 Again, we think that the materiality 22 aspect is a little, perhaps overblown is too strong, 23 but certainly premature. Materiality is clearly 24 that fact which will affect the stock price. To go 25 beyond that, I think is counter-productive. The Diversified Reporting Services, Inc. - (202) 296-9626 220 1 element of materiality is fundamentally fact driven, 2 and it is almost impossible to establish a set of 3 factual guidelines that establishes materiality 4 beyond the stock price. 5 We think Regulation FD should run a 6 little bit more. We are in a difficult market. It 7 is a volatile market. I don't think Regulation FD 8 contributed enormously to that volatility. What has 9 contributed to the volatility is the fact that we 10 have over-valued assets to an enormous degree that 11 are now being run out of the market. And what we 12 ought to do is we have to monitor Regulation FD 13 pretty closely for a number of months more and watch 14 matters and see how things proceed. 15 CHAIRMAN UNGER: Thank you. 16 Eric? 17 MR. ROITER: Thank you. I am Eric 18 Roiter, general counsel of Fidelity Management 19 Research in Boston. 20 I think when you speak about Regulation 21 FD, at least from my view, I speak about two 22 different rules. There is Reg FD, the conceptual 23 rule, and Reg FD, the operative rule or the rule as 24 observed in practice. 25 From the standpoint of Reg FD, the Diversified Reporting Services, Inc. - (202) 296-9626 221 1 conceptual rule, it is hard to, I would concede, 2 really impossible to quarrel with the objectives of 3 the rule that underlie more disclosure, parity of 4 access to information, fairness, and greater 5 confidence in the integrity of the markets. No one 6 can oppose these objectives. 7 Regulation FD, the operative rule, is the 8 somewhat different and more complicated matter. 9 For, in practice, Reg FD does pose some problems and 10 complications. 11 First, in concept, the rule contemplates 12 the promotion of more public disclosure and, at the 13 same time, preservation, if not advancement, of the 14 mosaic theory for analysts and open access for 15 analysts. The mosaic theory in the conceptual rule 16 of Reg FD is alive and well, but in practice, 17 issuers guided by their outside counsel do not quite 18 see it this way. 19 For various reasons, these issuers 20 operate under a version of Reg FD that pushes them 21 toward open webcasts and open conferences and away 22 from one-on-one meetings with analysts. These 23 issuers see the SEC's rule as a zero sum equation. 24 The more public access and public disclosure a 25 company provides, the less opportunity need be given Diversified Reporting Services, Inc. - (202) 296-9626 222 1 to analysts for one-on-one meetings. 2 One might ask, why should this not be 3 seen as a good result? If a company is holding open 4 webcasts and conference calls, why can't research 5 analysts simply pose their questions in that forum? 6 There are at least two answers to this 7 question. One fairly obvious, the other a bit less. 8 The obvious answer is that every analyst who wants 9 to ask all of his or her questions will not have a 10 chance to do so given time and other constraints. 11 This is not so much different from a presidential 12 news conference. 13 The other reason is that analysts, even 14 if given an opportunity to ask all of his or her 15 questions in a public forum, will not do so; at 16 least buy side analysts will not do so. And this 17 reflects the fact that the very questions posed by 18 insightful, well-prepared and skilled analysts have 19 value. At times, I would submit, even greater value 20 than any particular answer that a company executive 21 may provide. 22 I would also say that Reg FD, the 23 operative rule, also blurs the distinction between 24 what is material and what is not material. And I am 25 not here to propose that the SEC define materiality. Diversified Reporting Services, Inc. - (202) 296-9626 223 1 I do have a separate solution that, if we have time, 2 I will pose to you. 3 In practice, the gap between materiality 4 for an individual investor and materiality for an 5 institution, arguably is narrowing, given the vast 6 amount of information now available to all investors 7 over the web, and the immediacy of access to that 8 information. As materiality for individual 9 investors and institutional investors approach 10 convergence under Reg FD, the operative rule, some 11 of the issuers are becoming increasingly reluctant 12 to make distinctions between the two. 13 I would also add that another difference 14 between Reg FD, the conceptual rule, and Reg FD, the 15 operative rule, turns on the scope of materiality, 16 and the concept of Reg FD draws a contrast between 17 what is material and what is interstitial 18 information. The latter ramps up the mosaic, coming 19 in bits and pieces to present a full picture to the 20 analyst. 21 But Reg FD is leading issuers to blur the 22 distinction between material and immaterial, 23 treating virtually any relevant piece of information 24 as material if it relates in any way to the 25 company's current fiscal quarter. Diversified Reporting Services, Inc. - (202) 296-9626 224 1 I think I will stop here. I do have some 2 specific suggestions that the Commission might 3 consider, but that is some of the concerns that I 4 wanted to articulate at the outset. 5 CHAIRMAN UNGER: I guess one of the 6 fundamental questions that we have been asking today 7 is whether investors, and I know you represent 8 investors in different ways, are getting more 9 information as a result of Regulation FD, and, if 10 so, is it better information than you were getting 11 before? 12 So, if you have view on that? 13 MR. ROITER: I would say that, based on 14 our discussions with our analysts and our portfolio 15 managers, that there has been a deterioration in the 16 quality of information that we can see. 17 As I say, there may not be a chilling 18 effect with Reg FD, but I think there is certainly 19 an orchestrated effect with Reg FD. And we have 20 seen greater orchestration and greater scripting of 21 one-on-one meetings, if I can coin a phrase. And if 22 a question is asked that has not been anticipated in 23 advance by the shareholder relations people at a 24 given issuer, then no executive officer is prepared 25 to make a judgment on his or her feet, that a given Diversified Reporting Services, Inc. - (202) 296-9626 225 1 question that had not been anticipated should be 2 answered. 3 CHAIRMAN UNGER: Why do you think that 4 is? 5 MR. ROITER: Because the risks and 6 rewards of making a judgment on your feet about 7 whether some item of information is material or not 8 are certainly tilted in favor of competence 9 circumspect. And the Supreme Court recognized that 10 in Dirks as well. 11 I know Dirks has been criticized by other 12 panels today. I happen to think that Dirks is a 13 correct ruling, recognized a very different context 14 in which non-lawyers on their feet without the 15 benefit of consultation, without the benefit of 16 deliberation, must make judgments. And the Supreme 17 Court, I think, made the correct decision in Dirks, 18 that you cannot hold an issuer's management to the 19 same standard that you might in a given SEC filing 20 that has the benefit of deliberation with lawyers 21 and others. 22 CHAIRMAN UNGER: Do you have something 23 to add, Greg? 24 MR. HYMOWITZ: Yes. I think you have to 25 separate the timing, the timing of when the Diversified Reporting Services, Inc. - (202) 296-9626 226 1 information comes. Clearly, information on 2 conference calls and earnings release conference 3 calls, the quality of the information has not 4 changed dramatically. I would say it is relative to 5 the state that it has always been. 6 The difference, though, is the 7 information that people like myself try to ferret 8 out in due diligence in between the conference calls 9 clearly has changed, and I think mainly it is 10 because, and here there is differences between 11 issuers, but clearly it is because a lot of IR 12 professionals aren't sure what they can say and what 13 they can't say. 14 But I think there has to be an 15 appreciation for the fact that there are tens of 16 thousands of people like myself out there who are 17 charging the investor a fee, and sometimes a 18 significant fee, to add value. We are not going to 19 be doing our job too effectively if we do not 20 attempt in every legal way we know how to access 21 more information. 22 And what FD has done, quite frankly, and 23 this brings up a whole host of other problems, but 24 what FD has done, quite frankly, is because of who 25 it covers, it forces guys like myself to go and to Diversified Reporting Services, Inc. - (202) 296-9626 227 1 go further down the food chain, even though 2 obviously those people have their own laws that 3 cover those people, but it still creates an 4 incentive to go to trade shows and the conferences 5 that no individual investor is ever going to go to, 6 but this is what I get paid to do, to go to the 7 trade shows and the conferences and go and ask the 8 salespeople and stuff like that, "What is going on, 9 what are you seeing?" 