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Regulation FD: Will the Arm of the SEC Reach IT Industry Analysts?


Main Idea

Many publicly held high technology vendors are abiding by the new Securities and Exchange Commission (SEC) regulation regarding fair disclosure of financial information, established in October 2000. While executives have to modify the way they alert investors about financial reporting details, ARInsights� believes there is no imminent impact of �Reg FD� on a vendor�s relationship with industry analysts.

Research Topic

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IT and Internet vendors brief information technology (IT) industry analyst firms (e.g., AMR, Forrester, Giga Information Group, Jupiter) about their products, while passing along tech industry market intelligence. Unlike the financial analysts, briefing IT industry analysts appears to happen in a completely unregulated environment. But is it? Are the IT industry analysts really not covered by the SEC Regulation FD?


Regulation FD, the �fair disclosure� rule that outgoing Securities and Exchange Chief Arthur Levitt Jr. spent a large portion of last year sponsoring, forces corporate managers to reveal financial and business details to all securities professionals and investors at the same time�not just the chosen few institutional investors on Wall Street. Mr. Levitt essentially put an end to selected disclosure briefings when he passed the Fair Disclosure Regulation last October 2000. The fallout has been mixed, as some Wall Street followers have criticized the ruling. Many think it restricts the flow of accurate information because executives might be fearful of rapidly fluctuating stock prices in response to disclosing details to unsophisticated investors. Others maintain the openness will eventually cause corporations to be more forthcoming with details as the market becomes accustomed to responding to fundamentals as opposed to quarterly earnings reports (See Note 2: Related Articles).


The SEC specifically says Reg FD does not impact dealings with the media. It didn�t explicitly mention industry analysts in the same light as financial analysts. However, speculation surrounds the role of industry analysts�especially in the technology industry. These analysts, sometimes likened to the trade press, occasionally pass along information about technology and product plans to their IT users clients, before the information is made public.


IT industry analysts are hardly journalists. Where do CIO�s of small, medium, and large enterprises go when they need a customized opinion on a technology strategy or product? It probably won�t be the major business or technology journals. Chances are much better that CIO�s and their direct reports discuss multi-million dollar technology investments with analysts from AMR Research, Forrester, Gartner, Giga, or Meta Group, among dozens of others. Hence there is urgency on the part of many suppliers to foster beneficial relationships with industry analysts.


While most IT industry analysts do not maintain the sophistication of crack financial investors, the grapevine of information about new releases, future products, and budding technologies clearly affects revenue streams of vendors. ARInsights estimates that for nearly 80 percent of high technology vendors, industry analysts have a significant impact on customer perception of their products, strategies and�most importantly�buying decisions. Does perception impact the markets? Ask the Wall Street brokers who kept buying �new economy� stocks amid billion dollar valuations. With direct influence over the public perception of a supplier, industry analysts are highly sought after by users and vendors of IT alike. The market for IT research is healthy. Outsell, Inc., (Burlingame, CA, a market research firm specializing in information buyers and sellers), estimates that $2 billion was spent on computer industry analyst research in 2000. That�s a lot of research and influence flying under the radar of regulatory scrutiny. Furthermore, many of the securities firms and brokerages are paying clients of industry analysts.


Perhaps the reason why industry analysts were not included in the Reg FD ruling is that they generally are not securities holders of the firms they follow. And, no matter how strongly one can make a case that industry analysts materially affect the success of a firm they follow, there is not a direct connection with the buying and selling of stock. Therefore, without the official specter of insider trading looming over their interactions with industry analysts, IT vendors should take advantage of industry analysts and develop positive relationships. Influencing IT analysts through regular briefings, newsletters, and sharing intriguing intelligence from vendor internal networks will greatly enhance public perception of the firm. Vendors will indirectly and directly benefit from industry analysts as the analysts publicize their �findings� through personal conversations, conference presentations and published research.


Bottom Line

         �Reg FD� the SEC fair disclosure regulation that affects how public corporations disclose financial information explicitly excludes �press.� It does not mention industry analysts.

         ARInsights believes that industry analyst research practices are sufficiently esoteric as to keep the practitioners immune from federal regulation or legislation.

         Analyst relations professionals and executives of publicly held technology vendors should continue to build constructive relationships with industry analysts.



Note 1: Fair Disclosure, Regulation FD

On October 23, 2000, the SEC adopted a new rule, Regulation FD, to address the selective disclosure of information by companies and other issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities�generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information�the issuer must make public disclosure of that information. In this way, the new rule aims to promote the full and fair disclosure.


On October 19, 2000, the SEC�s Division of Corporation Finance issued a series of "telephone interpretations" that provide informal guidance on how companies can comply with Regulation FD.


The full text of SEC Regulation FD can be found at:


Note 2: Related Articles

1) BusinessWeek, January 8, 2001; Joseph Weber, �Give Fair Disclosure Time to Work�, pp. 42.

2) BusinessWeek, February 5, 2001; Susan Scherreik, �The Squawk Box Goes Public�, pp. 118.

3) Investor�s Business Daily, February 15, 2001; Ken Hoover �Earnings Surprises on Decline Under Rule FD�, pp. B1.