For Regulation FD, Is There Life After 20?

This October marks 20 years since Regulation Fair Disclosure (“Reg FD”) went into effect. Amid a global pandemic and economic recession, it might seem odd to focus on the legacy of SEC rules implemented so long ago. But Reg FD dramatically reshaped the investor relations practice of giving forward-looking business guidance, which is again being reshaped by COVID-19. So how should companies respond?

The History of Reg FD

Reg FD mandates broad public disclosure of any material, non-public information. The rule went into effect toward the end of the “dotcom” bubble, a time when the sell-side analyst was an indispensable part of the financial community ecosystem, and accurate quarterly earnings estimates separated the best from the rest. Some companies even privately guided analysts to estimates that were closer to what would be reported, depriving the general investing public of these advance insights. One of the SEC’s principal goals for Reg FD was to reign in these back-door conversations and thereby ensure that all investors had “a level playing field.”

While some expressed concern at the time that Reg FD would cause companies to provide less information, most responded by providing more – and more frequent – public earnings guidance. According to studies by the National Investor Relations Institute, by 2003 nearly 75% of public companies provided quarterly earnings guidance, compared to just over 36% prior to Reg FD.

The irony, of course, is that the trend toward providing quarterly earnings guidance drove an obsession with short-term results by a certain segment of the market. For a while, no one questioned if this was helpful or not. But by late 2019, according to FactSet, the five-year average of S&P 500 companies providing quarterly earnings guidance was down to around 20%, significantly lower than before Reg FD opened the floodgates.

COVID-19’s Impact

The extraordinary uncertainty surrounding the COVID-19 pandemic drastically changed the guidance landscape yet again. During the first and second quarters of 2020 approximately 850 companies withdrew or suspended earnings guidance of any kind, according to The Wall Street Journal, and many corporate executives now openly predict that earnings guidance may eventually disappear.

This raises an important question: do sophisticated, fundamentals-driven, long-term investors value (or even need) near-term earnings guidance from the companies they own? If they do not, what does that mean for how companies guide toward their future results?

Five Things to Keep in Mind

  1. The earnings “game” may be over, for good. A lot of companies are withdrawing earnings guidance amidst the COVID-19 pandemic. And some executives predict it won’t return.
  2. Reg FD still applies. It’s supposed to be a level playing field out there, and all investors deserve to know the same things at the same time. Fortunately, technology makes it easier than it was twenty years ago.
  3. This is a good time to revisit your disclosure policies and practices. Chances are they were drafted when the focus was on earnings guidance, or any material non-public information with an immediate market impact. Disclosure of anything that’s forward-looking should still be broadly disclosed within the meaning of Reg FD.
  4. Get ready for more changes to the financial community ecosystem. The role of the sell-side analyst has been changing for years, and their best clients (short-term investors) have played the earnings game. What happens to them if it’s no longer there to play? And activists have a reputation for being notoriously short-term but that, too, could start to change. Some of the more prominent activists argue that it already is.
  5. We now have the opportunity to focus on a company’s long-term outlook and strategy like never before. Consider the possibility that quarterly earnings are now less important, and what matters most is the foundation you’re building for performance three or more years from now. That perspective can have implications for strategic planning, capital allocation, sustainability practices, and more.

The short-termism that resulted from Reg FD may finally be evolving into a longer-term focus by companies and their investors. If that new perspective survives the current uncertainty, for Reg FD there is indeed “life after 20.”

Alan Oshiki is an Executive Vice President at Abernathy MacGregor. He has over three decades of investor relations and financial communications experience, both as a corporate executive and advisor.

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