The Securities and Exchange Commission (SEC) recently approved Regulation FD ("Fair Disclosure"). The new rule addresses the selective disclosure practices between corporations
and large institutional investors that have been part of the Wall Street culture for years. I believe that Regulation FD will level the playing field for all investors,
particularly in healthcare.
In the past, companies throughout the U.S. have routinely discussed upcoming material events with their largest institutional holders and sell-side analysts prior to public
dissemination. This includes "courtesy calls" made prior to press release distribution over the wires, additional information provided at one-on-one lunches, and "spur-of-the-
moment" comments made during telephone conversations. These practices have provided large institutional investors and analysts with an obvious investment advantage to smaller
institutions and/or individual investors.
Soon, all companies will have to take a hard look at their current communication practices to determine if they are stepping over the line newly drawn by the SEC. (Already we
are hearing cases of senior management teams limiting their communication with Wall Street). Those companies that continue to disclose material news to institutional investors
prior to the public will be punished with fines and injunctions. This signals an urgent need for some companies to overhaul their entire IR infrastructure and for others to update
guidelines for appropriate financial communication procedures.
Material Information
The definition of "material information" has been widely interpreted and has different meanings for different companies. The challenge that communications professionals and
corporate executives will have is in answering the question "What defines material information for my company?"
By forcing this issue, the SEC has pushed companies to make a decision. Companies will either make the investment in time and resources to take a deep look within for a
definition of "material," or they will simply severely limit their external communications. The latter could have adverse effects on the fair marketplace that the SEC seeks. I
believe this will make the investment decision-making process much more arduous than it needs to be.
Communication Implications
A survey conducted by the National Investor Relations Institute (NIRI) immediately following the SEC decision found that a surprising number of respondents indicated their
desire to scale-back their communications efforts. For example, over 30% of the approximately 2,500 companies surveyed said that they would cut back or eliminate such traditional
communications practices like holding one-on-one meetings with analysts and institutional investors, reviewing draft analyst reports (at the analyst's request) and participation
in broker- sponsored analyst meetings. Over 20% of respondents said they would cut back or eliminate their participation in company-sponsored group meetings, plant tours, and the
Q&A portion of conference calls.
In the spirit of fair disclosure, companies cannot take this posture. Rather, companies must embrace Regulation FD and prepare. Here are some initial steps to help healthcare
communications professionals adjust to the new rule.
- Constantly survey your investors. The analysts and institutional investors involved with your company are the best sources of information to help you
with your company's definition of material information. By asking the right questions of your investors, companies can quickly discover a pattern to the information that
investors want to know first.
- Keep current on industry reports. Again, the information is right at your fingertips. The quarterly reports that are published by many investment
firms can often act as a guideline to investor "hot buttons" that should be avoided during one-on-one conversations with investors.
- Designate corporate spokespeople. The best way to control messages is to control the number of people communicating the messages. All
spokespeople should be message-trained, knowledgeable about the company's definition of material information and well versed on the meaning of Regulation FD.
- Enhance your Web site. A corporate Web site can become one of the most valuable tools in adhering to Regulation FD. By providing extensive
information on the site, top executives will have a broader range of corporate topics to discuss with investors. As such, it is important for companies to constantly update their
site with publicly disseminated press releases and other important corporate information.
- Utilize Webcasting. Opening conference calls to all investors via Webcasting is a good way to keep within the guidelines of Regulation FD.
Ilyssa Levins is chairman and chief creative officerof GCI Healthcare in New
York. She can be reached at 212/886-8500.
Her co-author for this column is Robert C. Ferris, GCI's VP and director of
investor relations.