The Australian Securities and Investments Commission's decision to catch companies giving out price-sensitive information to analysts and selected investors by sitting in on their briefings won't win the regulator any awards for its intelligence-gathering acumen.
The response from corporate lawyers specialising in disclosure ranged from confusion to wariness at ASIC's decision to use spot checks on briefings between brokers and companies to crack down on what is essentially insider trading.
Selective disclosure is an age-old practice among companies and their important constitutes - analysts and institutional shareholders. Some companies follow the rules assiduously but plenty don't.
One large Sydney-based company that hosed down analysts' expectations about two months ago springs to mind. Out of nowhere a series of analyst downgrades emerged at the same time but no official announcement from the company. This particular incident contained a smoking gun but it is still circumstantial.
In this case the chats between the company and the analysts would have been on a one-on-one basis. And there is no way controversial or questionable snippets of information are going to change hands with an ASIC operative sitting around at the briefing.
With its limited arsenal against undemocratic release of information to the market, ASIC has chosen the deterrent route.
The spotlight is on the practice thanks to Newcrest's apparent bungling of its market update on earnings and production last month. After several individual conversations with analysts several produced reports with the same general theme in the days before the announcement by Newcrest to the stock exchange.
The outing of Newcrest has resulted in a flurry of investigations. ASIC is taking a couple of months to look at the circumstances and the company has begun an internal probe. But its scope and result remain clouded by the fact Newcrest chairman Don Mercer has already announced: "We don't think we have done anything wrong".
However, compliance questions will be visited by investment banks of their analysts' practices. Not just those reporting on Newcrest but across the board.
It is important to remember that the tipper and not just the recipient fall under the microscope on potential matters of insider trading.
It's particularly interesting that ASIC commissioner Cathie Armour made her first big announcement on selective disclosure, given her background as legal counsel for Macquarie Capital, the country's largest investment bank.
Armour's move from poacher to gamekeeper equips her with insight into the relationship between listed companies and stockbroking analysts. It is another reason the ASIC strategy of spot checks appears even stranger.
One can only conclude Armour is firing a shot across the bows in an attempt to spook those that stray too close or stepped over the line.
Only last year ASIC produced more guidance for companies about continuous disclosure but the fundamental rules remain the same. Companies are not allowed to selectively give out market-sensitive information. The grey area then arises from what is market-sensitive. Suggesting to individual analysts that their earnings projections are, say, too optimistic is the classic case of revealing too much, a method still regularly used to avoid disclosure shocks and the accompanying share price selloff.
There is nothing illegal about speaking to analysts on broader topics or on granular detail that is not price-sensitive, and it is that intimate understanding of the companies and sectors that provides value. They have every right to ask questions and it is up to the companies to be circumspect with answers.
ASIC regulatory guide 62 sets out clear procedures on briefing analysts. For example: "Confine your comments on market analysts' financial projections to errors in factual information and underlying assumptions. Seek to avoid any response which may suggest the company's or the market's current projections are incorrect. The way to manage earnings expectations is by using the continuous disclosure regime to establish a range within which earnings are likely to fall. Publicly announce any change in expectations before commenting to anyone outside the company."
Ironically this note was written in August 2000, only a few months before one of the most controversial cases of alleged selective disclosure hit the limelight.
A big investigation was undertaken into Brambles' disclosure practices after the announcement of an earnings downgrade and a private briefing to a CSFB analyst. The incident had been referred to ASIC by the ASX.
Then chairman of ASIC, David Knott, concluded nothing untoward took place, with no evidence of insider trading. But there was failure to adhere to some disclosure principals set out in the regulatory guide 62, and the company had allowed the perception of unequal disclosure to arise.
The episode left the industry rattled. The forensics around Newcrest will do the same. But whether it will alter the culture or help to narrow the gap between the information haves and the have-nots depends on how far ASIC is prepared to go.