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‘Reg FD’ is broken, time to throw out the rulebook


Fourteen years ago the SEC passed a well-meaning but comically ineffective rule called Regulation FD. Short for "Fair Disclosure," Reg FD amounted to mandating that companies disclose all material information to the public as a whole or to no one at all. What seemed hopelessly idealistic at the time has become all but laughable 14 years later in the age of social media and quasi-insider activist funds.

“To think that every material, interesting piece of information is going to be issued in a sanctioned form to everybody at once is totally hopeless,” says Yahoo Finance’s Mike Santoli in the attached video. “I don’t believe that’s an achievable goal. We probably shouldn’t even have it as an objective.”

As Steven Davidoff points out in today’s New York Times social media platforms now qualify as appropriate venues for disclosing material company information. Specifically, the SEC said it was fine for Netflix (NFLX) to use Facebook (FB) as a platform to announce it had streamed a billion hours of content. That pretty much gave every platform from Twitter (TWTR) to MySpace the right to claim status as an official platform for disseminating financial news.

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Like all poorly constructed regulations, Reg FD caused at least as many problems as it solved. Among the unintended consequences was companies hiding behind the guideline to issue investors even less information. Without having a functional definition of “material information” communications of all sort became immediately suspect.

More insidiously Reg FD is just another rule that only the most gullible actually believe. The absurdity of nothing “material” being discussed when activists meet with company management is just another reason for mythical Main Street investors to distrust Wall Street.

Medical students are taught a Latin phrase primum nil nocere. It roughly translates to “first do no harm” and forms the ethical basis if not literal meaning of the Hippocratic Oath.

From Reg FD to insider trading to the banks now labelled as felons but not put out of business, Wall Street regulations are a hodge podge of fictions and cynicism designed not so much to get criminals indicted as to lure the suckers into the tent. We’d be better off tearing them down and starting from scratch than laboring to come up with ways to modify ancient rules to the internet age.

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