10 And the risk, I think, that poses, is 11 that sometimes the people low down in the food chain 12 are not really aware what they should be saying and 13 what they can't be saying. We often hear of 14 situations where someone will say something and the 15 information will then be debated, whether or not 16 this is material, whether or not people have to 17 restrict themselves for the insider trading rules. 18 So I think, clearly, the timing is what I 19 think needs the focus. It is in between the 20 conference calls there has clearly been a chilling 21 of information, simply because no investor is going 22 to want to go to a one-on-one meeting unless the 23 information that they are going to receive is 24 important. I am not going all the way out to 25 Cincinnati to a factory tour unless I think I am Diversified Reporting Services, Inc. - (202) 296-9626 228 1 going to pick up something material and valuable. 2 Otherwise, why waste my time? 3 And I think that's one of the issues as 4 far as the quality of the information flow. 5 CHAIRMAN UNGER: For building the mosaic. 6 The legal theory is that no one piece of information 7 is necessarily material, but that taken in totality, 8 that's material. So in the course of some of the 9 other panels, people were saying "Aren't there 10 things that we still can do without rising to the 11 level of materiality in terms of imparting 12 information?" 13 And I am wondering if there are some 14 things that can be done that people would benefit 15 from in terms of having more information available 16 that is good information, without rising to the 17 level of materiality? 18 MR. ROITER: One thing that would be 19 helpful is for the Commission to consider the 20 approach that had been earlier proposed in the 21 aircraft carrier rules, and that is, whether you 22 want to call it material or not, and I would not use 23 that standard, I would say that materiality exists, 24 there is a huge body of case law under 10(b)(5) and 25 under the statutes and provisions of the securities Diversified Reporting Services, Inc. - (202) 296-9626 229 1 laws, but to recognize the dynamics of give and take 2 and on-your-feet conversations as a policy matter. 3 Rule 10(b)(5) remains there and the standard of 4 materiality still remains for what could constitute 5 breaches of 10(b)(5), but we are going to come up 6 with a more carefully crafted rule that uses a 7 different approach. And that would be an approach 8 along the lines of the aircraft carriers' proposal, 9 where you actually have identified the kinds of 10 events, the kinds of transactions that ought to 11 trigger prompt, simultaneous notice and disclosure 12 to the public at large. 13 Secondly, I think what would be helpful 14 is if the Commission could reiterate and strengthen 15 the distinction that is hinted at in the releases 16 between the retail investor, the individual 17 investor, on one hand, and the professional investor 18 and institutional investor on the other. It is not 19 that the institutional investor can't learn 20 something that it is dispositive in a one-on-one 21 meeting. It is that piece of information, while 22 dispositive to the trained analyst that has invested 23 a great amount of time and effort to understand the 24 company, could very well be material to the 25 professional investor or the institutional investor, Diversified Reporting Services, Inc. - (202) 296-9626 230 1 but not to the individual, to the retail investor. 2 And if the SEC could underscore that 3 distinction, I think that could be helpful and could 4 promote greater interchange between the 5 institutional investor analyst and management. 6 MR. LANGEVOORT: Could I jump in with an 7 academic-sounding comment? 8 Back when a lot of other countries and 9 markets were debating their own insider trading laws 10 and drafting them, everyone started the proposition 11 that the word should be "material" because that is 12 what the U.S. used, and the fear was expressed 13 around the world that that word was too expansive, 14 too overloaded, ignored the kinds of nuances that 15 Eric is talking about. 16 And many markets, many countries have 17 chosen words and phrases like "price sensitive 18 information," "facts of special significance," a 19 series of words that, first of all, that tie the 20 notion of materiality to an awareness by the 21 speaker. You know when you say it that it could 22 move markets. And, secondly, it gets away from the 23 hundreds and hundreds of cases on this subject and, 24 again, focuses in on what insider trading and 25 selective disclosure is all about, which is trying Diversified Reporting Services, Inc. - (202) 296-9626 231 1 to introduce a basic degree of fairness. 2 A basic degree of fairness means don't 3 intentionally give something to somebody else that 4 is clearly of value when you withhold it from 5 somebody else. 6 CHAIRMAN UNGER: So how would you do 7 that? Identify specific types or categories of 8 information? 9 MR. LANGEVOORT: No, I wouldn't do that. 10 I disagree with Eric on that one because I think the 11 list would grow too long. 12 And I am not saying I would adopt this, 13 but I would consider rephrasing "materiality" into 14 some other phrase that connotes an awareness by the 15 speaker that this is a fact of special significance. 16 CHAIRMAN UNGER: What would that be? 17 MR. LANGEVOORT: You are aware when you 18 are speaking that you are giving something that, if 19 it made it out into the marketplace, would have an 20 immediate impact on the market price. 21 MR. GARDNER: Let me just add, that I 22 think it is wonderful that companies' executives and 23 investor relations departments are hesitating before 24 they speak today. 25 As an individual investor, I may not get Diversified Reporting Services, Inc. - (202) 296-9626 232 1 paid by someone to manage money for them, but I pay 2 myself to manage my own money, and if I am willing 3 to make a trip to Cincinnati, how offensive would it 4 be to me as a potential or existing shareholder in 5 that company to know that I was not invited into 6 that conference? That a private conversation was 7 going on between a select group of either high net 8 worth money managers or analysts at big firms? 9 I guess I sat through the last panel and 10 asked myself, "What is an analyst? Why can't I be 11 one?" And I am glad that we are excited about 12 training the next generation of analysts. I might 13 suggest a four-year course in ethics as a great 14 introduction. 15 Let's not forget that analysts today are 16 not a public service, they do not provide a public 17 service. Analysts are working for firms that they 18 have responsibilities to. And if I were, for the 19 fun of it, to say for a little exercise, "Anyone in 20 the room who thinks that analysts are not impacted 21 by the underwriting business at their firms, please 22 stand up," and I know that probably we are shy, and 23 maybe there are one or two people out there that 24 don't think that the analyst is impacted by the 25 other businesses at the big investment firms, but if Diversified Reporting Services, Inc. - (202) 296-9626 233 1 you do believe that they are impacted, if you are 2 sitting down because you do believe it, then that 3 analyst is not an objective source to be a filter 4 for information for individual investors or of any 5 investor, except for the clients that they serve. 6 And if that's the case, then I find it a 7 violation of the public markets to suggest that we 8 have to protect or in some way provide a 9 preferential treatment for someone who is managing 10 money or working as a professional investor or for 11 an individual investor like myself or someone else 12 who might be a heck of lot smarter than me and 13 willing to travel to the conferences and willing to 14 sit in on conference calls and actually may possibly 15 be smarter than the analysts at the firm in 16 assessing that company's merits over the long term. 17 MR. MARKESE: Two things I have heard 18 that I would like to comment on. 19 One is, I guess I haven't thought that it 20 would lower fees, that's great. So Reg FD is going 21 to lower fees, too. I don't think the community 22 would do that, but there is a thought there. 23 Secondly, I think Eric was saying that we 24 have different standards of materiality for 25 knowledgeable investors and individual investors. I Diversified Reporting Services, Inc. - (202) 296-9626 234 1 think that if we perpetuate the idea that 2 materiality is somehow different for analysts than 3 it is for the rest of the investors, then we are 4 right back to selective disclosure again, so I think 5 we are underselling the individual investor. 6 MR. HYMOWITZ: Can I just address what 7 Tom said? 8 I am not exactly sure of the connection, 9 I mean I understand what you are trying to say, but 10 I am not exactly sure what the connection between 11 the analyst community and the individual investor 12 community holds. I think that it is nice to think 13 that the individual investor is going to get on a 14 plane to visit a factory and is going to spend 24 15 hours a day sloshing through Qs and Ks, that's 16 great. 