Selective
Disclosure Regulation Adopted
The efforts to stem selective
disclosure have culminated in formal SEC action, the
adoption of Regulation FD (Fed Sec L Rep ¶86,319).
The SEC believes it has crafted a regulation that
establishes a clear rule against selective disclosure
and encourages broad public disclosure, while at the
same time not impeding legitimate business
communications or exposing companies to liability for
selective disclosure arising from arguable but
mistaken judgments about the materiality of
information.
Selective disclosure occurs when
companies release material non-public information to
selected persons, such as securities analysts or
institutional investors, before disclosing the
information to the general public. In the SEC's view,
this practice undermines the integrity of the
securities markets and reduces investor confidence in
the fairness of those markets.
Regulation FD applies only to a
company's communications with market professionals,
and holders of the company's securities under
circumstances in which it is reasonably foreseeable
that the shareholders will trade on the basis of the
information. The regulation will not apply to company
communications with the press, rating agencies, and
ordinary business communications with customers and
suppliers. Moreover, Regulation FD applies only to
communications by the company's senior management, its
investor relations professionals, and others who
regularly communicate with market professionals and
shareholders.
The selective disclosure rules
do not create private liability. The regulation is a
disclosure rule. It does not create liability for
fraud. When the regulation is violated, the SEC can
bring an administrative proceeding seeking a cease and
desist order, or a civil action seeking an injunction
and/or civil penalties. The regulation includes an
express provision stating that a failure to make a
disclosure required solely by FD will not result in a
violation of Rule 10b-5.
Timing of Disclosure
Under the SEC rules, the timing
of public disclosures is based on the distinction
between intentional and non-intentional selective
disclosure. A company making an intentional disclosure
of non-public material information must publicly
disclose the same information simultaneously. A
selective disclosure will be considered intentional
when the person making the disclosure either knew or
was reckless in not knowing that he or she would be
communicating information that was material and
non-public.
For example, this definition
would cover situations when a corporate officer
determined to hold a conference call or a meeting that
excluded the public or selectively contacted a
particular analyst to disclose inside information. The
person making the disclosure must know that the
information about to be disclosed is both material and
non-public.
A communication would not be
intentional if it was disclosed inadvertently through
an honest slip of the tongue or because the person
mistakenly believed that the information had already
been made public. When this type of non-intentional
disclosure occurs, the company must make public
disclosure promptly. Because the disclosure was not
planned, the rules do not require simultaneous public
disclosure.
In this context,
"promptly" generally means as soon as
reasonably practicable but no later than 24 hours
after a senior company official learns that there has
been a non-intentional disclosure of information that
the senior official knows, or is reckless is not
knowing, is both material and non-public.
This separate prompt disclosure
requirement when the selective disclosure is
non-intentional is a recognition that corporate
officials sometimes make mistakes without the intent
to selectively disclose information. However, a
pattern of mistaken selective disclosure would make
less credible the claim that any particular disclosure
was not intentional.
Materiality
Materiality plays a large part
in Regulation FD, as it does in all facets of
securities law. The regulation applies to selective
disclosure of material non-public information. It does
not define the term "material," but rather
relies on the general securities law definition, which
is based on U.S. Supreme Court rulings. Thus,
information is material if there is a substantial
likelihood that a reasonable shareholder would
consider it important in making an investment decision
or if it would have significantly altered the total
mix of information made available.
Materiality does not lend itself
to a bright-line test, and the SEC acknowledges that
materiality judgments can be difficult. But the SEC
believes that concerns can be mitigated in several
ways. For example, companies can designate a limited
number of persons who would be authorized to make
disclosures or field inquiries from analysts,
investors, and the media. In addition, companies can
make sure that some record is kept of the substance of
private conversations with analysts and selected
investors. This could be done by having more than one
person present during these contacts or by recording
conversations.
A company is not prohibited from
disclosing a non-material piece of information to an
analyst even if, unbeknownst to the company, that
piece helps the analyst complete a mosaic of
information that, taken together, is material.
Similarly, since materiality is an objective test
keyed to the reasonable investor, Regulation FD will
not be implicated when a company discloses immaterial
information whose significance is discerned by the
analyst.
Means of Dissemination
The SEC rules provide that
companies can make public disclosure for purposes of
Regulation FD by filing or furnishing a Form 8-K, or
by disseminating information through another method of
disclosure that is reasonably designed to provide
broad, non-exclusionary distribution of the
information to the public. Generally, acceptable
methods of public disclosure for purposes of
Regulation FD will include press releases distributed
through a widely circulated news or wire service, or
announcements made through press conferences or
conference calls that interested members of the public
may attend or listen to either in person, by
telephonic transmission or by other electronic
transmission, including use of the Internet.
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