SEC Issues Final Rule On Selective Disclosure
August 2000
The Securities and Exchange Commission (SEC) has adopted a controversial new regulation that will require U.S. public companies that intentionally disclose material, nonpublic information to a select group (such as private meetings or closed conference calls with analysts) to also disclose it simultaneously to the public. In the case of unintentional disclosure of such information, the new rule, known as Regulation FD for Fair Disclosure, will require companies to promptly divulge the information within 24 hours of learning of the disclosure, or by the start of the next trading day, whichever is later. Although most well-counseled companies already substantially comply with the principles of the new rule, public companies should revisit their disclosure policies to ensure future compliance. The new Regulation FD and insider trading rules were published in the Federal Register on August 24, 2000 and thus will become effective on October 23, 2000.
The SEC received approximately 6,000 comment letters and e-mails on the rule as proposed. The brokerage industry was strongly opposed to the proposal, saying it would chill companies' communications with the markets, while consumer groups and individual investors supported it. In the release (No. 33-7881) issued on August 15, 2000 adopting the new rule, the SEC emphasized the importance of the comments on the proposed rule, which resulted in several modifications. One significant change concerns the recipients of the material information. Whereas the proposed rule covered selective disclosures made to "any person or persons outside the issuer", the final rule applies only to an issuer's communications with securities market professionals, and holders of the issuer's securities under circumstances in which it is reasonably foreseeable that the holders will trade on the basis of the information. In addition, the rule does not apply to issuer communications with the news media or the rating agencies. The adopting release indicates that the rule should not apply to communications made in the ordinary course of business, such as communications with suppliers and customers.
The SEC also narrowed the scope of the persons on the inside of the company making the selective disclosures. The final rule applies only to communications made by the issuer's senior management, its investor relations professionals and others who regularly communicate with securities market professionals and security holders.
Many comments expressed concern with the difficulty of making judgments on what information is material. The final rule provides that materiality judgments will be subject to an intent or reckless standard. There will be a violation where the person making the selective disclosure knows or is reckless in not knowing that the information selectively disclosed was both material and nonpublic. In the adopting release, the SEC provided some interpretive guidance about types of information or events that are more likely to be considered material. While noting it would be impossible to create an exhaustive list, the adopting release identified the following items as some types of information or events that should be reviewed carefully to determine whether they are material:
- earnings information;
- mergers, acquisitions, tender offers, joint ventures, or changes in assets;
new products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of a contract); - changes in control or in management;
change in auditors or auditor notification that the issuer may no longer rely on an auditor's audit report; - events regarding the issuer's securities -- e.g., defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, public or private sales of additional securities; and
- bankruptcies or receiverships.
The adopting release emphasizes that there should be no inference drawn that any of these items is per se material, that the information and events listed in the release still require determinations as to their materiality (although some determinations will be reached more easily than others), and that the SEC is not creating an exclusive list of events and information that have a higher probability of being considered material.
The new rule provides that issuers can meet Regulation FD's "public disclosure" requirement by filing a Form 8-K, or by disseminating information "through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public." The adopting release states that 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). The public must be given adequate notice of the conference or call and the means for accessing it. The rule does not require use of a particular method, or establish a "one size fits all" standard for disclosure; rather, it leaves the decision to the issuer to choose methods that are reasonably calculated to make effective, broad, and non-exclusionary public disclosure, given the particular circumstances of that issuer.
Regulation FD is a disclosure rule and does not create liability for fraud. The final rule eliminates the prospect of private liability for companies solely as a result of a selective disclosure violation.
In addition, the rule expressly excludes communications made in connection with most registered securities offerings. The rule also provides that a violation of Regulation FD will not lead to an issuer's loss of eligibility to use short-form registration for a securities offering or affect security holders' ability to resell under Rule 144 under the Securities Act of 1933.
Finally, contrary to the proposed rule, the final rule does not apply to foreign issuers.
