Cramer: New SEC Rules

N E W   Y O R K, Oct. 30 -- — It’s time to confront the reality of the new government regulations that govern the timely disclosure of information.

It’s time to evaluate what the Securities and Exchange Commission’s rule has done and recognize that it has made the stock market into a much larger game of chance than ever before.

And, as a totally unintended beneficiary, it has made financial journalists ludicrously indispensable because analysts now know no more than reporters and at the same time can’t be as honest as reporters, because of the usual institutional constraints on the investment banking side as well as a whole host of protocol that makes it tough to favor one client (the broker customer) over another (the corporate client who pays a much larger bill).

Money Made by Some, Not All

First, understand that the SEC meant well when it stopped the conduit, the back channel, between favorite analyst on the sell side (broker side) and the financial people at the companies. Before the rule, there was an informal process by which information was dispensed. Let’s say National Gift Wrap was worried that Remarc Brothers, a major brokerage firm, was carrying too high an estimate for next quarter. National Gift’s chief financial officer could call the analyst and say, “Hey, shade that down a penny or two, will you? You’re too high.”

Then, within the healthy confines of a reiteration of a buy, the analyst would cut numbers a bit, or shade them by a penny, which would allow the stock to go down gently over time. It was a terrific process for smoothing the volatility of a stock to the downside when something minor had gone wrong. But it got abused.

Some of the analysts called their favorite buy-side customers (mutual and hedge funds) and gave them a heads-up that they would be cutting numbers for the National Gifts, and the buy-side customers would have a crucial heads-up to be short the stock, or bet against it, and money would be made by some but not all.