Reg FD and the new information consultants

I have made it clear (e.g., here) that I'm no fan of Regulation FD, which was supposed to create a level playing field for the so-called ordinary investor. One possible effect has been to reduce the overall flow of information, and therefore market efficiency. But one would expect a second effect: the information finds some other way into the market. This is apparently exactly what's happened, according to a big article on the front page of today's WSJ.

Many law professors, including me, have received in the email somewhat mysterious "invitations to consult." I discarded mine, because that's just not how I get involved in consulting/expert gigs. But they sent one to the WSJ's Peter Lattman, and he evidently saw the story, turning it over to the WSJ's Laurie Cohen.

Here's the deal: Gerson Lehrman has set up a network of paid consultants that fills the information gap dug by Reg FD. Many of these consultants work deep in industries that big investors need information about and they're willing to pay a lot.

Theoretically, it's not insider trading because the firm deals in atoms of information that are material only when the buyers of the consulting service assemble them into molecules or globs. But as the WSJ article points out there are two problems. First, the consultants may cross the materiality line. Second, many firms have policies preventing this sort of moonlighting – precisely to police conflicts of interest that might cause employees to cross the line.

So here's the upshot: Before Reg FD, firms controlled their information and who got it. Then Arthur Levitt, corporate reformer, came along, and decided that investors needed a "level playing field." Super-dumb move because the information playing field can't possibly be level, and it's a scam for the SEC to imply otherwise.

But information still wants to be free. So the result is that the information goes underground, a market is created that helps undermine firms' property rights in their information, and the playing field becomes even less level.

This reminds me of the Williams Act, which was supposed to level the takeover playing field, but like Reg FD drove information underground to arbs like Boesky.

Of course firms can fight this with stricter policies against such conflicts. But as the WSJ article indicates, this will just drive the buyers to firms' suppliers (in an increasingly outsourced world) and to former employees.

Aren't we glad we have a level playing field now?

Comments

[Dominic Jones]

What proof do you have that companies controlled their information before FD? They did not. Management spoon fed analysts and investors selectively, which gave them an advantage over the rest of the market and removed the incentive for pros to do their homework. There was nothing stopping people doing their own legwork, but few bothered.

FD took away the spoon feeding, gave everyone access to the same information and created a more competitive environment. To get an edge today analysts and investors either have to be smarter or they have to do what they should have been doing all along -- kicking the tires on investments.

That's what I see happening here. Some healthy second-guessing by investors and analysts. If management is telling the truth, then they shouldn't have anything to worry about. If employees provide information in breach of company policies, they should be fired.

If nothing else, the WSJ story is evidence that FD works. Industry pros actually have to work for their commissions/fees. Surely that's a good thing.