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Law Professors Submit Brief Defending Regulation FD

A number of distinguished securities law professors have filed an amicus brief in support of Regulation FD. The brief, which was filed in response to an SEC enforcement action, emphasizes that Regulation FD corrected the deleterious market impact of selective disclosure and left the market more efficient, protected the independence of analysts and increased the flow of publicly released forward-looking information (SEC v. Siebel Systems, Inc., SD NY, March 10, 2005).

The brief was praised by Enforcement Director Stephen Cutler as a compelling defense of the SEC's authority in this area. He also affirmed that Regulation D embodies the Commission's commitment to information transparency and to fair markets where average investors can feel they are not being victimized by whispers among the denizens of Wall Street club rooms.

Regulation FD, which was adopted in 2000, prohibits the selective disclosure of material nonpublic information to analysts and other persons. It provides that a company that discloses such information to securities market professionals, or to shareholders who may trade on the basis of the information, must also publicly disclose that same information simultaneously if the selective disclosure was intentional or promptly if it was non-intentional.

The brief states that Regulation FD's prohibition against selective disclosure promotes fairness and efficiency by leveling the playing field between privileged and ordinary investors. Further, by reducing the ability of some securities professionals to trade on material inside information, Regulation FD produces greater transparency and makes the market a fairer and more efficient place. Regulation FD enhances the integrity of securities analysts by eliminating the environment in which corporate insiders used selectively disclosed information as a form of currency to reward favored analysts.

The law professors' brief also contends that, far from being a sweeping ban, Regulation FD is more accurately described as a set of prohibitions restricting the ability of professionals, who are directly regulated by the SEC, from receiving material, nonpublic information. The Commission's approach in Regulation FD to broaden the ways of informing investors is a natural and sensible means of keeping securities regulation current and effective.

According to the law professors, the principal authority for the adoption of Regulation FD is section 13(a) of the 1934 Act, which, by explicit reference to the twin statutory aims of the proper protection of investors and insuring fair dealing in the security, gives the SEC the power to require the filing of information to keep a registration statement current. In turn, this authority is the foundation for the continuous disclosure system for public companies. While section 13(a) speaks in terms of filings, the law professors said the SEC has the flexibility to respond to the perceived problems of evolving markets and to provide an alternative means of making documents public through Regulation FD in order to achieve a fundamental statutory purpose through current information technology.

The brief also rejects the argument that section 409 of the Sarbanes-Oxley Act, which mandated a rapid and current disclosure system, suggests that before 2002 the SEC lacked the authority to adopt Regulation FD. The professors believe that section 409 merely placed a Congressional imprimatur on the SEC's ongoing effort to create a more comprehensive system of disclosure.

The professors, in responding to the First Amendment concerns raised in earlier briefs, emphasized that Regulation FD is nothing more than an ordinary regulation of commercial activity like hundreds of other nondisclosure, mandatory disclosure and other commercial regulations. The professors noted that those briefs have sought to use the First Amendment as a means to escape ordinary commercial regulation, but said that taking this claim seriously would cast a suspicion on large portions of the securities laws, as well as on many other areas in which commercial or criminal communication is regulated.