SEC Adopts Fair Disclosure Regulation

The Securities and Exchange Commission has adopted Regulation FD (for "fair disclosure") to address the problem of "selective disclosure" of material information by public companies. Securities Act of 1933 Rel. No. 7881 (August 15, 2000). The release also covers the adoption of two new insider trading rules, Rule 10b51 and Rule 10b52. Regulation FD and the new rules will become effective October 23, 2000.

Regulation FD

Under Regulation FD, whenever:

an issuer, or person acting on its behalf,

discloses material non-public information about the issuer or its securities,

to specified persons (in general, securities market professionals, or holders of the issuer's securities who are likely to trade on the basis of the information),

the issuer must make public disclosure of that information

simultaneously, if the selective disclosure was intentional, or

promptly (generally within 24 hours), if the selective disclosure was unintentional.

A number of key terms used above are defined in Regulation FD or are discussed in the adopting release.

Issuers Subject To Regulation FD

Regulation FD applies to any issuer that has a class of securities registered under the Securities Exchange Act of 1934 or is required to file reports under Section 15(d) of that Act, including closedend investment companies but not other investment companies and excluding foreign governments and foreign private issuers as defined in Rule 405 under the Securities Act.

Person Acting On Behalf Of An Issuer

This phrase includes any senior official (i.e., any director, executive officer, investor relations or public relations officer or other person with similar functions) of the issuer or any other officer, employee or agent of an issuer who regularly communicates with securities professionals or with holders of the issuer's securities. Senior officials who direct lower level employees to make a selective disclosure would be responsible for having made the selective disclosure. Employees who do not routinely interact with securities professionals or shareholders would not otherwise be considered to have caused a violation of FD by disclosing such information. A person who communicates material, non-public information in breach of a duty to the issuer would not be considered to be acting on behalf of the issuer. These individuals would, of course, be subject to the usual insider trading laws.

Materiality

The Commission has not defined materiality but refers to the definition, generally found in antifraud cases, that information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision or if the information would significantly alter the total mix of SEC Adopts Fair Disclosure Regulation available information. The Commission cites TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) and Basic v. Levinson, 485 U.S. 224, 231 (1988), and the definition in Securities Act Rule 405 and Exchange Act Rule 12b2. The Commission also refers to Staff Accounting Bulletin No. 99 (August 12, 1999), which discusses the application of materiality thresholds to the preparation of financial statements filed with the Commission and the performance of audits of those financial statements. The SAB refers to the definition of materiality in TSC and emphasizes the importance of taking into account the "total mix" of information in judging materiality. In the context of financial statement items, this includes both the size in numerical percentage terms of the item as well as the factual context in which the user of financial statements would view the financial statement item. "The shorthand in the accounting and auditing literature for this analysis is that financial management and the auditor must consider both 'quantitative' and 'qualitative' factors in assessing an item's materiality."

The Commission recommends that the following types of information, while not per se material, should be reviewed carefully to determine their materiality:

earnings information

mergers, acquisitions, tender offers, joint ventures, or changes in assets

new products or discoveries, or developments regarding customers or suppliers, such as the acquisition or loss of a contract

changes in control or management

changes in auditors or auditor notification that the issuer may no longer rely upon an audit report

events regarding the issuer's securities, such as defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, and public or private sales of additional securities

bankruptcies or receiverships.

Of particular importance, the Commission has highlighted its concern about earnings "guidance" provided to analysts, while at the same time encouraging continued discussions with analysts as long as no material information is selectively disclosed. The FD release states that issuers take on a "high degree of risk" and "likely will have violated" FD if they discuss earnings estimates privately with an analyst, even if the issuer just confirms the accuracy of the analyst's forecast...