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