17 I just don't think in reality, the 18 company, any company, whether it be the largest 19 company in the world or the smallest company in the 20 world, is going to have the time or the resources to 21 devote to every single individual that calls them. 22 So, therefore, I guess if you want to solve the 23 problem, what you are going to have to do to even 24 the playing field completely, which I think is a 25 noble thing, I am not saying the playing field Diversified Reporting Services, Inc. - (202) 296-9626 235 1 shouldn't be even, I think the only way you are 2 going to have to do it is to cut off the information 3 to the institutional investor. Because there is no 4 way the resources exist for these issuers to speak 5 to every individual. 6 And, clearly, the institutional investor 7 gets some value out of having one-on-one discussions 8 with the companies that present. I mean, the whole 9 problem, which I didn't hear on the panel, was the 10 investment banks have all these conferences. The 11 people that go to MotleyFool.com are not invited to 12 Goldman Sachs, Morgan Stanley, et cetera's 13 conferences. 14 Right after those conferences, there are 15 one-on-ones, so unless the SEC is going to dictate 16 to all the sell side firms and the major banks that 17 from now on they have to open up their doors to 18 every single person who wants to go, and I think you 19 do away with one-on-ones, I just don't think it is 20 realistic to think that the individual investor and 21 the institutional investor are ever going to have a 22 level playing field. 23 So I think, therefore, you have to strive 24 to put some parameters around the materiality. And 25 I will just make one suggestion: If so much of the Diversified Reporting Services, Inc. - (202) 296-9626 236 1 focus was on managed earnings and earnings leaking 2 out to the favored analyst, who we call on the 3 Street the axe in the stock, that is one thing that 4 FD has done very quickly, there is no longer an axe 5 in the stock, an axe being the analyst who sort of 6 had the "in" with the CEO and was able to 7 effectively get the information out to the Street 8 first. That is effectively gone, which I think is 9 actually a good thing. 10 I think that maybe you limit materiality 11 to or around earnings issues, because other than 12 earnings issues, I think it is very debatable what 13 someone will really trade on. And that is the other 14 part of it, what is reasonably conceived to be 15 trade-worthy, and it depends on what kind of an 16 investor you are talking to. So maybe you focus it 17 more on earnings and around things that touch 18 earnings issues, as opposed to many other things you 19 pick up on a plant tour or a factory tour. 20 MR. CLEVELAND: There is still a lot of 21 disappointment, particularly in the last year, with 22 the analysts, because I think a lot of investors 23 assume that the analysts were working for them. 24 I was struck by a comment earlier this 25 afternoon, "Why would the Commission care what Diversified Reporting Services, Inc. - (202) 296-9626 237 1 analysts do, we are working for somebody," and I 2 guess, in this instance, it was an investment bank. 3 CHAIRMAN UNGER: I think it was, "Why do 4 we care whether there are good analysts or bad 5 analysts?" 6 MR. CLEVELAND: We care, and I am sure 7 the Commission cares, because we want to have good 8 analysts, or at least we want a set of circumstances 9 where bad analysts get weeded out. I mean, if there 10 is a broad coefficient of variants as to what 11 analysts conclude from information, then the 12 analysts that are more right than wrong will survive 13 and those that are more wrong than right will go by 14 the wayside. 15 Investors were really disappointed this 16 morning at the talk about hanging out lawyers. I 17 happened to pick up a Financial Times editorial from 18 March 20, 2001, "Shoot All The Analysts." Well, the 19 temperature should probably drop a little. I mean, 20 I think everybody is trying to do the right thing, 21 we are just not sure who is working for who. Right 22 now, I think most investors have concluded that the 23 analysts are not working for the investor. I think 24 that is a conclusion you can come to. 25 There is a concern about the dearth of Diversified Reporting Services, Inc. - (202) 296-9626 238 1 information that is out there. Well, if management 2 of companies are not calling their chosen analysts 3 to give them the information that they used to, 4 great. Regulation FD then is working. So if the 5 spigot is shut off, super. That's the view of this 6 investor. 7 And I think that the analysts probably 8 are trying to get back to the fundamentals of how 9 you dig up the information. There is something 10 called "Securities Analysis," this text, the Bible, 11 which I brought a copy of right here. It is not 12 that difficult to read. It requires a lot of 13 attention, but I think a lot of analysts are, in 14 fact, trying to get copies, because I did a little 15 survey watching, using the Internet, what the price 16 of Securities Analysis is going for because it is 17 out of print. 18 And there are a number of editions, there 19 is the '34, '51 edition, the '62 edition and the '88 20 edition. And it is incredible, the '51 edition has 21 been creeping up in price, so that the average right 22 now for this text right here, is about $550, which 23 ranges from about $950 to the lowest I think I could 24 find was 400. 25 The '62 edition goes for $105 to $275. Diversified Reporting Services, Inc. - (202) 296-9626 239 1 The '88 edition, which is the last edition, the 2 fifth edition, I could only find two, at $200 and 3 $205. The 1934 edition -- if this is on your 4 shelves, folks -- sold for $1,500, and the book 5 seller is indicating it is very interested in taking 6 more because there is a demand for this book. And 7 there one listed for, unsigned, uninscribed 1934 8 edition, $30,000. 9 This tells me that the analysts are there 10 desperately looking for guidance on how to do 11 securities analysis, okay, and I think they are 12 going to be working a lot harder and I think they 13 are getting back to fundamentals, and I think that 14 is a good thing. 15 CHAIRMAN UNGER: The fundamentals go 16 back to 1934? 17 MR. CLEVELAND: Well, to 1988. 18 CHAIRMAN UNGER: I think what we are all 19 talking about, just to tie up the threads of this 20 conversation -- which I feel like you don't need me 21 here, it has been a very good conversation and we 22 will continue it -- is the integrity of market 23 information and access to that information and how 24 Reg FD might open up the access, but what does it do 25 to the integrity or the quality of the information, Diversified Reporting Services, Inc. - (202) 296-9626 240 1 and is there anything more we need to do to refine 2 the rule to have both, access and quality, and is 3 that the case, that we need to do something? 4 So maybe with that in mind... 5 MR. JOHNSON: Actually, the thing that 6 caught our attention or the reason we originally 7 supported this rule was that it talked about the 8 very term, "selective disclosure." It didn't talk 9 about access to information. 10 Access has a lot to do with the diligence 11 of the person who is out trying to get the 12 information. And once that person gets the 13 information, the use they make of that information, 14 their skill, their judgment, their experience that 15 is brought to bear on that information will mean 16 that even though the playing field is level, the 17 score is going to be a lot different at the end of 18 the day. 19 And we don't think that that whole arena 20 should really be addressed by this. We would like 21 to see it back in the fundamental issue that we 22 perceive, and that is, are there disclosures of 23 information that are made on a selective basis for 24 purposes that have not to do with the integrity of 25 the market, but to give unique advantages to unique Diversified Reporting Services, Inc. - (202) 296-9626 241 1 and distinct groups? So that if, indeed, a company, 2 let's say, is willing to have people come look at 3 its factory and talk to its managers, I guess we 4 would be concerned if they have a select group of 5 analysts who are the only ones invited. 6 I don't think they need to be perturbed 7 or overwhelmed by individual investors coming in 8 hordes to do it, but quite frankly, I think if the 9 individual investor wanted to do that, I think it 10 would be good for the company to disclose to them, 11 on a non-selective basis, anything they disclose to 12 anyone else who has the diligence and the skill to 13 come get that information and make use of it. 14 So it seems to me that the discussion, at 15 least from our standpoint, is going a lot further 16 afield than the fundamental reason that we 17 originally supported this, which is to protect the 18 integrity of the market by making sure that there 19 are not special arrangements or special bits of 20 information that go to special recipients. And I 21 think a lot of the difficulties that we are having 22 in seeing this rule implemented relate to some of 23 these other issues, and not just to that fundamental 24 thing that attracted our support in the initial 25 phase. Diversified Reporting Services, Inc. - (202) 296-9626 242 1 CHAIRMAN UNGER: Which was the nexus of 2 the information and the trading, or just the 3 informational advantage? 4 MR. JOHNSON: Well, from the information 5 comes the trading. I think that is what happens. 