United States: SEC Proposes New Rules Concerning Selective Disclosure

By Michael R. Littenberg

On December 15^th, the SEC proposed Regulation FD (Release Number 34-42259), which would ban selective disclosure of material information by public companies. Regulation FD - which stands for "fair disclosure" - arises out of the SEC's concern over advance disclosure of earnings and other material information to analysts and/or institutional investors. Before its adoption, proposed Regulation FD is subject to a 90-day public comment period. Therefore, it will not be adopted prior to mid-March 2000.

Regulation FD would apply whenever a public company or another person acting on its behalf discloses material nonpublic information to a person outside the issuer. When this occurs, the issuer would be required to either simultaneously (for intentional disclosures) or promptly (for non-intentional disclosures) make public disclosure of the same information. Regulation FD would not impose a general requirement on issuers to publicly disclose material developments when they occur, and this is in most circumstances not required by the Federal securities laws.

Regulation FD does not specify what constitutes "material" information. The generally applicable standard under the Federal securities laws would apply; i.e., information would be material for purposes of Regulation FD 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. Issuers will therefore be required to use their judgement as to whether a particular disclosure is required under Regulation FD.

The disclosure obligations of Regulation FD only would apply if disclosures are made to "persons outside the issuer." Under Regulation FD, this would exclude persons who are bound by duties of trust or confidence not to disclose or use the information for trading, such as attorneys, investment bankers and accountants. Regulation FD also would permit disclosures to be made to persons who expressly agree to maintain material information in confidence. For example, an issuer would be able to share material nonpublic information with a potential party to a business combination or a potential purchaser in a private placement without making public disclosure.

Under Regulation FD, a selective disclosure would be "intentional" when the person making the disclosure either knew prior to making the disclosure, or was reckless in not knowing, that he or she would be communicating material nonpublic information. According to the Proposing Release for Regulation FD, a disclosure would be intentional, for example, where an official of an issuer holds a conference call or meeting that excludes the public or selectively contacts a particular analyst or investor to disclose material nonpublic information.

Under Regulation FD, non-intentional disclosures of material nonpublic information would be required to "promptly" be publicly disclosed. Examples of non-intentional disclosures cited in the Proposing Release include an inadvertent slip of the tongue or a mistaken belief (as long as not reckless) that the information already had been made public.

In order for disclosure to be made "promptly," it would be required to be made as soon as reasonably practicable, but not later than 24 hours, after a senior official of the issuer knows or is reckless in not knowing of the non-intentional disclosure. A "senior official" is defined to include any executive officer or director of the issuer, an investor relations or public relations officer, or another person with similar functions.

Regulation FD would provide an issuer with a number of public disclosure alternatives. Disclosure would be able to be made by filing a Form 8-K with the SEC (or a Form 6-K for a foreign private issuer). Alternatively, an issuer would be able to disseminate a press release containing the information through a widely circulated news or wire service.

Dissemination also would be able to be made through any other method of disclosure that is reasonably designed to provide broad public access and that does not exclude access to members of the public. This could include, for example, an announcement at a press conference to which the public has access. The issuer would, however, first be required to provide notice of the pending disclosure in a form that is reasonably available to investors.

The Proposing Release for Regulation FD also encourages issuers to post Regulation FD disclosures on their websites. However, a website posting alone would not be adequate public disclosure for purposes of Regulation FD.

Regulation FD would apply to foreign private issuers that are required to file periodic reports under the Exchange Act (i.e., Form 20-Fs and Form 6-Ks).

Regulation FD would apply only to reporting issuers. It would therefore not apply to an issuer's IPO before the registration statement is declared effective.

Regulation FD would however apply to disclosures made in connection with subsequent securities offerings by a public company, including statements made in a road show. In that context, if an issuer makes an oral selective disclosure of material information, Regulation FD would require the issuer also to publicly disclose the information.

Because the required public disclosure could be considered an "offer" of securities for purposes of Section 5 of the Securities Act and, if disclosed in writing or in a broadcast, a prospectus that violates the prospectus content requirements of the Securities Act, the SEC also has in conjunction with Regulation FD proposed Rule 181 under the Securities Act. Under Rule 181, a public disclosure required by Regulation FD would not be required to satisfy the prospectus content requirements under the Securities Act as long as the disclosure complies with Regulation FD.

An issuer would not have liability to a private party for failing to comply with Regulation FD. However, the SEC would have the power to bring an enforcement action, an administrative action seeking a cease and desist order or a civil action seeking an injunction and/or civil monetary penalties against the issuer. The SEC also would be able to bring an enforcement action against the individuals responsible for the violation.

Regulation FD would not modify any of the existing bases of liability for selective or incomplete disclosures of material information. For example, an issuer and certain other persons could still have liability for "tipping" under Rule 10b-5 under the Exchange Act or under Section 11 or Section 18 of the Exchange Act for materially false or misleading statements made to the public in connection with a Regulation FD disclosure.

About the Author: Michael R. Littenberg is a Partner at Schulte Roth & Zabel LLP. He can be contacted as follows: telephone-212-756-2000; fax-212-593-5955; or click Contact Contributor button to send an e-mail