.jpg)
SEC Chairman Arthur Levitt said, "High quality and timely information is the lifeblood of strong, vibrant markets. It is at the very core of investor confidence. Regulation FD will bring all investors, regardless of the size of their holdings, into the information loop-where they belong."
Chairman Levitt said that the Commission received more than 6,000 comment letters from the public and that most were from individual investors concerned about fairness in the markets. The final rule reflects issues raised during the comment process. The changes are detailed on the attached fact sheet.
Opening Statement of Chairman Arthur Levitt Open Meeting on Regulation Fair Disclosure
Good morning. The Commission meets today to consider the adoption of rules designed to promote the full and fair disclosure of financial information. High quality and timely information is the lifeblood of strong, vibrant markets. It is at the very core of investor confidence.
But when that information travels only to a privileged few, when that information is used to profit at the expense of the investing public, when that information comes by way of favored access rather than by acumen, insight, or diligence, we must ask, "Whose interest is really being served?" If investors see a stock's price change dramatically-but are given access to critical market-moving information only much later-we risk nothing less than the public's faith and confidence in America's capital markets.
There's a saying that only three things matter in real estate: location, location, location. Unfortunately, in some quarters, the same principle is taking root in investing, and the place to be is inside the information loop-that small circle of Wall Street professionals with whom companies share significant nonpublic information before the rest of us. Like that neighborhood with gated entrances and tall fences, moving into the information loop is not always an option for many of America's small investors.
Today, as Wall Street analysts play an increasingly visible role in recommending stocks, some in corporate management treat material information as a commodity-a way to gain and maintain favor with particular analysts. What's more, as analysts become more and more dependent on the "inside word," the pressure to report favorably on a company has grown even greater, as analysts seek to protect and guarantee future access to selectively disclosed information.
Simply put, these practices defy the principles of integrity and fairness. In this country, we pride ourselves on having the purest form of meritocracy in the world. We teach our children that a person gets ahead through hard work and diligence. We ground ourselves in a trust that, through equal opportunity, everyone has a chance to succeed. America's marketplace should be no exception. Instead, it should serve as a beacon. No one should be excluded.
The adoption of today's rules-appropriately named Regulation FD, for Fair Disclosure-would mean that when companies disclose material, nonpublic information, they must disseminate this information broadly. If, for instance, corporate officers wish to inform Wall Street analysts that the company may not make its upcoming quarterly earnings estimate, this same information must be simultaneously disclosed to the public, through a press release or other comparable avenue. Regulation FD would bring all investors, regardless of the size of their holdings, into the information loop-where they belong. To all of America's investors, it's well past time to say, "Welcome to the neighborhood."
While investor interests have conditioned every decision made by this Commission since 1993, our rulemaking must be characterized by balance and fairness. The comment period is intended to evaluate divergent views and respond with modifications that bring the process as close to consensus as possible.
Nearly every rule elicits warnings about unintended consequences. Our markets, however, are so dynamic that the consequences of no action are often more serious than the process of adapting to change. Clearly it is the responsibility of this and successor Commissions to continually evaluate the impact of laws and regulations on our markets and seek ways to adjust in an increasingly competitive global environment. This is no one-shot process but, rather, an ongoing effort to adapt to change by fine-tuning the important guideposts that will insure the primacy of U.S. markets and protection of U.S. investors.
Now, various investment professionals have argued that Regulation FD might "chill" the flow of information as some companies, fearful of legal liability, respond by providing less disclosure altogether. Many of the concerns raised in the comment letters were thoughtful and valid. I firmly believe, however, that the rules before us today address these concerns.
To provide even greater protection against the possibility of inappropriate liability, and to guard against any chilling effect, we have modified and narrowed the scope of Regulation FD in several respects. I want to thank my fellow Commissioners for their insight and efforts towards ensuring that these rules would be both practical and effective. But today's rules would not be nearly as elegantly crafted if not for the tireless work and discerning eye of Dean Hunt. The rules, for example, now apply only to communications with securities professionals and holders of the issuer's securities when it is reasonably foreseeable that the security holder will trade on the information. We have also honed the rules to cover only communications by senior issuer officials and those persons who normally communicate with securities industry professionals or security holders. These changes together make crystal clear that Regulation FD will not cover communications with the media, or ordinary-course business communications with an issuer's customers or suppliers. Dean Hunt was also instrumental in our decision to exclude communications made in connection with most public offerings. And there is now an express provision stating that failure to make a disclosure required solely by Regulation FD will not result in a violation of Rule 10b-5.
Finally, today we will also consider two amendments that will clarify and enhance existing prohibitions against insider trading. The first addresses the important but unsettled question of whether insider trading liability arises when a person trades while "aware" of material nonpublic information. The second amendment addresses what types of family or other non-business relationships can give rise to liability under the misappropriation theory of insider trading.
I thank our Office of the General Counsel, Division of Enforcement, and Division of Corporate Finance for their incredible dedication, countless hours, and a truly collective effort, which has made today's rules possible.
At this time, I'd like to turn it over to David Becker, our General Counsel, to talk about today's proposed rules in greater detail.
