The Securities and Exchange Commission is promising to review its rule regarding what companies can say ahead of an initial public offering. The move is long overdue, especially in the wake of the botched Facebook (FB) public stock sale.

For one thing, the rules surrounding the "quiet period" are confusing because, as the SEC website itself notes, the term isn't defined in federal securities laws. The Wall Street Journal, which broke the story, notes banks involved in IPOs are allowed to communicate with clients ahead of the sale but are forbidden to broadly distribute research.
 
The rules are designed to prevent companies from jumping the gun by releasing market-moving information to some investors and not others. Ironically, that's precisely what lawsuits against Facebook and its underwriters accuse. Some companies also observe a quiet period around the release of quarterly earnings though some experts have argued that it is not required.

Much of the recent incidents involving quiet-period violations involving Groupon (GRPN), Salesforce.com (CRM) and Google (GOOG) appear to have been settled by amending SEC registration statements. In Facebook's case, it appears as though other SEC rules governing the disclosure of non-public information such as Regulation FD were also not followed. The company and the banks involved have denied wrongdoing.  

If the quiet period rules were enforced robustly, the Wall Street Journal, New York Times and CNBC wouldn't be able to function. A company that wants to get its message out will do it, or seasoned reporters will uncover the information anyway.

The media often learns about IPO roadshows that are supposed to be top secret because those involved blab for a variety of reasons. Some fund managers and investment bankers love to chat with reporters about hot deals' so long as the information is not attributable to them. Ditto for the elite group of M&A public relations agencies. Publicity to these people is like heroin and in the case of bankers is priceless marketing to help them win the next deal.

The real losers are small investors who can't make informed investment decisions because they lack access to relevant, timely information. The SEC needs to strike a balance between free speech and consumer protection that the current quiet period rules seem to be lacking.

--Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr.

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