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SEC
Commissioner Hunt Suggests Changes to Proposed
Selective Disclosure Rules
Proposed Regulation FD,
if adopted, "would be extremely costly to
corporations and provide little benefit to
investors," in the view of SEC Commissioner Isaac
Hunt. Addressing the Ray Garrett, Jr. Corporate and
Securities Law Institute in Chicago, Commissioner Hunt
emphasized that selective disclosure is a problem the
Commission needs to address immediately. However, he
offered several changes that would make the rules that
were proposed last December less burdensome.
Regulation FD would
require SEC registrants to provide fair disclosure of
material nonpublic information. If a registrant knows
that it is going to disclose such information to
someone such as a securities analyst, the rule would
require disclosure to the public at the same time. If
the registrant learns that it has unintentionally
disclosed material nonpublic information, it would
have to promptly (within 24 hours) make full public
disclosure.
Reduction of scope
Commissioner Hunt said
he would like to reduce the proposal's scope in three
ways. First, he would have Regulation FD apply only to
material communications that are not made in
connection with an offering of securities. He said he
has asked Chairman Arthur Levitt and Corporation
Finance Director David Martin to schedule a series of
roundtable discussions on the easing of restrictions
on communications made during the offering process,
which raise many more difficult questions than the
traditional analyst conference call. He noted that the
proposal would affect Sections 5, 11 and 12 of the
Securities Act, as well as the disclosure of material
nonpublic information by the issuer. For example, he
asked, could the proposed safe harbor from Section
5(b) be used to circumvent the prohibition against
offers during the waiting period? Why not also provide
a safe harbor from Section 5(c)? Why does the proposal
cover roadshows conducted by reporting companies, but
not those in connection with a company's initial
public offering?
Second, Commissioner
Hunt would limit Regulation FD's scope to material
communications made by an executive officer of the
issuer and persons charged with the responsibility of
either investor relations or public relations for the
issuer. It is rare for other employees to have
material discussions with analysts or institutional
investors, so this limitation would make it easier for
issuers to implement procedures for the disclosure of
material nonpublic information. This also should
eliminate the problem of "unintentional"
disclosures, he said.
Third, Regulation FD
would apply only to material communications made to
analysts or institutional investors. "I believe
by narrowing and better defining the scope of
Regulation FD, companies will be in a better position
to implement changes that would more effectively
reduce selective disclosure," explained the
Commissioner.
Methods and timing
His second set of
changes would deal with the methods available and the
timing associated with publicly disclosing material
nonpublic information. The default requirement would
be the filing of a Form 8-K (or Form 6-K for foreign
issuers). However, Commissioner Hunt would require the
filing to be made either the same business day, if the
disclosures are made before or while the markets are
open, or the next business day for a disclosure that
is made at the close of the market.
Next, he would allow a
company to make public disclosure by submitting the
material information to the SEC within two business
days, provided that the analysts or institutional
investors to whom it is first disclosed agree to keep
the data confidential for the earlier or two business
days or until it has been submitted to the SEC. This
would allow companies to continue to have one-on-one
discussions with their analysts and institutional
investors, subject to an embargo until the information
can be made public, for the protection of small
investors. While submitted through EDGAR and available
to the general public, the information would not be
"filed" with the SEC, thereby avoiding
liability under the Securities Act or under Section 18
of the Exchange Act. The only liability would be under
Rule 10b-5.
Commissioner Hunt's
final suggestion was that a company could make public
disclosure by allowing access to a conference call or
presentation through its web site or through a
toll-free telephone number, but only if a transcript
or summary of the material information disclosed is
submitted to the SEC within two business days. This
would ensure disclosure to small investors who may not
receive effective notice of a conference call,
particularly if one that is not regularly scheduled.
Commissioner Hunt
concluded by asking his audience to help find
solutions to the tough problem of selective disclosure
that will "first, do no harm."
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