[VIEWPOINT]Disclosure rule is not always fair

The fair disclosure rule took effect one month ago. The rule forbids managers and employees of listed companies from providing critical information to selected parties. Korea is the second nation to adopt such a regulation. The first was the United States, which introduced the rule in October 2000.

Occasionally Korean companies offered information to securities analysts selectively in return for what was possibly a worthwhile recommendation for investment. Then the analysts presented the inside information to their clients, which frustrated minority shareholders. Institutional investors also benefited from inside information, which was often used to manipulate stock prices. The fair disclosure rule was adopted to prevent negative side effects from any unfair distribution.

Investors are interested in stock prices. Arthur Levitt, chairman of the U.S. Securities and Exchange Commission, introduced the rule in the United States. He believed that because companies give information to favored parties, minority shareholders were distrustful of the stock market and thus investment in the stock market decreased. There were conflicting opinions. Although the rule might reduce any unfair distribution of information, the amount and quality of information that flew into the stock market would deteriorate. Stock prices would then drop and, due to insufficient information, the fluctuation of stock prices would become severe. Laura S. Unger, a Securities and Exchange commissioner who took the helm of the commission after Mr. Levitt, opposed the introduction of the rule from the beginning. Research on the effects of the rule confirmed that such phenomena actually occurred.

Similar occurrences have been observed in Korea even after the rule went into effect in early November. Stock market authorities seem to enjoy an increase in the number of disclosures. In November, disclosures totaled 64 per day, up 40 percent from October. However, the rise in the number of disclosures does not necessarily mean a larger supply of information. Instead, the quality and the amount of information are dwindling. Investors say that much information provided according to the fair disclosure rule is close to garbage, such as corporate promotional information, and that is evidence of a deterioration in the quality of information. Com-panies are reporting the kinds of information that was once distributed at news conferences, production and investor relation sessions to the Financial Supervisory Service in fear of violating the fair disclosure rule. Moreover, a series of news conferences on next year's business outlook has been canceled, and managers and executives were told to keep their mouths shut. Some company officials recommended strict supervision of e-mail and mobile phone usage. They are avoiding securities analysts and fund managers because they might let slip business information during a conversation with an outsider and be reprimanded for violating the rule. At this point investment related business information is available only through an official release from a single source. Therefore, even information involuntarily given away has vanished.

The advocates of the fair disclosure rule did not understand the process of creation of information, or they ignored it. Information does not exist by itself. Many people have bits and pieces of information related to their companies. It is impossible for one person to know everything happening in a company. When someone finds useful and accurate information and processes it in a way that is presentable to investors, the information then becomes valuable. This was the job of securities analysts and fund managers. They benefited from a relatively higher rate of return and commission in return for producing quality information. The fair disclosure rule prevents whomever needs information from aggressively producing the information. Now investors can rely only on information unilaterally supplied by companies. This is why in the United States the demand for abolishing the fair disclosure rule remains strong.

* The writer is a vice chairman of the Center for Free Enterprise.

by Kim Chung-ho