6 If someone is out there looking for material 7 information, shame on them. 8 MR. HYMOWITZ: That's exactly, though, 9 in a way, what would have to happen in a one-on-one 10 meeting, right? You know, the large -- Fidelity, 11 who will have no problems getting any meeting they 12 want, so let's be frank about that. Fidelity calls 13 up a company, "I want to have a one-on-one meeting 14 after the Merrill Lynch conference," I doubt very 15 much the Fidelity portfolio manager or analyst is 16 going to waste their time unless they thought they 17 were going to come away with some material 18 information. 19 MR. GARDNER: But I really have to say, 20 I believe in a public market, that the 21 responsibility of those overseeing and guiding that 22 market is to make sure that the information is a 23 commodity that is available to all people. Because, 24 otherwise, you will have, as you had certainly prior 25 to Reg FD, companies say, "You have been a good Diversified Reporting Services, Inc. - (202) 296-9626 243 1 analyst, you have interpreted our position well and 2 you will be invited into the circle to get 3 information." 4 "You have not been a great analyst, you 5 will not be invited in the circle to get that 6 information." And so unless you actually 7 standardize the communication of information, you 8 are going to have people who get an informational 9 advantage by playing the company in a way that the 10 company wants them to. 11 That's why we have less than one percent 12 of all recommendations from analysts as sells. 13 That's one of the reasons. 14 MR. HYMOWITZ: Tom, can I just step in 15 for a second? 16 You use the terms "investor" and 17 "analyst" interchangeably, and I think there is a 18 big difference. An analyst works for a sell side 19 firm, Goldman, whoever, name one. I just keep using 20 Goldman because I used to work there. But analysts 21 work for a sell side firm. Investors, there's tens 22 of thousands of registered investment advisors out 23 there that are not what you are perceiving to be 24 analysts. 25 I think there are very different sets of Diversified Reporting Services, Inc. - (202) 296-9626 244 1 behavior that each operates under, and it should be 2 noted that they are very different from analysts. 3 CHAIRMAN UNGER: Tom, it sounds like you 4 are talking about a distinction about analysts, 5 though, not between analysts and investors; is that 6 right? 7 MR. GARDNER: I don't see a legal 8 distinction between analyst and investor. I don't 9 see why an analyst should get an advantage. 10 CHAIRMAN UNGER: No, but you were just 11 saying that, "You have been a good analyst, 12 therefore, you are being invited in for this 13 session." And "You haven't," but you weren't 14 distinguishing between investors and analysts, were 15 you? 16 MR. GARDNER: In that case I wasn't, but 17 I still would suggest that all of these analysts are 18 investors, they all should have access to the 19 information, whether or not they have said, "This 20 stock is a sell," and they are an analyst at 21 Goldman, or they are an analyst on a website. 22 MR. ROITER: Well, I think we have 23 enough real issues here. It is helpful to try to 24 identify false issues and false choices. And it is 25 really a false issue to talk about access for Diversified Reporting Services, Inc. - (202) 296-9626 245 1 individual investors and access for professional or 2 institutional investors. If companies wish to post 3 tours of their plants and offices and specify a 4 given day during the quarter for investors to come 5 to their headquarters or plant, that's fine. 6 Another false choice, I think, is you 7 have to either be fundamental in your analysis or 8 talk to management. We try to do both. Our 9 approach is to perform fundamental analysis, and 10 when we speak with management, the last thing our 11 people are looking for is a tip on what the quarter 12 looks like. We are trying to assess the quality of 13 management. And that's accomplished when you have a 14 face-to-face meeting. 15 We have no quarrel with providing full 16 and limited access to all investors to information 17 from the issuer, but the SEC itself in Reg FD and 18 the Supreme Court itself in Dirks, recognized that 19 the interchange between an issuer's management and 20 professional analysts involves a value creation on 21 the part of the analyst. 22 There is such a thing, we think in 23 theory, of work product of an analyst. And before 24 Reg FD, our analysts did not ask questions in open 25 conference calls. Even though the public wasn't Diversified Reporting Services, Inc. - (202) 296-9626 246 1 invited, other analysts were there. And on the buy 2 side, we have a single mission, we don't think we 3 have any conflicts. We are trying to do the best 4 job we can to get as much information that is 5 relevant to an investment decision as we can. 6 That includes doing all the fundamental 7 analysis that we can and it also includes testing 8 our own understanding with management, and assessing 9 the quality of management. And we feel duty-bound 10 as a fiduciary to obtain and use that information to 11 benefit our clients, who happen to be small 12 investors. 13 CHAIRMAN UNGER: Can we move off this 14 topic for a couple of minutes? 15 There was some information that I thought 16 would be helpful to this discussion, which is: What 17 is the type of information that you consult in terms 18 of advising your clients? What are your most 19 favorite sources of information? 20 MR. HYMOWITZ: I'm sorry, what was the 21 favorite source of information for us as investors 22 that we like to see from companies that make 23 investment decisions? 24 CHAIRMAN UNGER: Yes. 25 MR. HYMOWITZ: Well, I guess, the Diversified Reporting Services, Inc. - (202) 296-9626 247 1 typical way we look at investments is, you know, you 2 get a thousand ideas a year. When an idea hits our 3 radar screen and rises to a level that it is time to 4 do due diligence, we usually, unfortunately, Tom, 5 call the company up and say, "We would like to come 6 down and see you." And companies love to hear that. 7 What company wouldn't want someone who possibly 8 manages a fair amount of money to come down and take 9 a look at the company and buy the stock? 10 And we pretty much go through what any of 11 you could imagine you look for: What's the 12 business, is it defendable, is there a moat around 13 the business? I think it is the trading. We are 14 not traders, we are very long-term investors. We 15 are much like, not as big as Fidelity, but we think 16 like Fidelity. We also try to sneak into 17 management's head, get inside management's head. 18 We only own in one of our portfolios 25 19 names, so you can only imagine that we spend 15 20 hours a day, six days a week trying to learn 21 everything we can about those 25 names. So if you 22 think about what we are doing when we are not in 23 earnings season, we are not on the earnings calls. 24 All the time is spent trying to learn information 25 that gives you just the slightest edge on making a Diversified Reporting Services, Inc. - (202) 296-9626 248 1 judgment about the business. 2 So whether it is going to a trade 3 conference, whether it is speaking to the IR people 4 on a biweekly basis. A typical conversation with 5 the IR person you have known for a couple of years 6 goes something like this, "Hi, Tom, how are you? It 7 is Greg from Entrust. How is business?" 8 Now, if he answers that question, is that 9 a reaffirmation of guidance? I don't know. Before 10 FD, companies would typically say, "Business is 11 okay. You know, it is a little slow in the 12 northeast because of the weather." I think the 13 problem is, very clearly, that companies are not 14 sure what they are allowed to say to you anymore in 15 between conference calls. I think it is really that 16 simple, they are just not sure. 17 And while some companies may have 18 promulgated policies, many companies are waiting to 19 see some kind of enforcement action or something 20 else from the SEC that gives them some clue of how 21 they should behave, for the moment. And I think it 22 is too early to tell, but for the moment, many, many 23 companies have effectively shut down the 24 communication or the quality of the communication 25 has deteriorated significantly in between earnings Diversified Reporting Services, Inc. - (202) 296-9626 249 1 calls. That is just the reality of the situation. 2 I speak to companies every single day, and it is 3 clear that, as an investor, you just get less 4 information. 5 Now I just add one thing. That's for a 6 guy who is managing a million dollars. I am not so 7 sure that Putnam and Fidelity have the same problem. 8 I would suspect, competence in this business for a 9 decade, that they don't. As a matter of fact, 10 Putnam is running ads now that the reason why you 11 should invest with them is because of all the 12 meetings they go to and the plant trips they go to, 13 so if it wasn't adding value for them, I don't see 14 why they would be advertising it. 15 MR. ROITER: To answer your question, I 16 think when we meet with management, what we try to 17 do is understand the industry they are in, the 18 competition they face, the long-term prospects they 19 have, the business models they have. And whether 20 they meet quarterly earnings targets or not is 21 really not on the radar screen because we are not 22 interested in trading in or out on a quarterly 23 basis. 