Is “Regulation Fair Access” next for investor relations?

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AMID deep public distrust of all things Wall Street, regulators are coming under growing pressure to act against the billion-dollar business of private meetings between corporate executives and an elite group of traders and analysts.

At the heart of the issue is whether large investors glean valuable information not available to other investors when they meet corporate executives in private one-on-one meetings or nonpublic confabs arranged by brokerage firm “corporate access” units.

There is growing evidence from studies as well as media reports that says they do.

In a lengthy article Monday in the Wall Street Journal , writers David Enrich and Dana Cimilluca explored the issue of private meetings between hedge funds, investment bankers and corporate executives.

Much of the article’s focus is on investment bankers meeting with hedge fund traders to discuss industry M&A activity, but part of it focused on how brokerage corporate access departments arrange meetings between their high paying hedge fund clients and corporate executives.

The authors state that while private meetings have been a longstanding practice “in the shadows” of Wall Street and the City of London it is now causing concern among regulators and some banks.

The article says the US Securities and Exchange Commission (SEC) “recently warned some banks… to be careful that such meetings don’t result in the improper exchange of privileged information.” Goldman Sachs has barred its bankers from meeting outside hedge-fund traders while Bank of America Merrill Lynch has reduced such meetings.

Analysts and investors believe material info being leaked

Meanwhile, further evidence that all is not well in the cozy world of private meetings comes from the findings of a recent survey conducted by researchers at PwC and the Rotterdam School of Management, Erasmus University (RSM) among some 400 international investors and analysts between March 28 and April 4.

It found that about 47% of investors and analysts say that they often receive material information in on-one-one meetings with companies. The percentage is lower in the US (39%) than in Asia, South America and Europe, which the researchers say can probably be attributed to stricter US regulations.

Commenting on the findings, Richard Sandler, Partner at law firm David Polk writes: “If this is at all accurate, this is an eye-opening result and reinforces the need for careful consideration of the timing, manner, ground rules and objectives of these sessions. Reports like this may also attract regulatory scrutiny.”

The RSM survey follows a study last year by researchers from Goethe University Frankfurt who found evidence to suggest that corporate executives are sharing material, non-public information in private earnings calls and conferences with select groups of invited analysts.

What does $3.7 billion in fees buy?

The picture the public is getting is of aggressive hedge fund traders pressuring investment bankers and executives for information that can give them an edge in their portfolios. The fund traders are paying upwards of $3.7 billion in brokerage commissions to banks, according to Greenwich Associates, and a large chunk of that pays for corporate access.

Of course, for those on the outside looking in the obvious question is “what are they getting for all that money?” Reading the comments on Journal’s website, you get a clear sense of what readers believe. One commenter points out that there is little difference between expert networks, currently the focus of several insider trading cases, and investment bank corporate access departments.

Another commenter named AJ Discala, puts it more bluntly:

This story reinforces that if you’re not on the inside, you’re going to get screwed. Hedge funds are so desperate for an advantage that private, clandestine meetings have taken on an institutional quality. Instead of receiving specific information about a pending deal, they come away with a better understanding of the CEO and his/her inclinations to make certain decisions – this is an improper relationship.

“Without a question, the big banks are receiving advanced information and access that is unavailable to individual investors. These meetings perpetuate investment disadvantages for private shareholders. How is this not a violation of the SEC?

The anger is palpable, and my sense is that the media and politicians are ready to take up the cause, not just on behalf of individual investors who comprise the bulk of their readers, contributors and voters, but for the benefit of the investment professionals who happen to work at opposing banks or who are at firms too small to be on the exclusive invite lists.

Recall that Bloomberg is currently defending itself against a copyright infringement suit for distributing a transcript of an invitation-only conference call between management at Swiss company Swatch and a group of analysts. The financial news service has made it clear that it views information in all such meetings as in the public domain.

Echoes of Reg FD

Looking at the current landscape, there are parallels with where we were in 1999/2000 in the lead up to the adoption of Regulation Fair Disclosure. There were two main impetuses for Reg FD:

• the mainstreaming of the Internet, which democratized access to stock trading via personal computers; and,
• the dot-com bubble, which focused massive public attention on the stock market and the practices of its participants.

That unprecedented public scrutiny shone a bright light on selective disclosure by management to sell-side analysts, and it forced regulators to act against the unfairness in the securities markets.

Fast forward a decade and we have a similar situation, except that this time it is global in scope and the extreme event focusing public attention on the markets is the worldwide financial crisis, which has nearly evaporated public confidence in the economic establishment.

And this time the new technology is social media or Web 2.0, which is democratizing ordinary people’s access to publishing technology and to other people, including politicians, sports personalities, musicians, actors and journalists.

Missing from the party, however, are the corporate and finance elites, who continue to operate as if the new social rules don’t apply to them. Think about it this way: if I can engage with President Obama on YouTube or send a tweet to Justin Bieber on Twitter, why can’t I do the same with the hired executives of companies of which I am a part owner?

For company executives and corporate directors to only be accessible to an elite few who pay the biggest fees to Wall Street matchmakers seems entirely unsustainable in the long run.

Where to next?

National Investor Relations Institute (NIRI) president & CEO Jeff Morgan touched on this issue in his weekly blog post yesterday when he said that the Galleon insider trading case, the Journal article and the RSM survey findings should act “as a reminder of the importance of Reg FD training and compliance.”

Unfortunately, battening down the compliance hatches isn’t going to work. If anything, it will raise the price funds are prepared to pay for access and make them even more determined to extract value from the outlay.

NIRI’s leadership will need to be more imaginative because compliance with Reg FD isn’t enough when the perception is that the rule itself doesn’t go far enough.

Either investor relations professionals will come up with innovative solutions to narrow the access divide through more inclusive IR practices, or the politicians will push regulators to do it for them.

One suggestion put forward by the RSM’s Dr. Erik Roelofsen and Professor Gerard Mertens is for companies to be more open about the 100 to 150 one-on-one meetings they hold with investors each year.

They suggest forcing companies to explicitly disclose the names of those they have talked to and when they did so. And according to their survey, 48% of investors and analysts would support this type of openness, while 22% oppose it.

That may well be part of the solution, but merely disclosing that you have met with investors in private probably isn’t going to cut it. It doesn’t democratize access, it just makes it clearer who is privileged enough to have it.

The solutions won’t be easy, and they will confront fierce resistance from many powerful players, but fairer access will become a reality for corporate executives.

The question is what role will IR and corporate governance professionals play in making that happen.

Dominic Jones

Dominic (bio & disclosures) is IR Web Report‘s founder and an online investor relations consultant. He advises leading public companies and investor relations service providers worldwide on using the web for disclosure, engagement and profile building. You can contact him via the contacts page.