“ARE (ordinary investors) being played for patsies in this system? Are there really just two tiers, and the insiders are always favored?”
That question by NewsHour correspondent Maragaret Warner to Columbia Law School professor John Coffee on PBS on Friday night (MP3, 4.0 MB) encapsulates a view many Main Street investors are likely to share following last week’s headline-grabbing insider trading cases.
The three cases — the News Hacker Case, the Oyster Bar Case and the TXU Case — may heighten investors’ sensitivity to feeling like the dice are loaded against them. And that in turn is likely to make them much more sensitive to investor relations practices that treat them as second-class citizens.
The impact on the public psyche of the SEC’s swoop on illegal traders is likely to be exacerbated by the fact that it made headlines just as stocks experienced their sharpest drop in years. Consequently, not only were many more mainstream investors watching the business news, but they were seeing their own wealth dwindle amid the revelations.
And as goes Main Street, so go the politicians. The insider trading debacle comes just as companies are under intense scrutiny over executive pay, and as politicians are looking to bring in new laws to address pay and other issues.
It could be a rocky time for executives and IR departments.
Avoid two-tiered IR practices
Ultimately, the capital markets work on trust. IROs play an important role both for their companies and for the system as a whole in ensuring that people trust the markets to be fair.
IR departments control the flow and form of information to market participants and thus have the ability to ensure equivalent access to information for all investors, regardless of size or influence.
And while Regulation Fair Disclosure has resulted in less discrimination against smaller investors than there was 10 years ago, some obvious forms of favoritism persist. In countries where Regulation FD has no force, unequal treatment of investors can be particularly evident.
However, even most U.S.-listed companies still treat investors unevenly, and the offending practices may come into sharper focus for main street investors in light of mounting evidence that Wall Street is a den of thieves.
Investor presentations are a key area where IR departments should focus improvements. This includes so-called “bus tours,” which typically are not open to the same extent as other presentations. Question-and-answer sessions of presentations often are not included in archived webcasts, which means that only brokerage firms’ invited guests get to hear the most interesting parts of these events.
Companies and conference sponsors also remove access to archived events too quickly, denying interested, but less-active retail shareholders access to the information that more active professionals have access to.
IR departments should also guard against website practices that demonstrate an obviously two-tiered approach to investor relations. A simple example is to avoid offering separate information for retail investors and professional investors, including contact information.
In general, it’s simply bad form to treat individual investors differently. The practice of laying on special sections for individual investors containing summary, or “dumbed down,” information is misguided. Individuals don’t want special treatment, they want equal treatment.
On another level, segmenting people based on perceived notions of their relative intelligence is simply insulting, so just don’t do it.
IR departments also should be more proactive in using the Web to break down barriers to information. Go beyond minimum compliance standards and make an effort to use Web technologies to give the broadest possible audience access to management.
There are many ways to do this cheaply and effectively on the Web. All that’s really required is the will do them.
Reinforce corporate policies
Of course, the events of last week also offer a good reason to review your company’s disclosure policy. Does it say enough about equal treatment of investors? Does it explain how the company treats situations where it gives preferential access to select groups and individuals?
The facts in the individual cases the SEC is pursuing can also be useful as reminders to employees about company policies on insider information and trading. Consider summarizing the facts and reiterating corporate policies in an alert to executives and employees.
Companies which record and store information about identifiable investors’ activities on their websites should assess the compliance and public relations risks of their practices. Information about which investors and analysts are using a company’s website could be misused in a variety of ways if proper safeguards are not in place.
It’s important to remember that illegal trading isn’t only a concern for retail investors. Portfolio managers of large funds also are extremely concerned about information leaking out ahead of their trades in companies’ securities.
This was made clear recently when the SEC announced it was developing a database that would help them map suspicious hedge-fund trading. Part of the objective is to find out if brokerage firms are tipping off their hedge fund clients, which pay $10 billion a year in fees, to pending trades by big mutual and pension funds.
Invasive IR website tracking systems, such as that being pushed by NASDAQ Stock Market Inc. subsidiary Shareholder.com, essentially breach the confidentiality of investors’ research activities and present new opportunities for front-running.
Although the SEC has moved to make such systems illegal on websites hosting companies’ electronic proxy statements and shareholder reports, the IR profession in the form of its associations and trade press has been strangely mute on the issue.
The silence is unfortunate because, as last week’s insider trading cases show, the actions of few can have widespread consequences for the reputation of an entire profession.