24 I would say that there are a couple of 25 practical things that the Commission could consider. Diversified Reporting Services, Inc. - (202) 296-9626 250 1 Reg FD does have a sudden death element to it if you 2 make intentional disclosure of material information 3 in a selective setting. There is a great deal of 4 consternation over what constitutes "intentional." 5 It is as amorphous as "materiality." 6 If the SEC were to adopt an amendment to 7 the rule that said "We are not going to get into 8 questions of intent. We are saying that if you meet 9 with analysts and you disclose something that meets 10 our standard, whether it is the materiality standard 11 or some other standard, you have a period of time to 12 get it out to the public." And I would suggest that 13 it be somewhat longer than 24 hours. I would give 14 companies until mid afternoon on the following day. 15 If you have a one-on-one meeting with 16 analysts in the morning, say, 8 o'clock or 8:30, and 17 you are faced with the prospect of assessing the 18 materiality of that information, that can send 19 companies into near panic. They may not be able to 20 contact their lawyers during the course of a single 21 day. If you gave people a little bit more time into 22 the next day, so that they would be able to actually 23 step back and consider the import of what they 24 disclosed in the analysts meeting, so long as they 25 get it out in whatever you feel is a means Diversified Reporting Services, Inc. - (202) 296-9626 251 1 reasonably calculated to disseminate the information 2 to the public by, say, 2 o'clock the following day, 3 I think that would do a great deal to relieve some 4 of the chill and some of the orchestration that goes 5 along with meetings. 6 MR. MARTIN: Eric, can I ask you a quick 7 question? 8 Prior to FD, what were the consequences 9 in those one-on-one meetings, if, in fact, material 10 information was given to the visitee? 11 MR. ROITER: We would make the judgment 12 whether that information was material, and even 13 though we would have a defense under Dirks if there 14 was no personal benefit involved, as a prophylactic 15 measure, we would put a Chinese Wall around the 16 analyst and wait for the information to be made 17 public. 18 We would defend the ability to use that 19 information because we would say it didn't 20 constitute a violation. 21 MR. MARTIN: But you make the judgment 22 as to whether it was material at the time you were 23 given it or the next day? 24 MR. ROITER: It would take sometimes 24, 25 36 hours. Diversified Reporting Services, Inc. - (202) 296-9626 252 1 MR. MARTIN: When the market moves? 2 MR. ROITER: No, the information well 3 may not have come out by that time. 4 CHAIRMAN UNGER: Who makes that 5 determination, though? That is an interesting 6 question. 7 MR. ROITER: It is part of my job. 8 MR. HYMOWITZ: The way we handle it is 9 very simple. I mean, often you are in meetings and 10 -- before FD, you would be in a meeting and ask 11 management a question, and we will look at each 12 other, my partner and I will just give each other a 13 look, like, "That is strange that this guy, or this 14 woman, is saying this to us." 15 And we would leave the meeting and we 16 would realize that it is questionable. And what we 17 do is call our outside counsel -- 18 CHAIRMAN UNGER: Not your broker? 19 MR. HYMOWITZ: No. 20 We would call our outside counsel and 21 explain to them the information, and then typically 22 what we do, just to err on the conservative side, we 23 restrict ourselves and we just would not trade in 24 the stock, buying or selling the security. 25 MR. MARTIN: But prior to FD, would you Diversified Reporting Services, Inc. - (202) 296-9626 253 1 have guessed that most of those issuers were, in 2 fact, competence trained in school not to give you 3 material information in those meetings? 4 MR. HYMOWITZ: I think the information 5 -- look, the reality of the situation is if you get 6 a piece of information like that, it tends not -- I 7 don't think that information or if you get into a 8 situation like that, I don't think it is 9 inadvertent. 10 I think sometimes these companies have 11 incredible amounts of pressure on them. They are 12 sitting in front of a large shareholder and they say 13 something like that, "You know, the weather," I 14 don't want keep using the weather, that is the 15 excuse everyone else uses. But they will say 16 something like, "You know, the quarter is looking a 17 little weak." That is what we get, "The quarter is 18 looking a little weak." 19 And you will walk out of the meeting and 20 you will say, "This guy, or this woman, effectively 21 said something to us he or she should not have said, 22 what are we going to do?" 23 And we will get on the phone with 24 counsel, and counsel will say, "That rises to 25 materiality, I don't want you trading on that until Diversified Reporting Services, Inc. - (202) 296-9626 254 1 they announce earnings." And we restrict ourselves 2 and sometimes it costs you a lot of money. Often it 3 costs you a lot of money. 4 MR. MARTIN: It would have seemed, 5 though, in that situation you acknowledge the issuer 6 probably didn't do the right thing, as evidenced by 7 the fact that you went to your counsel. 8 MR. HYMOWITZ: I think it is clear any 9 time there is a question, they tend not to do the 10 right thing. 11 But that's very different than what we 12 were talking about earlier, which is there has been 13 a real chilling effect on the quality and the 14 quantity of information. Let me explain one thing, 15 when you are talking about material, I am assuming 16 you are talking about material as it violates 17 insider trading rules, not material as in, you know, 18 learning that a certain chip is selling well. 19 That's material information to me. (A) I 20 don't think it violates insider trading rules; and 21 (B) I don't necessarily think that I am going to 22 necessarily trade on that. So there is material as 23 in material inside information, and then there is 24 just material information. 25 CHAIRMAN UNGER: There is material Diversified Reporting Services, Inc. - (202) 296-9626 255 1 non-public information and material public 2 information. 3 MR. HYMOWITZ: That's right, exactly. 4 MR. CLEVELAND: I will dissent from 5 Eric's suggestion. It really makes me 6 uncomfortable, the idea that there would be a safe 7 harbor for insider trading for any length of time. 8 MR. ROITER: I didn't say that a safe 9 harbor would still apply. 10 MR. CLEVELAND: Well you have to be very 11 careful with respect to that rule because what I 12 heard -- 13 MR. ROITER: With Reg FD? 14 MR. CLEVELAND: Right, it is not always. 15 Frankly, I like Greg's response better. 16 Theoretically I think I like it better. How it 17 works out in the real world may be something 18 different. 19 Again, to get to a point which I wanted 20 to get back to earlier, but it has come around 21 again, about the quality and the amount of 22 information that is coming out being as rich as it 23 used to be. I think we ought to be very careful, 24 again in this environment, to reach that kind of 25 conclusion. We are in an extraordinary environment Diversified Reporting Services, Inc. - (202) 296-9626 256 1 right now, and to attribute anything to Regulation 2 FD, I think it is extremely difficult to sort out 3 what we are seeing and trying to develop some kind 4 of a cause and effect that was observed earlier on 5 the previous panel. 6 I don't think we could do that. I don't 7 think we should do that, and I would urge that we 8 resist the temptation to tinker with the rule 9 without really knowing what we are observing. I 10 think time is, if we let time go by -- 11 MR. MARTIN: This is the quality of the 12 disclosure from my son. When his report card is 13 bad, it is also very poor. 14 MR. CLEVELAND: I agree with you 100 15 percent on the effect it has on the market. Quite 16 frankly, the argument before about whether FD causes 17 volatility, I agree with you 100 percent, it is way 18 too early to tell. And my bet would be that it 19 doesn't affect the volatility of the market. 20 However, it is not too early to tell that the amount 21 of information investors are getting in between 22 conference calls is less. 23 CHAIRMAN UNGER: So my fundamental 24 question for this panel, and I think now we have 25 about eight minutes left, I think we should take Diversified Reporting Services, Inc. - (202) 296-9626 257 1 time to sort of sum up and make any points you want 2 to make, is whether FD is benefitting investors, 3 bottom line. 4 Let's start with Eric. 5 MR. ROITER: I say the results are mixed 6 and it is too early to tell. The purpose of Reg FD 7 is salutary and give it more time. 8 I think the rule is in need of some 9 adjustment and it is not a zero sum equation. The 10 rule can be fashioned somewhat differently to 11 benefit both individual investors and institutional 12 investors. 