We know that corporate insiders often have access to material nonpublic information that can have a significant potential impact on stock prices. When some investors have access to insiders and others don't, the former can have a significant trading advantage. In order to prevent selective disclosure by insiders to some but not all investors, the SEC adopted Regulation FD:
Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities—generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information—the issuer must make public disclosure of that information.
Recent research suggests that Reg FD has not fully leveled the playing field:
Executives of publicly‐traded firms spend considerable time meeting privately with investors, despite regulation restricting their ability to convey material nonpublic information. Using a set of records of all one‐on‐one meetings between senior management and investors for a NYSE traded firm, we investigate which funds meet privately with management and the consequences of these interactions. We find that hedge funds, large block holders, geographically close investors, and investors with higher turnover meet more frequently with management. We also find that trades are more correlated among funds that meet with management and these trades better predict future performance. Overall, our results suggest that private meetings help some investors make more informed trading decisions.
Which confirms that (a) private meetings with investors persist despite Reg FD and (b) investors privileged to participate in such meetings still get a significant advantage when trading.
The Federal Reserve is not subject to reg FD, of course, because it's not a Securities Exchange Act of 1934 reporting company. Yet, if private issuers shouldn't be giving select investors an informational advantage, shouldn't the same principle apply to the government.
The WSJ today reported that:
Hours after an Aug. 15 meeting with Federal Reserve Chairman Ben Bernanke in his office, Nancy Lazar made a hasty call to investor clients: The Fed was dusting off an obscure 1960s-era strategy known as Operation Twist. ... Ms. Lazar is among a group of well-connected investors and analysts with access to top Federal Reserve officials who give them a chance at early clues to the central bank's next policy moves, according to interviews and hundreds of pages of documents obtained by The Wall Street Journal through open records searches. Ms. Lazar, an economist with International Strategy & Investment Group Inc., wouldn't comment for this article. ...
Mr. Bernanke discusses only matters already public, a spokeswoman said. But hedge fund managers and Wall Street executives who meet regularly with him and other Fed officials—both in his office and through advisory committees—say they get valuable insights during the face-to-face talks.
I find this quite astonishing. Basically it means that the Fed is tipping off select investors who use what they learn to reap trading profits by trading with less well informed investors. If the policy against selective disclosure makes any sense, it ought to apply to the Fed as much as to private issuers.
