Fair Disclosure Rules: Knowing When Not to Say
Published: Sunday, October 01, 2000
But for those companies that have gone public, SEC has its own set of rules to regulate what companies can say generally. And there is a plethora of plaintiff’s lawyers waiting for yours to make a mistake.
And now, SEC has issued yet another rule and presented all the lawyers another opportunity to do just that.
On Aug. 15, SEC adopted “fair disclosure” rules, appropriately denominated Regulation FD. They address selective disclosure of material nonpublic information by publicly traded companies (“issuers”) to securities market professionals, institutional investors and others likely to trade on that information. SEC’s intent is to promote broader and fairer disclosure and to prevent a privileged few from gaining an informational edge and profit opportunity. The regulation is effective on Oct. 23.
In adopting Regulation FD, SEC stated: “We have become increasingly concerned about the selective disclosure of material information by issuers. … Many issuers are disclosing important nonpublic information … before making full disclosure … to the general public.
“Regulation FD is also designed to address another threat to the integrity of our Markets: The potential for corporate management to treat material information as a commodity to be used to gain or maintain favor with particular analysts or investors. … Analysts feel pressured to report favorably about a company or slant their analysis in order to have continued access to selectively disclosed information. Finally, … technological developments have made it much easier for issuers to disseminate information broadly.”
Regulation FD requires that when an issuer’s senior management or other enumerated person acting on its behalf makes an intentional disclosure of material nonpublic information—such as an advance warning of earnings results—to certain defined persons who might trade on the basis of that information, the issuer must simultaneously make public disclosure of that information.
When an issuer or other enumerated person acting on its behalf makes a nonintentional, selective disclosure, the issuer must make public disclosure of that information promptly after learning of the nonintentional disclosure.
Under the regulation, the required public disclosure may be made by filing the information on a Form 8-K or by other methods that will effect broad, nonexclusionary distribution of the information to the public.
The regulation makes clear that it is a disclosure rule and not an anti-fraud rule. As adopted, the regulation does not create liability for fraud based solely on a failure to make a public disclosure required by the new rules. Therefore, it does not broaden the grounds for liability under Rule 10b-5 or other anti-fraud principles. If the regulation is violated, however, SEC is empowered to seek an administrative cease-and-desist order or a court-ordered injunction and civil money penalties.
The regulation is designed to address the core problem of selective disclosure made to those who would reasonably be expected to trade securities on the basis of the information or provide such advice to others—i.e., registered broker-dealers, investment advisers and institutional investment managers, investment companies, and holders of an issuer’s securities where it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the information.
The regulation applies only to disclosures by directors and senior management of the issuer or its investment adviser, or any other officer, employee or agent of an issuer who regularly communicates with securities market professionals or with security holders. By including only those persons who “regularly” communicate with securities market professionals and security holders, the regulation does not cover every employee who may occasionally communicate with an analyst or security holder.
There are exclusions from the regulation’s coverage, and acceptable methods of making the required public disclosure are also described in the regulation. SEC says the regulation is not intended to “chill” communications with analysts but to make it available to all.
But many commentators disagree. Accordingly, Regulation FD should be reviewed carefully by publicly traded companies and their counsel. You can get a copy of our law firm’s analysis of the regulation by e-mailing me at the address listed below.
Anthony L. Young, Esq., is a partner at Piper Marbury Rudnick & Wolfe LLP in Washington. Contact: anthony.young@piperrudnick.com.