13 And I think, just to respond very briefly 14 to my suggestion, Rule 10(b)(5) will remain in 15 place. If there is insider trading or any other 16 fraud violation, you are still vulnerable. But what 17 it does do is give management a little time to make 18 a considered assessment of the import of what they 19 say. 20 We are seeing a disturbing development 21 among a very small number of issuers that are pre- 22 conditioning attendance of our analysts at 23 one-on-one meetings with an undertaking to maintain 24 confidential all information that is conveyed at a 25 one-on-one session, with no distinction to Diversified Reporting Services, Inc. - (202) 296-9626 258 1 materiality at all. 2 We are uniformly resisting that. We 3 think it is bad, it is a bad consequence and it is 4 against public policy because it does choke off the 5 access that I think the SEC contemplated analysts, 6 particularly buy side analysts, would continue to 7 have after Reg FD. 8 CHAIRMAN UNGER: Thank you. 9 Alan? 10 MR. CLEVELAND: Regulation FD, I think 11 that the purposes of the Commission, and I think it 12 is unarguable with respect to whether these things 13 ought to be subject to a cost benefit analysis. I 14 don't think transparency is subject to a cost 15 benefit analysis. A level playing field is not 16 subject to a cost benefit analysis. Accountability 17 is not subject to a cost benefit analysis. 18 And I think those are the primary 19 elements. The time has long since passed where 20 those are debatable issues, I think those are 21 fundamental principles. Regulation FD, the purpose 22 of it, is to serve those principles, and that's 23 good. 24 With respect to the nuancing or the 25 refining of the rule, again, I won't take any more Diversified Reporting Services, Inc. - (202) 296-9626 259 1 time to be redundant, but I think, really, it is too 2 early to tell, particularly, in this kind of a 3 market which is an amazing, extraordinary market. 4 We have seen just the S&P 500 alone within the last 5 year, six movements that should not occur but once 6 every 120 years. We have seen six of them. 7 This is a very strange market and it is a 8 very scary market. And I don't think we ought to be 9 changing Reg FD as written based on what we are 10 observing because, frankly, I don't think there are 11 too many folks out there that know with certainty 12 what we are, in fact, observing. 13 CHAIRMAN UNGER: Thank you. 14 Greg? 15 MR. HYMOWITZ: I guess I watch the 16 markets every day, and I really don't see why we 17 should even note the volatility of the markets 18 recently as it relates to this. I really think it 19 is one of communication. I speak to so many 20 companies every single day, and I think it is fairly 21 obvious, at least from my vantage point, that 22 companies are talking less to investors. 23 And I think that hurts, quite frankly, I 24 think it hurts Tom's clients because the 25 information, whether you think it gets put out all Diversified Reporting Services, Inc. - (202) 296-9626 260 1 at once or it filters down through myself or other 2 analysts, it clearly hurts everybody. Companies are 3 reluctant to talk, at least talk in between 4 conference calls. 5 And I think, to Tom's earlier point, you 6 also have to realize there is a stratification 7 between the institutional investors themselves. 8 Unfortunately, I do not have as much pull as 9 Fidelity. And when Fidelity or Putnam calls up and 10 says they want a one-on-one or they want to speak, 11 believe me, these conversations are taking place and 12 I am sure they are not wasting their time. So they 13 are learning stuff that, unfortunately, Entrust 14 Capital or Tom's clients will never be able to 15 learn. 16 And I just think that if you think you 17 are going to be able to squelch those kinds of 18 conversations, then, really, quite frankly, much of 19 the investment management business is going to have 20 to change. Because to John's point, you are right, 21 I am going to have to charge lower fees because I am 22 going to be adding no value. And many people will 23 -- you know, Vanguard will be the ultimate 24 beneficiary because people will just start indexing 25 because, quite frankly I will add no value. Diversified Reporting Services, Inc. - (202) 296-9626 261 1 And I agree with Alan that it is way too 2 early to tell the effects on the market, and I 3 assume we never really will be able to tell the 4 effects on the market. But I think it is very easy 5 to tell the effects on communication between 6 companies and I think both the individual investor 7 and the institutional investor are getting hurt here 8 because companies are not sure what they are able to 9 say. And I think that to the extent you can put 10 bookends around the concept of materiality as it 11 relates to FD, I think would be very helpful from 12 the issuer's perspective, and I think all individual 13 investors and institutional investors will be well 14 served. 15 CHAIRMAN UNGER: Thank you, Gregg. 16 Kim? 17 MR. JOHNSON: I should disclose one 18 other fact, that is, that six years ago CERA's 19 assets were worth $14 billion, they are now worth 20 $30 billion, and almost all of that, more than 99 21 percent of that can be attributed to the fact that 22 we basically own the market. The market did it, not 23 our CEO. We own 2500 domestic stocks, and as they 24 went up, we went up. 25 With that bias in mind, I will comment, Diversified Reporting Services, Inc. - (202) 296-9626 262 1 in the short term, our observations are that there 2 have been some potholes in the implementation of 3 this Regulation. It could probably use some fine 4 tuning, and that will probably come with time in any 5 case. What we think is far more important is that 6 any rule which offers the prospect that the market 7 as a whole will operate more fairly and more 8 efficiently, and perhaps just as importantly, will 9 be perceived by the broad range of investors to 10 operate fairly and efficiently, is the kind of 11 market we want and we are prepared to support by 12 some patience, and if necessary, fine-tuning, which 13 we think may contribute to that environment. 14 CHAIRMAN UNGER: Thank you. 15 John? 16 MR. MARKESE: Thank you. 17 I have to say that I think my observation 18 of the ability of individual investors who want to 19 make their own decisions on stock selection has gone 20 up dramatically with Rule FD. 21 I would like to think that we are going 22 to go forward and get more information. I think the 23 firms that are not talking as much now are in 24 transition, frankly, hiring IR firms to put in place 25 procedures and policies and teaching people there, Diversified Reporting Services, Inc. - (202) 296-9626 263 1 getting it all nailed down. And, frankly, I think 2 this too shall pass. 3 I have to say that I think analysts and 4 individual investors who want to make their own 5 decisions are really doing the same work. They 6 think differently but they are really doing the same 7 job. And they may not have quite the same access, 8 but they are doing the same fundamental analysis. 9 So I think we should make sure we don't 10 make distinctions going forward about materiality 11 levels, or in the interest of analysts or the 12 institutional investors and the individual 13 investors, I think they all should be the same. 14 CHAIRMAN UNGER: Thank you. 15 Tom? 16 MR. GARDNER: I guess I would like to 17 reiterate -- or maybe this is the first time that I 18 have said it today, that we live in a country with a 19 wonderful public market system and the work that the 20 SEC has done in the past five years, ten years in 21 this country has made extraordinary strides in 22 opening the marketplace up to every investor, 23 regardless of the size of their account, whether 24 they are making their first investment in a dividend 25 reinvestment plan with $50 or whether they are a Diversified Reporting Services, Inc. - (202) 296-9626 264 1 retired UPS employee with $50 million of UPS stock, 2 or whether they are an analyst or a mutual fund 3 manager managing a tremendous amount of money for 4 other individual investors. 5 I have been slightly irascible as a fool 6 today, which should not really be in my nature. But 7 I feel a responsibility because I know that the 8 investors that we reach on our site and the various 9 services including our radio program, there have 10 been very active calls on the subject broached 11 today. I know that it is almost unanimous that 12 individual investors are very much in favor of 13 Regulation FD. 14 I will reiterate what John said, I have 15 had a number of investors say to me that they were 16 surprised that in America it didn't already exist. 17 So I am certainly not opposed to the fine-tuning of 18 Regulation FD. All I would ask is that the 19 participation of individual investors be a critical 20 part of the fine-tuning of Regulation FD. After 21 all, the individual investing in America is by far 22 the most substantial amount of money that is 23 invested in equities from one year to the next. 24 I hope we don't move into a world where 25 money buys you private information in a public Diversified Reporting Services, Inc. - (202) 296-9626 265 1 market. I don't think any of us want to find that 2 true about our market system, or frankly, any market 3 system that we invest in in the world. I am just 4 going to read in closing two quotes. One from 5 probably a real small investor and one from a real 6 big investor, both of who seem to come to similar 7 conclusions. And I will just emphasize, and really 8 respectfully say we have a high level of integrity 9 and diligence sitting on the panel today, but I 10 don't think we should legislate based on the 11 assumption of that high integrity and diligence 12 which we have seen this afternoon. 