September 26, 2000
Sec Approves Rule Barring Selective Disclosure
Executive Summary
The Securities and Exchange Commission recently adopted a regulation prohibiting public companies from disclosing, to securities analysts and/or institutional investors, "material" (market-sensitive) information that is reasonably likely to affect the market without releasing the same information to the public at large. The SEC adopted the regulation since analysts or institutional investors that are privy to material nonpublic information (such as earnings reports) gain an informational advantage which they can use to make a profit or avoid a loss at the expense of the common investor.
The new regulation, Regulation FD, bars a public company, its executive officers, directors, investor relations personnel, or other employees with similar duties from selectively disclosing material nonpublic corporate information to securities analysts, other security professionals, or shareholders when it is reasonably foreseeable that those individuals will trade on the information. However, Regulation FD does not prohibit communications with selected groups, such as the press, attorneys, investment bankers, accountants, and rating agencies, that are not reasonably expected to trade on the information, nor does it prohibit selective disclosure by foreign private issuers.
Determining Materiality
Regulation FD is silent as to when non-public disclosure is "material." Therefore, the general applicable standard defining materiality under the Federal securities laws is applicable: Information is "material" if "there is a substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision or if there is a substantial likelihood that the information would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. This is the standard that the Supreme Court set forth in TSC Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) and in Basic Inc. v. Levinson, 485 U.S. 224, 231 (1988). Examples of material information may include, among other items, earnings information, significant mergers or acquisitions, significant new products or discoveries, and a change in control of a corporation.
Intentional vs. Non-intentional Disclosures
Regulation FD requires that a public company intentionally disclose material nonpublic information only through public disclosure, not selective disclosure. If the public company does make selective disclosure, then it must make public disclosure to rectify the situation. The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional.
Under the regulation, a selective disclosure is deemed "intentional" when the person making the disclosure either knew prior to making the disclosure, or was reckless in not knowing, that he or she would be communicating material nonpublic information. A public company must make public disclosure simultaneously with the intentional disclosure. When the specific disclosure is unintentional (such as a spontaneous comment in a telephone call), Regulation FD requires a public company to make "prompt" public disclosure. Prompt is defined as the later of 24 hours or the start of the first trading day after a "senior official" of the public company learns that the inadvertent selective disclosure has occurred and knows (or is reckless in not knowing) that the information is nonpublic and material.
Methods of Disclosure
Regulation FD provides several methods by which a public company can make the required public disclosure. The disclosure may be made by filing or furnishing a Form 8-K with the SEC or by means of another form of dissemination reasonably designed to provide broad, non-exclusionary distribution of the information to the public. For example, whereas the SEC noted that while a website posting alone would not provide adequate public disclosure, that posting, together with a distribution of a press release through a widely circulated news or wire service, could likely provide sufficient public disclosure.
Liability for Violating Regulation FD
Following Regulation FD's anticipated October 23, 2000 effective date, the SEC can use its existing power to bring an enforcement action, an administrative action seeking a cease and desist order, or a civil action seeking an injunction and/or civil monetary penalties against the public company or responsible individuals. However, a violation of Regulation FD will not give rise to an action under the antifraud provisions contained in Rule 10b-5 of the Securities Exchange Act of 1934 nor provide a private right of action against the issuer under those laws.
Although many opponents expressed their fear that Regulation FD may chill the flow of market information, this regulation only covers the selective disclosure of material non-public information. The SEC noted that this regulation will provide for more objective and accurate analysis and recommendations from securities analysts to the investing public and in return increase investor confidence.
Nonetheless, public companies should take immediate steps to comply with Regulation FD. At a minimum, they should limit the number of personnel authorized to provide material information about the company and monitor processes used to disseminate that material.
Please feel free to contact us if you have any questions regarding Regulation FD or if we can assist you in establishing corporate procedures designed to assure compliance with regulation FD.