Publications
SEC Proposes Selective Disclosure Regulations
New SEC Proposals
On December 15, 1999 the SEC proposed Regulation FD and Rules 10b5-1 and 10b5-2 for adoption under the Securities Exchange Act of 1934 (the “Exchange Act”).
What is Regulation FD? How Can I Fix a Selective Disclosure Problem? What Can I do to Prevent Selective Disclosure?
Proposed Regulation FD (the “FD” stands for fair disclosure) requires public companies to take corrective measures if nonpublic information is selectively disclosed to analysts or others. An intentional disclosure requires the issuer to make a simultaneous disclosure of that same information to the public. An unintentional disclosure requires the issuer to promptly disclose that same information to the public. “Promptly” means “as soon as practicable,” but no later than 24 hours after the issuer becomes aware of the selective disclosure.
An issuer can remedy a selective disclosure problem by disclosing the same information in any of the following ways:
- Filing information with the SEC (e.g., Form 8-K)
- Issuing a press release (Dow Jones, Bloomberg, Business Wire, PR Newswire, or Reuters)
- Using any means reasonably designed for broad public access, that does not exclude access to members of the public (e.g., press conference that permits public attendance), although it is unclear whether disclosure on the issuer’s website would be sufficient.
An issuer who fails to take corrective measures may be subject to SEC enforcement consequences (cease and desist order, injunction, and/or money penalties).
In order to avoid intentional and unintentional selective disclosure problems, issuers should do the following:
- Limit the number of persons who are permitted to make disclosures to, or respond to inquiries from analysts, investors, or the media.
- Keep a record of the substantive information that is disclosed during private communications with investors or analysts.
- Inform analysts and investors of the following: (1) the name of the person who the issuer has authorized to make disclosures; (2) that responses to inquiries will not be made until the issuer can consult with others; and (3) that any information disclosed in private communication remain confidential until after the issuer has had an opportunity to review and assess the record of the discussion.
Use confidentiality agreements to protect communications in the context of business combinations or other transactions that the issuer expressly does not want disclosed to the public.
What is Proposed Rule 10b5-1? What Defenses can be Raised Against a Claim of Insider Trading?
Proposed Rule 10b5-1 seeks to resolve conflicts among the courts about whether insider trading liability requires trading merely while in “knowing possession” of material nonpublic information or actual proof that the trader “used” the information while trading. To resolve the conflict, the new rule proposes an “awareness” concept. If it is determined that a trader is “aware” of material nonpublic information at the time the person makes the trade, then the conclusion that necessarily follows is that the trader used the information.
Proposed Rule 10b5-1 provides four affirmative defenses to insider trading claims. A person would not be liable under Rule 10b5-1, if the person could show that he or she acted in good faith, and that
- if, before becoming aware of the material nonpublic information, he or she entered into a binding contract to trade in the amount, at the price, and on the date at which he or she ultimately traded; or
- if, before becoming aware of the material nonpublic information, he or she provided instructions to another person to execute a trade for his or her account in the amount, at the price, and on the date at which that trade was ultimately executed; or
- if, before becoming aware of the material nonpublic information, he or she adopted, and previously adhered to, a written plan specifying the purchases or sales of the security in the amounts, and at the prices, and on the dates at which he or she purchased or sold the security; or
- he or she traded according to a written plan that tracked or corresponded to a market index, market segment, or group of securities (for example, a trading strategy developed by the fund or its manager).
Any of these affirmative defenses would be lost if it is shown that the trader executed a hedging transaction with respect to his planned trade, such that upon receiving material nonpublic information, he can simply cancel the unfavorable position.
What is Proposed Rule 10b5-2? Familial Relationship Creates Presumption of Duty of Trust How Can the Presumption be Rebutted?
Proposed Rule 10b5-2 expands the scope of the misappropriation theory to cover business, familial and personal relationships. The misappropriation theory of insider trading covers those instances when material nonpublic information is misappropriated for securities trading purposes in breach of a duty of trust and confidence, which currently extends only to the business relationship context where an express confidentiality agreement, or pre-existing fiduciary-like (attorney-client or employee-employer) relationship exists. The proposed change expands the theory’s application to tipping (insider gives information to a trader) and trading (insider discloses information to a person, with an expectation of confidentiality, that person then subsequently trades on the basis of that information).
The proposed Rule states that a duty of trust and confidence arises (and the misappropriation theory is applicable):
- Whenever a person agrees to maintain information in confidence; or
- Whenever the parties to the disclosure have a history, pattern or practice of sharing confidences, such that the person disclosing the information had a reasonable expectation that the person receiving the information would keep it confidential; or
- Whenever a person receives or obtains material nonpublic information from the person’s spouse, parent, child, or sibling.
The third bullet point above sets forth the presumption that within certain family relationships there is a reasonable expectation of confidentiality. However, the Rule also provides an affirmative defense, which would require the family member to show that no duty of trust or confidence existed by showing the lack of agreement or lack of a history, pattern or practice of sharing confidences.
The SEC is soliciting comments on these proposals, which must be submitted on or before March 29, 2000.
