Kristian Allee is Associate Professor and Garrison/Wilson Chair in Accounting at the University of Arkansas Sam M. Walton College of Business. This post is based on a recent paper authored by Professor Allee; Brian Bushee, Geoffrey T. Boisi Professor of Accounting at the Wharton School of the University of Pennsylvania; and Tyler Kleppe and Andrew Pierce, PhD candidates at the University of Arkansas.
The practice of firms selectively disclosing nonpublic information to analysts and preferred investors has been a longstanding concern for regulators. The Securities and Exchange Commission (SEC) promulgated Regulation Fair Disclosure (Reg FD) in October of 2000 with the goal of mitigating the practice of firms selectively disclosing material nonpublic information. Although the initial wave of post-Reg FD academic studies found that Reg FD was effective in “leveling the playing field” for all investors, more recent studies find that private meetings with managers provide investors with significant trading advantages and possibly undermine the intent of Reg FD. In our paper, Did the Siebel Systems Case Limit the SEC’s Ability to Enforce Regulation Fair Disclosure?, we posit that the mixed evidence in the Reg FD literature could stem from the failed 2005 SEC enforcement action in SEC v. Siebel Systems, Inc. (hereafter Siebel), which challenged the SEC’s ability to subsequently enforce Reg FD. After this ruling, managers likely perceived a lower probability of Reg FD enforcement and had incentives to return to some degree of selective disclosure.