Fact Sheet:
Regulation Fair Disclosure and New Insider Trading Rules
Today the Commission will consider adopting new rules to address the problem of selective disclosure and clarify existing insider trading law. The new rules relate to three issues:
Selective disclosure by issuers of material nonpublic information; when insider trading liability arises in connection with a trader's"use" or "knowing possession" of material nonpublic information; and when the breach of a duty of trust or confidence in a family or other non-business relationship gives rise to liability under the misappropriation theory of insider trading.
Regulation FD
On December 20, 1999, the Commission proposed new Regulation FD - for "fair disclosure" - to combat selective disclosure. Selective disclosure occurs when issuers release material nonpublic information about a company to selected persons, such as securities analysts or institutional investors, before disclosing the information to the general public. This practice undermines the integrity of the securities markets and reduces investor confidence in the fairness of those markets. Selective disclosure also may create conflicts of interests for securities analysts, who may have an incentive to avoid making negative statements about an issuer for fear of losing their access to selectively disclosed information.
Regulation FD would require that when an issuer intentionally discloses material information, it do so publicly and not selectively. The company may make the required disclosure by filing the information with the Commission, or by another method intended to reach the public on a broad, nonexclusionary basis, such as a press release. When selective disclosure of material information is made unintentionally, the company must publicly disclose the information promptly thereafter.
Comments on the Proposal and Revisions to Narrow Regulation FD
The Proposing Release prompted an outpouring of public comment - nearly 6,000 comment letters. The vast majority of the comments were from individual investors who urged - almost uniformly - that the Commission adopt Regulation FD. These investors expressed frustration with the practice of selective disclosure, believing that it places them at a severe disadvantage in the market.
The Commission also received numerous comments from securities industry professionals, issuers, lawyers, media representatives, and professional and trade associations. Some expressed concerns about the approach of the proposal and suggested alternative methods for addressing selective disclosure.
Regulation FD has been revised in light of the issues raised by the commenters. The principal changes are summarized below:
Narrowed Scope of the Regulation
The regulation will apply only to an issuer's communications with market professionals, and holders of the issuer's securities under circumstances in which it is reasonably foreseeable that the security holders will trade on the basis of the information. The regulation will not apply to issuer communications with the press, rating agencies, and ordinary-course business communications with customers and suppliers.
The regulation will apply only to communications by the issuer's senior management, its investor relations professionals, and others who regularly communicate with market professionals and security holders.
Rule of Disclosure that Does Not Create Private Liability
The regulation text makes clear that it is a disclosure rule. It does not create liability for fraud. Where the regulation is viulated, the SEC could bring an administrative proceeding seeking a cease and desist order, or a civil action seeking an injunction and/or civil penalties.
The regulation has been revised to eliminate the prospect of private liability for companies sulely as a result of a selective disclosure violation.
Requirement of Intentional or Reckless Conduct
The regulation requires public disclosure only where the person making the selective disclosure knows or is reckless in not knowing that the information disclosed was both material and nonpublic.
No Application to Most Registered Offerings or Foreign Issuers
The regulation now expressly excludes communications made in connection with most registered securities offerings.
The regulation does not apply to foreign issuers.
No Affect on Eligibility for Short-Form Registration or Resales under Rule 144
A violation of Regulation FD will not disqualify a company from use of short-form registration, or affect investors' ability to resell under Rule 144.
With these changes, Regulation FD establishes a clear rule against selective disclosure and encourages broad public disclosure. At the same time, it does not impede legitimate business communications or expose issuers to liability for selective disclosure arising from arguable but mistaken judgments about the materiality of information.
New Insider Trading Rules
The prohibitions against insider trading play an essential rule in maintaining the fairness, health, and integrity of our markets. Insider trading law has developed on a case-by-case basis under existing provisions of the federal securities laws. From time to time there have been issues on which various courts have disagreed. The Commission will consider adopting new Rules 10b5-1 and 10b5-2 to resulve two such issues. In all other respects, the law of insider trading remains unchanged.
"Use/Possession" Issue
Courts have split on whether insider trading liability requires trading while in "knowing possession" of material nonpublic information, or proof that the trader "used" the information in trading. New Rule 10b5-1 provides that, for purposes of insider trading, a person trades on the basis of material nonpublic information if a trader is "aware" of the material nonpublic information when making the purchase or sale. The rule also sets forth several affirmative defenses or exceptions to liability, which have been modified in response to comments. These exceptions permit persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.
Clarifying Duties of Trust or Confidence in Misappropriation Cases
The misappropriation theory of insider trading, upheld by the Supreme Court in the O'Hagan case, provides that a person commits insider trading by misappropriating and trading on inside information in breach of a duty of trust or confidence. The theory's application is most clear in cases invulving misappropriation of confidential information in breach of an established business relationship, such as lawyer-client or employer-employee.
The Commission is considering adoption of new Rule 10b5-2 to clarify how the theory applies to certain non-business relationships. Under the new rule, a person receiving confidential information under the following circumstances would owe a duty of trust or confidence, and thus could be liable under the misappropriation theory when: the person agreed to keep information confidential; the persons involved in the communication had a history, pattern, or practice of sharing confidences that resulted in a reasonable expectation of confidentiality; or the person who provided the information was a spouse, parent, child, or sibling of the person who received the information, unless it were shown affirmatively, based on the facts and circumstances of that family relationship, that there was no reasonable expectation of confidentiality.
The new rules will take effect 60 days after publication in the Federal Register.
