A Level Playing Field, not Great for Bobsleders


New York – As early as Economics 101, we learn that the government is all thumbs in terms of hampering economic efficiency. This is especially true in the area of financial market regulation. In the investment community, most legislation is intended to protect the investor, especially the retail investor. For the record, Integrity is squarely on the side of the investor, and the protections that they need to invest with confidence in the financial markets. Still, there are a number of concerns in turning this intention into law.

Let’s face it, the primary type of law making in this area is reactive. This means that the tendency to over-regulate is very probable, since regulations tend to change most when things go wrong. Additionally, regulation always has intended and unintended consequences. Sarbanes Oxley is an example of this overstepping, raising the cost of reporting in the US well beyond costs internationally. These rules almost single handedly shifted IPO issuance from New York to London and Hong Kong.

One regulation, Reg FD, is seen as the fair-haired child of SEC regulation, since it truly exhibits the spirit of the open access to information, while not raising the cost of information transmission greatly. Reg FD is in place to constrain the selective flow of material non-public information to a limited number of recipients. As such, it has leveled the information playing field for all investors and also reduced the informational alpha of new information.

However, an article on Reg FD in Directorship, a publication that discusses boardroom intelligence, depicts the unintended impact of the legislation. In short, the board, faced with providing negative guidance to a few savvy investors holding large stakes in the company compared to the investor population as a whole, might decide not to disclose the guidance at all rather than accept the legal risk of selective information flow.

The article suggests that the dialogue between the board and the large shareholders has been dampened by this concern.


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