Outlook 2005: Corporate Regulation FD performance leaves investment pros less than fully satisfied

By Ted A. Knutson

Washington, Dec. 31 - The Securities and Exchange Commission's Regulation FD was designed to work as a new source of sunlight into the world of investor information when the rule became effective in 2001.

But some of the four-star generals (and buck privates) of the high-yield corporate sector have reworked it as a source of fog.

George Lynch, senior high yield analyst for Invesco Inc. said he hates the rule.

"People have become so concerned about what they say and when they say it, Regulation FD has led to companies going to the extreme in the other direction," he said.

"In the bad old days, companies were saying things to a select universe, now they are not saying anything at all, even those things that are intuitively obvious like the state of the overall market and general business conditions in their industries."

Lynch's boss, Martha Metcalf said the quality of information as well as the quantity has declined since the introduction of FD.

In looking at FD from the perspective of two major classes of high-yield issuers - young companies and "fallen angels," Lynch said executives at the latter are more adept at manipulating investors with FD because they are more experienced with what levels of disclosure the SEC will and won't tolerate.

A military analogy that Lynch and other experts agree is apropos is just as the Pentagon refuses to divulge some non-life threatening information because it is "classified," some corporate executives try to hide embarrassing news about their companies using Regulation FD as an excuse.

However, Prof. John Coffee, director of the Center for Corporate Governance at the Columbia University Law School noted: "Regulation FD is not a prophylactic ban on disclosure, it is a ban on selective disclosure."

Brian Hessel, managing partner of Stonegate Capital Management LLC, said the best thing the rule has done for high-yield bond investors has been to make company presentations available on the web.

Yet, this overseer of $300 million to $400 million in high-yield bond funds, sees executives using the rule for the opposite purpose for which it was intended.

"If FD is a way to help you control when information is released, then companies that try to keep a tight reign of information will exploit it," said Hessel.

Regulation FD does not put an entire ban on selective disclosure.

Companies can release some information to rating services and not divulge it to the general public without risking SEC sanctions.

However, Sean Egan, a principal at Egan-Jones Rating Co., an independent rating service in Ardmore, Pa., said he tells companies he does not want data before the rest of the investment community gets it

"We don't think anybody in the market should be given priority access to information," said Egan.

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