The SEC Addresses Selective Disclosure With Proposed Regulation FD

With the rapid growth of public companies in today's e-commerce and technology driven economy, the need to quickly disseminate material information to investors and potential investors has never been more critical. Moreover, the full and fair disclosure of material information to the investing public is paramount to the operation of efficient capital markets.

The SEC states that the best disclosure practice is the prompt public disclosure of material information. Generally, however, public companies are not required to disclose all material information simultaneously with its occurrence. Rather, companies are required to file periodic reports (Forms 10-K, 10-Q and 8-K) after the event has occurred.

Selective Disclosure

A company will often make a voluntary initial disclosure of an event prior to the required filing of a periodic report. With these releases, known as selective disclosures, a company retains control over the content and audience of the release, often targeting a select group of analysts to receive, as an example, earnings updates prior to dissemination to the general public.

While "whispering" these earning numbers has a predictable and significant impact on a company's shares, the practice has received critical attention from the SEC. The SEC, in its Selective Disclosure and Insider Trading Proposed Rule (proposed "Regulation FD"), comments that "the current practice of selective disclosure poses a serious threat to investor confidence in the fairness and integrity of the securities markets. We have recognized that benefits may flow to the markets from the legitimate efforts of securities analysts to 'ferret out and analyze information' based on their superior diligence and acumen. But we do not believe that selective disclosure of material nonpublic information to analysts--or to others, such as selected investors--is beneficial to the securities markets." Furthermore, "the impact of such selective disclosure appears to be much greater in today's more volatile, earnings-sensitive markets." Clearly, the SEC perceives an inequity.

Proposed Regulation FD

In an attempt to curb this practice of selective disclosure, the SEC, on December 15, 1999, proposed new Regulation FD (Fair Disclosure). In summary, Regulation FD would require that:

when a public company intentionally discloses material information, it does so through public disclosure, not through selective disclosure;

and whenever a public company learns that it has...