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A fairer disclosure Featured

6:22am EDT July 19, 2002

It would be an understatement to say that the face of investing has changed over the past few years.

Today's market is no longer just for the privileged few. Investment now takes the form of employee mutual funds, 401(k)s or, in some cases, results from the proliferation of stock options and reimbursement plans offered to employees. As a result of this increase in individual investing, more employees are acutely aware of the ins and outs of their company's stock performance.

In response to these new individual investors, Arthur Levitt, director of the SEC, enacted the Fair Disclosure Rule to counteract what was considered an unfair advantage for analysts. The rule was designed to eliminate invitation-only or private meetings, designed to guide earnings projections, between analysts and the public companies.

Levitt says these meetings drove trading and ultimately affected stock prices, smacking of insider trading, but not quite falling under the SEC's insider trading laws.

Whether the new disclosure rule is a populist victory or a corporate logistical nightmare continues to be debated. However, as part of a monthly International Business Communicators Association (IABC) lunch series, James Roop, CEO of The James Roop Co., offered tips for how business owners can adapt to the new rules.

No secrets

The SEC Fair Disclosure rule does not permit the disclosure of material information on a nonpublic basis. If material information is inadvertently disclosed privately,there is a 24-hour amnesty to disseminate the same information publicly.

The SEC reserves the right to judge what constitutes material information, but the ruling definitely includes mergers and acquisitions, divestitures, new products, bankruptcy, customer development and other earnings guidance information.

Who's the boss?

With the proliferation of employees owning stock in the companies they work for, coupled with the fair disclosure rule, many companies have a whole new set of investors to appease. One consequences is the subsequent availability of financial information to employees of all levels.

And, depending on the nature of the information, it may have a profound effect on intracorporate morale. Earnings shortfalls and lower-than-expected stock prices can create "an emotional roller coaster and create problems with management loyalty," Roop says.

Loose lips

Employee morale is not the only issue that may be affected. Roop cautions that any management comments outside of the public forum could be construed as material and therefore merit public disclosure.

As the landscape changes and the media and analysts are looking for nonpublic information, employees may find themselves more susceptible to being asked to make unauthorized announcements. Be aware that chat rooms and the ever-present rumor mill could also be a source for an information leak for which the company is held liable.

What to do?

Whether a company is public or private, communication and well-thought-out policies are always the best bet. Here are a few tips for avoiding unnecessary liability:

  • Include the investor relations department. It needs to be in the loop.

  • Plan management comments and scripts for conference calls and interviews with both media and analysts.

  • Create a disclosure policy to help keep internal communications from being discussed.

  • Monitor what employees say, including everything from press releases to what salespeople say at trade shows.

  • Be prepared to do damage control, even with the smallest misstep.

  • Keep up with communications -- update Web sites and send out internal and external press releases frequently.

  • React publicly. The "hide your head in the sand" approach can backfire.
How to reach: IABC, www.clevelandiabc.com; The James Roop Co., 902-3800

Kim Palmer (kpalmer@sbnnet.com) is managing editor of SBN Magazine.