Regulation Fair Disclosure (Reg FD) attempts to level the playing field for investors, stating that any “informational edge” should be due to investors’ “skill, acumen, or diligence” rather than “from their superior access to corporate insiders.”[1]However, Reg FD does not prohibit private meetings between companies and their investors, and evidence is mounting that investors gain informational advantages from these private meetings.[2]

The “superior access” Reg FD aims to prevent can occur either via preferential access to private meetings or via preferential disclosure within those meetings. We already know that some professional investors, especially those from large investment firms, are more likely to gain access to private meetings.[3] However, we cannot see what transpires in those meetings; is it possible that preferential disclosure occurs there? That would suggest that the current disclosure environment is an unlevel playing field – even among professional investors granted private access.

To date, there are three proposed solutions to address possible informational advantages that result from private meetings. First, at the extreme, some have called for the SEC to prohibit private meetings.[4] Second, opting for a more moderate approach, recent updates to standards of practice and ethical principles by the National Investor Relations Institute (NIRI) emphasize how firms must provide fair and equal access to all investors,[5] essentially ending preferential access to private meetings. This solution establishes a level playing field only if there is no preferential disclosure within private meetings. If preferential disclosure continues even with equal access, certain investors will still gain an informational advantage. Third, as a further precaution, SEC guidance and NIRI standards call for firm representatives to carefully consider the materiality of information prior to any private meetings in order to limit preferential disclosure in those meetings.[6]

In a new study, we provide evidence on the feasibility of these solutions. We solicit participation from 273 investor relations officers (IROs) in two controlled experiments. These experiments document that IROs engage in preferential disclosure by disclosing more to preferred investors on multiple topics. This occurs even though (1) different investors ask IROs the exact same questions and (2) IROs perceive all investors as equally knowledgeable. These results challenge the feasibility of the second proposed solution above. Granting equal access to private meetings cannot lead to a level playing field when IROs engage in preferential disclosure.

We also investigate the effects of the third proposed solution: How does careful consideration of information materiality, as advocated by the SEC and NIRI, affect preferential disclosure in private meetings? Unfortunately, our results show that prompting IROs to consider information materiality before a private meeting does not constrain and may even exacerbate preferential disclosure. That is, materiality consideration either has no effect on IROs’ disclosures or the gap widens between what more and less preferred investors receive. Thus, careful materiality consideration cannot level the playing field, even among investors granted private access.

So, we are left with the most extreme of the three proposed solutions – Should the SEC prohibit private meetings altogether? Data from our study alone cannot conclusively answer this question. However, our results show that the current flexibility in Reg FD allows IROs to disclose different information to preferred investors, suggesting that Reg FD is not fully meeting its stated goals. Further, the SEC’s focus on materiality consideration does not appear to be an effective solution. When taken in conjunction with prior research that documents informational advantages from private meetings, our results suggest that regulators consider eliminating private meetings if they wish to eliminate preferential disclosure and truly create a level playing field as was initially intended with Reg FD.

One option is for the SEC to mandate that all investor meetings be publicly webcast.[7] Some companies already voluntarily do so.[8] Such a change would entitle all investors to the same information at the same time and is consistent with arguments by legal scholars that preferential disclosure of even immaterial information should be considered illegal.[9] This change also helps address SEC concerns about protecting nonprofessional investors. We observe preferential disclosure between two groups of professional investors who ask the exact same questions. This unlevel playing field is likely even more severe when considering nonprofessional investors, who generally do not even have access to private meetings.

ENDNOTES

[1] Securities and Exchange Commission (SEC) (2000) Final Rule: Selective Disclosure and Insider Trading. https://www.sec.gov/rules/final/33-7881.htm

[2]  For example, see the following two studies:

Campbell J.L., Twedt B.J., Whipple B.C. (2021). Trading prior to the disclosure of material information: Evidence from Regulation Fair Disclosure form 8-Ks. Contemporary Accounting Res. 38(1):412-442. https://doi.org/10.1111/1911-3846.12610.

Durney MT, Kyung H, Park J., Soltes E. (2023). What Makes Managers’ Private Disclosures Informative? Evidence from Professional Investors’ Perceptions. Working paper, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4211877.

[3] Brown L.D., Call A.C., Clement M.B., Sharp N.Y. (2019). Managing the narrative: Investor relations officers and corporate disclosure. Journal of Accounting and Economics 67:58-79. https://doi.org/10.1016/j.jacceco.2018.08.014.

[4] Sorkin A.R. (2021). Anyone can manipulate the market. Here’s how to fix that. The New York Times. https://www.nytimes.com/2021/02/02/business/dealbook/gamestop-markets-trust.html.

[5] National Investor Relations Institute (NIRI) (2023) Standards of Practice for Investor Relations, 7th Edition.

[6] NIRI (2023); Securities and Exchange Commission (SEC). (2010). Regulation FD – Section 101. Rule 100: General Rule Regarding Selective Disclosure. SEC Compliance and Disclosure Interpretation. (June 4). Washington, DC: SEC. https://www.sec.gov/divisions/corpfin/guidance/regfd-interp.htm.

[7] Asay H.S., Durney M.T., Witz P. (2024). Private access and professional investor judgments. Working paper, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4740875.

[8] For example, see Progressive’s policy here: https://s24.q4cdn.com/447218525/files/doc_downloads/other_important_documents/Investor_Relations-Policy.pdf.

[9] Davidowitz A.S. (2014). Abandoning the mosaic theory: Why the mosaic theory of securities analysis constitutes illegal insider trading and what to do about it. Washington University Journal of Law & Policy 46:281-303.

This post comes to us from professors H. Scott Asay at the University of Iowa, Shana Clor-Proell at Texas Christian University, and Michael T. Durney at the University of Iowa. It is based on their recent paper, “Behind Closed Doors: Preferential Disclosure in Private Meetings,” available here.