Regulation FD

SEC Paternalism on equity crowdfunding rulesSteven M. Davidoff, the New York Times DealBook’s Deal Professor, has a good outline of the various unforeseen consequences of Regulation FD that have unfolded since its adoption by the SEC in 2000.  Reg FD was intended to combat the practice by public companies of providing material information selectively to favored contacts, such as investment bank analysts, which provided a trading edge to the clients of the banks over small investors who didn’t have access to such information.  Much like the laws against insider trading, which some argue is a victimless crime, Reg FD is intended to create a level playing field for all investors, because if the general sense among the public is that the equity markets are rigged against the little guy, the small investors will stay away from investing and thereby lose out on its long term gains.

Davidoff’s litany of problems with Reg FD, including decreased analyst coverage of public companies and the difficulties in controlling what is said on social media, are real and need to be addressed.  He ultimately questions whether we even need the rule and speaks of the old days, where information was filtered through the analysts, with nostalgia.  However, in so many other areas of life, the advent of improved communications technology has served to eliminate middlemen, saving costs for everyone.  Are we really advocating, in an era of unprecedented amounts of available information about public companies, that investors need to pay a third party for their expertise, or otherwise not participate?

I would argue that the basic concept behind Reg FD – that companies need to avoid selective disclosure to preserve a general sense among investors that they have equal access to information – is worth preserving.  The goal of the SEC should be to adapt and tailor its rule for the new realities.  For example, instead of using the Netflix CEO’s Facebook post as a teachable moment showing that Reg FD applies to social media posts (as described in the Davidoff piece), instead acknowledge that it’s tough for companies to monitor this kind of thing and apply a more lenient standard to insider social media posts than the harsh disclose-immediately-or-else standard applied to company statements.  Under a more relaxed standard, there would be a violation only if the social media posts were part of a coordinated effort to evade Reg FD, not an innocent bit of bragging as appeared to be the case with Netflix.