Depending on who's talking, the U.S. Securities and Exchange Commission's new regulation on fair disclosure, known as Reg FD, will either put securities analysts out of business or have little, if any, effect on their profession.
Under the new regulation, companies will begin disclosing everything under the sun to the public, or they will clam up. The regulation will either help individual investors or overwhelm them with information they are ill-equipped to use.
In the six weeks the rule has been in effect, it has already changed the way some investor-owned hospital chains convey information. Whether they choose not to whisper in an analyst's ear or publicly release more information than they did previously, companies are becoming more cautious in their communications procedures.
Consider Health Management Associates. The Naples, Fla.-based rural hospital chain in the past has eschewed holding a telephone conference call with analysts to discuss results, instead limiting earnings information to a quarterly press release and to investor conference presentations. But on Oct. 17, just six days before the new SEC regulation officially took effect, the company issued two press releases: one to announce earnings results for the most recent quarter and the other to announce "fiscal year 2001 objectives."
The second release was crafted specifically to conform to the new regulation, says HMA Chairman and Chief Executive Officer William Schoen. It consisted of a list of measurements, from revenue to admissions growth, with acquisition objectives and interest expense amounts. It gave the company's targets for each category. Objectives would be amended if they changed significantly, the company stated.
"We had several discussions in our company on how we could conform to the regulation to the letter of the law, and basically we ended up with the decision to put out, right when we announced our earnings in October, a sheet outlining our objectives for the year 2001," Schoen says. "By doing so, we basically set guidelines, and it went to everybody. It went out to the press, it went out on our Web site, it went out to analysts."
In issuing Reg FD, the SEC attempted to take on selective disclosure. Put simply, the regulation requires any organization that issues registered securities, including publicly traded companies, to broadly disclose any information it gives to securities analysts, select shareholders or bondholders who may make trades based on the information (See chart).
Penalties for noncompliance can include a civil action brought by the SEC and fines.
"Reg FD does not preclude one-on-one talks with a financial analyst," says Harold Degenhardt, an SEC district director in Fort Worth, Texas. "What it does do is make one be on-guard."
Some companies are clearly changing their practices to meet the new standards, whereas others have not appeared to shift gears.
Tenet Healthcare Corp., like HMA, issued a press release Nov. 15 that it probably would not have released in a world without Reg FD. The release summarized admissions trends, cash flow and physician-related losses for the Santa Barbara, Calif., company's first two months of the quarter ended Nov. 30.
The release came shortly before Tenet was to make a presentation at an investor conference sponsored by Credit Suisse First Boston in Phoenix.
"We need to know before we go to an investor conference or before we have a conference call what forward-looking statements we're going to be making," says Tenet spokesman Harry Anderson. "Those are the things we need to put out simultaneously with or before those meetings."
The regulation in a way makes life easier for investor-relations managers, because the information gets to everyone at the same time and fewer follow-up calls need to be made to individual analysts, Anderson says.
Dallas-based Triad Hospitals encountered Reg FD at a particularly sensitive moment in its evolution, just as it was grappling with the pending purchase of Brentwood, Tenn.-based Quorum Health Group in a deal that will effectively double its size. The deal is not likely to be completed until early next year, but Triad Chief Financial Officer Burke Whitman says he is already thinking about disclosures the company will probably make because of Reg FD.
"It does change the landscape somewhat," Whitman says.
Whitman says Triad has not issued press releases similar to HMA's and Tenet's, "but I'll tell you, we have considered doing something along those lines, particularly as we get closer to being able to discuss our plans with Quorum."
A release would probably detail which hospitals the company plans to divest, the time frame of the acquisition, and what the financial numbers of the combined company will look like.
Some argue that the new disclosure rules will render analysts obsolete, because it prevents companies from giving analysts exclusive information unless those analysts agree to sign a confidentiality agreement.
One healthcare analyst, who asked not to be named, says the new rule may result in big fluctuations in stock prices because companies will not hint at earnings shortfalls to analysts until they release the information publicly, which will have a more volatile effect on share price.
Healthcare analyst Joseph Chiarelli, of J.P. Morgan Securities, says he has found that companies forthcoming with information in the past are now keeping quiet because they don't want to become the first bad example under the new regulation.
"Has it changed relationships?" he says. "I think it has."
Chiarelli says the regulation will make it more difficult for analysts to come to insightful conclusions about the companies they cover.
"Then again, it might separate the wheat from the chaff when it comes to analysts," he says. "It will make good analysts more valuable and others superfluous."
The SEC's Degenhardt agrees.
"It will force them to go back to the old way of doing things, which is working and doing analysis rather than expecting companies to hand them the information on a silver platter."
Degenhardt has several simple compliance suggestions for companies.
Give plenty of notice for quarterly earnings conference calls, he says. One day's notice is probably not enough. It is also a good idea to ensure that compliance with fair-disclosure rules be a part of a company's ethics policy.
"Make your legal counsel your best friend in establishing a program, much like you have a compliance program on antitrust issues," Degenhardt says. "Expand that manual to include a discussion on Reg FD."
No hospital chain administrator interviewed said he or she expected to incur significant compliance costs. Patricia Ball, Triad's spokeswoman, says company personnel have attended workshops and spent time with SEC officials to make sure personnel understand the government's expectations.
"It's just one more item on the checklist," she says.