Wall Street's financial analysts may no longer be privy to corporate secrets. Then again maybe they will be if they agree not to tell anyone. On October 23, 2000, Regulation FD (Fair Disclosure) went into effect. It is designed by the Securities and Exchange Commission (the SEC) to address the selective disclosure of material nonpublic information by public companies. The major implication for such companies and their executive officers is that now they will need to design a communications policy to comply with this new regulation. The regulation requires simultaneous public disclosure of intentional selective disclosures and prompt public disclosure for unintentional disclosures. This article addresses the background of the regulation, its mechanics, and finally some considerations for designing such a communications policy.

The regulation was designed to curb the informational advantage certain securities market professionals previously gained during discussions with senior management of public companies. Wall Street analysts track public companies, build earnings forecasting models, and relay the information to the brokerage sales forces of their firms and later to the public in general. Prediction of next quarter's earnings down to the penny per share is the name of the game. To play it well, top analysts often review the assumptions built into their models with the senior management of the companies they follow. This same senior management may reward analysts who favor the company (that is when the analyst issues a "buy" rating) by providing the analyst with selective information about the company that can lead the analyst to make more accurate predictions vis-à-vis other analysts (often times analysts who issue a "sell" rating on the company). Thus, companies can use this "inside information" to reward analysts for publishing "buy" ratings and punish analysts for publishing "sell" ratings (i.e. by withholding the information).

The SEC also seeks to dissipate any informational advantage private parties have over the market in general. Why should select Wall Street firms or other private parties receive material nonpublic information that the public does not yet know about? Why should such party know whether earnings will be higher or lower than expected at a time when they may trade on such information and reap profits? Section 10(b) of the Securities Exchange Act of 1934, as amended, as well as related Rule 10b-5, already prohibits insider trading by prohibiting the trading on material nonpublic information. Now, the SEC wants to cut the flow of information to the select few or in the alternative mandate broad public disclosure. This is the heart of Regulation FD.

To eliminate the informational advantage, the SEC through Regulation FD, now requires issuers to inform the public generally when there is a selective disclosure of material nonpublic information. The regulation provides that when a company, or a person acting on behalf of the company (for e.g., officers and directors), discloses material nonpublic information to certain securities market professionals, or to stockholders "who may well trade on the information," then the company must make the disclosure to the public. If a selective disclosure is intentional, then the company must make the public disclosure simultaneously with the selective disclosure. If the selective disclosure is non-intentional, then the company must make public disclosure promptly. Characterizing the disclosure based on intent and the definition of "promptly" is obviously problematic. In addition, the regulation excludes from its mandatory public disclosure, disclosures made to a person who owes a duty of trust or confidence to the company (i.e. an attorney or investment banker) and also to "a person who expressly agrees to maintain the disclosed information in confidence." Indeed, an analyst may make such an agreement and use the information in his earnings models, but he must not communicate the selectively disclosed information. To what extent his forecasts embody the confidential information and thus may or may not be communicated may raise additional problems which are beyond the scope of this article.

The pressing concern is that now public companies and their directors and executive officers must be alert to the potential for selective disclosure. If they intend on causing a selective disclosure, they need to simultaneously issue a press release (and possibly furnish a Form 8K Current Report to the SEC). The company should design a communications policy that sets forth the procedures the company will follow during an intentional selective disclosure. The communications policy should also provide for procedures to have designated one or more company officials informed within twenty-four hours of a non-intentional selective disclosure so that the company may decide if it needs to promptly publicly disclose the information by issuing a press release and furnishing a Form 8K or whether an exclusion may be applicable.

This article by its brevity can only identify the broader issues that this new regulation entails. An analysis of your company's current communications policies and the designing of new communications procedures will now necessarily include the implications of this regulation. Indeed, public companies and their officers, including investor relations personnel, are now transforming their policies in light of this new regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.