13 The two quotes I will read are one from 14 the small guy who said, "For gosh sakes, keep full 15 disclosure. As individual investors, we should not 16 be penalized with selective or late information. A 17 level playing field for everybody. The market is 18 not a private playground for the professionals. 19 Tighten up on Regulation FD, don't loosen it. Some 20 information is still getting out before public 21 disclosure." 22 And the second quote from a much bigger 23 -- somebody who shares a lot of interest with small 24 investors, comes from Warren Buffet's letter to 25 shareholders on March 10th, "The fact that this Diversified Reporting Services, Inc. - (202) 296-9626 266 1 reform," in reference to Regulation FD, "The fact 2 this reform came about because of coercion rather 3 than conscience should be a matter of shame for CEOs 4 and their investor relations departments." 5 I don't think that there are any easy 6 answers to Regulation FD, but I sure am proud that 7 we are here today asking the tough questions about 8 it, and I hope that more and more people will become 9 involved in this issue because I think it is 10 critically important to the nature of our public 11 markets. 12 CHAIRMAN UNGER: Thank you, Tom. 13 Donald? 14 MR. LANGEVOORT: I think simple 15 economics teaches us that the chill that is felt 16 now, and I am sure is felt, is going to be resisted 17 by the issuer community. They have to tell their 18 stories, they are going to find ways. 19 And best practices are going to lead the 20 way. As some company gets more comfortable with 21 one-on-ones, or pushes a little bit the definition 22 of materiality and doesn't find the Commission 23 cracking down on them, I think others are going to 24 follow. And I think that process, with a 25 permissive, reasonable, interpretive enforcement Diversified Reporting Services, Inc. - (202) 296-9626 267 1 posture by the Commission, will within the next year 2 get us to a place where investors are better off. 3 CHAIRMAN UNGER: David had one thing to 4 add. 5 MR. MARTIN: Just as a clear 6 post-script, I have been here all day with Amy 7 Starr, who is sitting back there, and in our office 8 we take telephone calls on this Regulation. And I 9 want to encourage everyone that if there are 10 interpretations or matters of confusion in the 11 Regulation, we would like to take your questions. 12 I think that I have learned a lot more 13 this afternoon, and if there are some ways we can 14 give some guidance on the telephone, that may help 15 nuance the reaction and the reception to the rule. 16 So I would like to continue to do that, even short 17 of surveys or written best practices or even 18 provisions to the rule down the road. 19 CHAIRMAN UNGER: And your number is? 20 MR. MARTIN: 942-2900. And we will 21 call you right back. 22 CHAIRMAN UNGER: I would like to thank 23 this panel as well, not only for the insight and the 24 comments you have given, but also for your patience 25 for the somewhat tardy schedule that we have had. I Diversified Reporting Services, Inc. - (202) 296-9626 268 1 apologize for that. 2 I will not make my usual observations 3 because in the interest of time and in the interest 4 of our final panelist, Herb Wander, who is going to 5 make the observations, not only about this panel but 6 about the entire day. And I would like to invite 7 Herb to come down now before everybody leaves, 8 because I think he is going to add a lot of value to 9 clarifying and maybe crystallizing a lot of the 10 thoughts that we have heard today. 11 CHAIRMAN UNGER: I will invite Herb to 12 introduce himself and to go ahead and make 13 observations about what we have heard today and to 14 put it all into perspective as a lawyer. 15 MR. WANDER: Thank you very much. 16 I appreciate the opportunity to speak 17 before this Roundtable this afternoon on this 18 crucial issue to the capital markets of the United 19 States. 20 A little background, I have been 21 practicing law for some 40 years. I have never been 22 a member of the SEC. We represent all sorts of 23 financial clients such as issuers, hedge funds, buy 24 side analysts, sell side analysts, investment 25 bankers. You name it, we represent them, so our Diversified Reporting Services, Inc. - (202) 296-9626 269 1 views and my experience has been on all sides of 2 this particular question. 3 I think one of the things that I will 4 start off by saying is that it probably is too early 5 to make any final judgments, although I think it is 6 good to stop, look and listen and find out what is 7 going on in the marketplace today. I am going to 8 raise three issues, and if I have time, one more. 9 The three issues are, that this 10 regulation is very broad. It is much broader than 11 has been discussed here and I think we haven't had 12 markets -- we have volatile markets but we haven't 13 had the kind of market that really tests whether the 14 rule works or not. And I will discuss that in a 15 minute. 16 Second, I want to really deal with the 17 issue of materiality. I have my own judgments on 18 that and some suggestions. 19 Finally, a more mundane subject, we do 20 need to update, which I think is very important if 21 we want the rule to function more effectively for 22 the capital market. 23 Let me start off by saying that in the 24 Dirks case -- and, by the way, I was a witness for 25 the Commission in the Dirks case, so I am familiar Diversified Reporting Services, Inc. - (202) 296-9626 270 1 with it. In the Dirks case, the Supreme Court said 2 "No" to the SEC and, in effect, said the SEC's 3 position rests on the erroneous theory that the 4 antifraud provisions require equal information among 5 all traders. 6 And I think the SEC has been shaken under 7 that rule. I think before the Dirks case, it wanted 8 to oppose that rule and it has been trying over 9 these many years to, I think, find some way to get 10 around that prohibition by the Supreme Court in the 11 Dirks case. And Regulation FD gave, I think, the 12 Commission the opportunity to do this, and it really 13 has a wide net, much broader than I think anybody 14 thinks. 15 For example, we are now just finding out 16 that it deals with shareholder meetings. What can 17 you say in shareholder meetings if you don't have it 18 in a webcast? I was even asked a question by one 19 general counsel, "We have a practice of coming out 20 with our year-end earnings release, then we send out 21 our annual report to shareholders and then we file 22 our 10-K maybe a week or two later. Can I send my 23 annual report out to shareholders without filing it 24 with the SEC?" 25 The answer is probably "No," because the Diversified Reporting Services, Inc. - (202) 296-9626 271 1 annual report contains the M&A, which is a much 2 broader discussion of the business than would appear 3 in the earnings release for the last part of the 4 year. Reg FD applies in the M&A situation and Reg 5 FD applies in both public and private offerings. We 6 have not seen a robust public offering market yet, 7 and I think it is yet to be determined whether FD 8 will really work whereby you get an exemption for 9 road shows from FD in public offerings. So I think 10 it is way too early to tell. We haven't had enough 11 experience yet, we don't know all the implications 12 of the rule. 13 Well, I think what happened with the 14 adoption of FD was that this was a way to, in 15 effect, I think, extend the reach of the securities 16 laws, level the playing field, commendable 17 discussion. And what happened was, I think where it 18 fell a little off kilter, as I think every panel 19 discussed today, was in trying to define 20 "materiality." 21 I have done considerable thinking about 22 defining materiality, and thought if there is a 23 better way, as Don suggested, to define materiality, 24 or Eric or some of the earlier speakers. And, 25 frankly, where I think it fell off track is two Diversified Reporting Services, Inc. - (202) 296-9626 272 1 places. One, the definition should have stopped 2 with the definition that materiality is a 3 substantial likelihood that a reasonable investor 4 would consider the information important in making 5 an investment decision, period. 6 And what happened was, in the release, 7 the SEC, trying to be helpful, came up with a whole 8 series of examples and then with its famous 9 paragraph dealing with lower than, higher than or 10 the same as the Street estimates. That is where I 11 believe it got into the problem area that has caused 12 everyone so much difficulty, and that is trying to 13 define the more specific terms of materiality. 