SEC May Bar Selective Disclosures by Firms

The U.S. Securities and Exchange Commission may bar companies from disclosing market-moving information to securities analysts before releasing it to the general public, SEC officials said Tuesday.

“Our goal is to figure out a way to level the playing field,” SEC corporation finance director Brian Lane said in an interview. To do that, the SEC staff may recommend a new selective-disclosure rule or guidelines to the agency’s commissioners following a broader review of insider-trading regulations, he said.

The staff review, which is likely to take several months, ratchets up SEC Chairman Arthur Levitt’s effort to coax businesses to voluntarily stop selective discussions with analysts and big investors that can move stocks before other investors get the news.

In January, for example, General Motors shares rose 3.2% after the auto maker told analysts at an invitation-only meeting about plans to raise production of certain vehicles.

Last month, shares of brokerage Lehman Bros. surged 6.8% after Chairman Richard Fuld told analysts at a lunch meeting that first-quarter earnings may rise.

Levitt has called selective disclosure “a stain upon our market.” And billionaire investor Warren Buffett, in his annual letter to his shareholders Saturday, criticized companies that “matter-of-factly favor Wall Street analysts and institutional investors in a variety of ways that often skirt or cross the line of unfairness.”

Some SEC division directors and commissioner Isaac Hunt said a new disclosure standard would benefit small investors. “I am hopeful that we will be able to find a legal way to stop these practices,” Hunt said.

The SEC staff is considering one proposal that would prohibit companies from disclosing information to select groups before or at the same time that they issue a press release, said SEC general counsel Harvey Goldschmid, who is heading the review.

The SEC staff is giving the issue priority because of Levitt’s interest in the subject.

Any recommendations emerging from the review would have to be crafted into a rule proposal for consideration by the commission. If Levitt, Hunt and other commissioners vote to issue such a proposal, they would take public comments on the issue for a period before final approval.

“The SEC effort is overdue,” said Louis M. Thompson, chief executive of the National Investor Relations Institute, which represents corporate investor-relations officers. “Some people don’t know what standards are operative.”

The SEC’s enforcement director, Richard Walker, said one benefit of a new rule “would be to clear up the uncertainty among many companies and analysts about what practices to follow.”

Lehman spokesman William Ahearn said analysts at a February lunch weren’t told anything that wasn’t available to others. Fuld’s comments--that first-quarter earnings may surpass those of the same period a year ago--came in response to an analyst’s question, he said. “Any investor who would have asked the same question of investor relations would have gotten the same kind of guidance,” Ahearn said.

GM “has a keen interest in preventing selective disclosure, and we don’t use meetings with analysts for such a purpose,” said GM spokesman Mark Tanner.

Toys R Us, H.J. Heinz, Federated Department Stores and Dayton Hudson, among others, have recently excluded some shareholders from conference calls or meetings about earnings or other issues.

The selective-disclosure issue caught Levitt’s attention last year after some companies discussed financial topics on analyst conference calls, then waited hours before making a public announcement. During the interim, some companies’ stock moved as much as 25%.

Last November, Levitt said selective disclosure amounts to “cheating” and harms the integrity of U.S. markets. He also urged companies to include reporters in their analyst calls.

But some experts worry that any new SEC rule could soon be overtaken by technological change. A rule written on the basis of current Internet use could become obsolete as more people get easy access to Web sites that could be used to disseminate company information, said securities lawyer John Olson.

“It’s possible there aren’t enough Net users today for a company to post earnings and have that considered public dissemination,” said Olson, a partner with Gibson, Dunn & Crutcher. In a couple of years, though, “virtually everyone may have Internet access, with a bell ringing to signal a corporate announcement.”

SEC Chairman Arthur Levitt will be a keynote speaker at The Times’ Investment Strategies Conference May 22-23 at the L.A. Convention Center. To register, call (800) 350-3211.