Regulation FD grew out of inability to protect retail investors. Regulation FD turned 20 in 2020. The SEC might never have adopted Regulation FD, The Corporate Counsel notes, except for the simultaneous trends in the 1990s that highlighted the regulators’ inability to protect individual investors from public companies’ overly close ties to securities analysts. Many investors, including day traders, came to favor direct trading over employer-sponsored retirement plans and mutual funds. The Internet provided easy access to market data, online trading became inexpensive, and investors feared missing out on investing in a steady stream of IPOs. They soon discovered that they faced two difficulties: IPOs did not allocate shares to individual investors, and companies practiced selective disclosure. The available market data, while more plentiful than in pre-internet days, was still far less than what companies were giving to analysts and the banks employing analysts.
Whether selectivity is intentional or not. Supreme Court decisions in the 1980s—such as Chiarella and Dirks—prevented the SEC from attacking selective disclosure by punishing insider trading (which therefore thrived). So the SEC adopted Regulation FD, based on its power under Section 13(a) of the 1934 Act to compel full and fair disclosure. FD’s trigger is the disclosure by a public company or its agents of material nonpublic information to analysts, institutional investors, other stock-market professionals, or specified holders of company securities, absent an exemption. The company must then publicly disclose that information in a wide-ranging, all-inclusive manner. Intentional selective disclosure requires simultaneous disclosure, the article explains, while unintentional selective disclosure requires disclosure promptly thereafter. The company may use Form 8-K; a press release sent to a broadly disseminated news service or wire service; a properly noticed, publicly accessible webcast or teleconference; or, under specified conditions, its website or social-media accounts. Regulation FD has succeeded in eliminating selective disclosure by making remediation nearly impossible when the selectivity is intentional, as it almost always is.
Little enforcement, but pandemic raises the risk. The SEC has never aggressively administered or enforced Regulation FD. There were only five enforcement actions—every one of which was settled—in the regulation’s first four years, and few since then. The SEC has offered advice on using company websites or social media to comply with Regulation FD, but companies find the advice antiquated, so an overwhelming majority still depend on time-tested means of compliance: press releases, 8-Ks, or both. Companies need more help from the SEC than ever during the COVID-19 pandemic. Violations during the pandemic are likelier, the article warns, since wildly fluctuating stock prices and general economic uncertainty push analysts and shareholders to demand information on management’s comfort with previous earnings guidance, business performance, steps taken to maintain liquidity, and company prospects.
Remediating and fine-tuning compliance. Companies’ best efforts cannot always avoid Regulation FD violations, concludes The Corporate Counsel. Officers often meet privately with analysts or investors, who persuade them to elaborate on publicly disclosed information. When this happens, corporate counsel needs to take remediation steps. First, decide if the selective disclosure was unintentional. If so, file an 8-K immediately. If not, as is generally the case, decide if the new information was material and nonpublic. This is generally not the case, but if so, decide whether to self-report to the SEC, which might respond by forgoing an enforcement action. The SEC could also learn of a possible violation through its sophisticated technology, which detects unusual trading and dissemination of information to the markets, or from a whistleblower or a disgruntled analyst or investor. Companies should fine-tune their FD policies to stop the external release of all material nonpublic information by restricting who may speak publicly for the company; setting up a central information clearinghouse headed by a compliance officer; clearing all presentations to analysts or investors; suitably restricting social-media usage; and watching for abnormal trading, communications with analysts and investors, and market rumors.
To read the full article in Dimensions Vol. 2021, No. 1, click here.
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