14 I think it can't be done, and I will use 15 as my text for that the Supreme Court's decision in 16 the Basic case. If any of you were around at the 17 time, you knew there were great arguments. People 18 wanted a specific rule, a bright line test on what 19 materiality was. And the Basic case was one 20 involving a merger, and people were saying, "That's 21 a bright line test, we should use that." 22 And the Supreme Court clearly said that 23 there is no bright line test, it depends on all the 24 facts. And it reiterated this definition of 25 materiality in Northway. People were very Diversified Reporting Services, Inc. - (202) 296-9626 273 1 disappointed with that. Lawyers, clients, issuers, 2 everybody was disappointed, "I want more 3 specificity." 4 Well, the problem is, the more 5 specificity you get, the tighter it gets. The 6 Commission is not going to give you carte blanche, 7 and they are going to want to have in their 8 enforcement arsenal enough tools to fight fraud and 9 to fight over-reaching. And so they are not going 10 to give you the kind of specificity that you want 11 and, therefore, my strong suggestion is that you 12 take the definition as it was given by the Supreme 13 Court in the Basic case, in the Northway case, in 14 other cases, and learn to live with it. 15 And, in fact, we have lived with it. If 16 you look at the cases since Basic, everybody was 17 worried, I will never be able to get a summary 18 judgment anymore, it is always going to be a facts 19 and circumstances decision. That hasn't been the 20 fact. The courts have been very responsive to 21 factual settings in which people can determine 22 whether it is material or not material. And lawyers 23 have learned to live with that and have counseled 24 their clients. 25 Now, we go through this list that is in Diversified Reporting Services, Inc. - (202) 296-9626 274 1 the Release adopting FD, that has six -- seven 2 specific items about earnings. And the list is sort 3 of comical, frankly. I mean, I guess bankruptcy is 4 a material event. Who could argue with that? But 5 the first one is earnings information. And when I 6 read this in August of last year, I double-colored 7 it because I had no idea what it meant. I think it 8 tries to be too specific and it has counselors who 9 are counseling clients as to what materiality is 10 concerned about whether they can say anything or not 11 say anything. 12 And then you go down to the paragraph 13 dealing with earnings releases, and right away, it 14 sets off red flags for lawyers who are paid to 15 counsel their clients and keep them out of trouble 16 and not get them to the edge of the line. 17 Then the next paragraph deals with the 18 mosaic theory still exists. Well, it has to because 19 the Supreme Court says so. The fact is, I must tell 20 you, I defy anyone to tell me what is left of the 21 mosaic theory in light of the way materiality has 22 been defined in this release, coupled with, and let 23 me add this, SAB 99. I think SAB 99 deserves 24 rereading by everyone, and I think, frankly, that 25 the Commission itself should reread SAB 99, should Diversified Reporting Services, Inc. - (202) 296-9626 275 1 look at it and should really come back with a much 2 simpler, straightforward definition of materiality. 3 SAB 99 supposedly deals only with 4 financial statements, but as we know, the Second 5 Circuit has now approved it. SAB 99 frankly deals 6 with misstatements, known misstatements, and do they 7 have to be corrected. It is a different issue than 8 trying to counsel somebody about what materiality is 9 when they are going into the one-on-one conference. 10 And, finally, SAB 99 deals with, in my 11 opinion, a lot of intentional maneuvers to 12 manufacture earnings, to keep the stock price up, 13 which is a very different set of factors than 14 dealing with materiality, particularly in 15 one-on-ones where I think the crucial issue comes 16 up. So, I think, unfortunately, after having given 17 a lot of thought to the subject, that we have to go 18 back to the very simple, straightforward definition 19 of materiality, leave it to the clients and the 20 lawyers and the SEC to ferret this out. 21 And, frankly, I am not so sure one good 22 case wouldn't help us all out. I think if all of us 23 remember the Van Gorkom case, the decision by the 24 Delaware Supreme Court probably did more to add more 25 to be more attentive to the fiduciary obligations Diversified Reporting Services, Inc. - (202) 296-9626 276 1 than all the rules and commentary on the fiduciary 2 obligations did. 3 My final comment deals with the duty to 4 update. Here again, in counseling people to provide 5 more information and more forward-looking 6 information, the problem is do I have to update it 7 or when do I have to update it? 8 It would seem to me that the Reform Act 9 discussed this issue, and I am not certain what it 10 means, but I think it would be helpful if the SEC 11 said that if you tell people what your policy is, 12 and you don't manipulate that policy with respect to 13 updating, you will have a double benefit. First, I 14 think it will clear up the confusion. Particularly, 15 because there are differences between the circuit 16 courts in deciding what the duty to update is. And 17 I am not only talking about the situation where 18 there was a purposeful error in the earlier 19 disclosure, but where things have changed since the 20 earlier disclosure. 21 So we will have more certainty and I 22 think much more counseling in an effort to use the 23 forward-looking information. And the double benefit 24 would be that you would have more forward-looking 25 information. And one of the ways we try to counsel Diversified Reporting Services, Inc. - (202) 296-9626 277 1 our clients about Reg FD is, in fact, to provide 2 more information in the quarterly earnings releases, 3 frankly, so that the analysts in one-on-ones can go 4 through more detail and drill down. 5 I don't think asking the question, what 6 do you think the tax rate will be this quarter, or 7 what do you think the cap X's are going to be for 8 this quarter, necessarily is a material piece of 9 information that has to be disclosed. You know, if 10 we have the broad definition of materiality, no 11 insider will ever be able to sell any stock, because 12 an insider always knows my cap X two years from now 13 will be X or Y or something else. And that just 14 isn't realistic when you sit down and think about 15 it. 16 Finally, I do think one of the things 17 that I have heard today, and I have heard before, is 18 one of the unfortunate results of Regulation FD is 19 that by saying it is not only the top executives 20 who, in effect, are identified to make disclosures, 21 that other people can make disclosures. 22 What the Bar has done, and we have heard 23 it from a number of other people, is to clearly come 24 out and say, "These three people are the only ones 25 who can speak for the company," for fear that Diversified Reporting Services, Inc. - (202) 296-9626 278 1 someone lower down might give away some material 2 information, they haven't been properly trained, 3 don't understand the rules. And what that has 4 caused is, I think, a drying up of the information 5 you heard from so many of the panelists here today 6 because they can't go down to lower level people. 7 And, indeed, one of the interesting things that one 8 of my buy side analysts has told me is that they 9 can't go to competitors because the competitors have 10 also said, "Don't tell any information to any stock 11 professional, whether it is about our company or it 12 is about our competitor." 13 That, I think, needs some fixing to 14 enlarge the group of people that can be on the 15 firing line with respect to providing information to 16 investors generally. 17 And that's essentially my remarks. 18 CHAIRMAN UNGER: Do you want to add that 19 last point? 20 MR. WANDER: That was really the point 21 on the putting in the penalty box far more people 22 than I think anyone anticipated. 23 CHAIRMAN UNGER: Herb, I appreciate both 24 your observations and your staying power in terms of 25 today, as well as audience. Diversified Reporting Services, Inc. - (202) 296-9626 279 1 I just want to quickly thank Commissioner 2 Hunt and his staff, my staff for putting this 3 together, Mary Head and Rich Levine and Sharon, 4 David Becker, and thanks to all of the people who 5 appeared today and were very frank and outspoken in 6 their observations. 7 I think today's discussion will really 8 give us a lot of things to think about in terms of 9 Regulation FD and what, if anything, we need to do 10 about it. I do expect to release a report on 11 today's discussion and any recommendations that I 12 may have for improving the rule or modifying or 13 refining the rule as we discussed today. 14 So, again, thanks to everyone. Thanks to 15 the webcasters. And we are now adjourned. 16 (Time noted: 4:55 p.m.) 17 18 19 20 21 22 23 24 25 Diversified Reporting Services, Inc. - (202) 296-9626 280 1 2 C E R T I F I C A T I O N 3 4 5 I, MARGARET EUSTACE, a Shorthand 6 Reporter and Notary Public, within and for the State 7 of New York, do hereby certify: 8 That I reported the investigatory 9 proceedings in the REGULATION FD ROUNDTABLE, 10 on Tuesday, April 24, 2001 at the offices of the 11 Securities and Exchange Commission, 7 World Trade 12 Center, New York, New York, and that this is an 13 accurate copy of what transpired at that time. 14 15 16 MARGARET EUSTACE, Reporter 17 18 19 20 21 22 23 24 25 Diversified Reporting Services, Inc. - (202) 296-9626