The Securities and Exchange Commission (SEC) has adopted Regulation FD (for "fair disclosure") to address the issue of selective disclosure. In addition, the SEC has adopted new rules to clarify certain aspects of existing law relating to insider trading liability. The new rules will take effect as of October 23, 2000.
Regulation FD
- Regulation FD applies to all public reporting companies, except for investment companies (other than closed-end investment companies), foreign governments and foreign issuers.
- Regulation FD prohibits selective disclosure by requiring companies, when disclosing material nonpublic information, to disseminate this information broadly. Selective disclosure occurs when a company releases material nonpublic information about itself to securities market professionals (e.g., securities analysts or institutional investors) before disclosing the information to the general public.
- The ban on selective disclosure applies to communications made by a company to securities market professionals and to investors where it is reasonably foreseeable that such investors would trade the company's securities on the basis of the information. Selective disclosure is not prohibited with respect to disclosures made: (1) to an attorney, investment banker or accountant, (2) to any person who agrees to maintain the information in confidence, (3) to credit rating agencies, (4) in connection with registered securities offerings, (5) to suppliers, strategic partners and customers in the ordinary course of business, (6) to the press or (7) to governmental agencies.
- Regulation FD only covers disclosures made by senior management (including directors) or any other employee or agent of a company who regularly communicates with any securities market professionals or with the company's security holders (e.g., investor relations officers).
- The required timing of the public disclosure depends upon whether the company has made an "intentional" (knowing or reckless) or non-intentional selective disclosure. For intentional selective disclosures, the public disclosure of the same information must be made simultaneously. For non-intentional selective disclosures, the public disclosure must be made promptly, i.e., as soon as reasonably practicable, but no later than the later of 24 hours or the start of the next day's trading on the NYSE, after senior management (including directors and investor or public relations officers) learns of the disclosure.
- A company may satisfy the public disclosure requirements of Regulation FD either by filing or furnishing the information on a Form 8-K or by disseminating information through another method, or a combination of methods, of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public (e.g., press releases or publicly accessible conference calls).
- In general, Regulation FD will not apply to disclosures made in connection with a securities offering registered under the Securities Act of 1933. In unregistered offerings, companies should either publicly disclose the material nonpublic information disclosed to investors or protect the information from misuse by having investors agree to maintain it in confidence.
- Violations of Regulation FD will not affect a company's eligibility for use of short-form registration on Forms S-2 or S-3, resales of restricted and control securities under Rule 144 of the Securities Act or employee benefit plan offerings under Form S-8.
- Companies failing to comply with Regulation FD could be subject to an SEC enforcement action. The SEC may also seek a cease-and-desist order, an injunction or civil money penalties. In appropriate cases, the SEC may bring an enforcement action against the company's employees or agents responsible for the violation.
- A failure to make a public disclosure required solely by Regulation FD will not be deemed to be a violation of Rule 10b-5. Accordingly, Regulation FD does not affect any existing grounds for liability under Rule 10b-5 nor may private plaintiffs rely on a company's violation of Regulation FD as a basis for a private action alleging Rule 10b-5 violations.
New Insider Trading Rules
- New Rule 10b5-1 clarifies the issue of whether insider trading liability requires trading while in "knowing possession" of material nonpublic information or proof that the person trading "used" the information in making the trade. The new rule provides that a person trades on the basis of material nonpublic information if he or she is "aware" of the material nonpublic information when making the trade. The rule does not modify or address any other aspect of insider trading law.
- New Rule 10b5-2 clarifies the duties of trust or confidence for purposes of the misappropriation theory of insider trading under Rule 10b-5 (i.e., the misappropriation of material nonpublic information for securities trading purposes in breach of a duty of loyalty and confidence violates Rule 10b-5). A duty of trust or confidence exists when:
- a person agrees to maintain information in confidence;
- two people have a history, pattern or practice of sharing confidences such that the recipient of the information knows or reasonably should know that the other person expects that the recipient will maintain its confidentiality (a facts and circumstances test); or
- a person receives or obtains material nonpublic information from spouses, parents, children and siblings (a person, however, may demonstrate that under the facts and circumstances of that family relationship, no duty of trust or confidence existed).
This is only a summary of certain portions of the new rules. To review the entire text of the new rules, please click: Regulation FD.) Please feel free to contact any of the attorneys at Buchanan Ingersoll, including the ones listed below, if you have any questions regarding these new rules.
Pittsburgh
Thomas M. Thompson
(412) 562-8855
thompsontm@bipc.com
James J. Barnes
(412) 562-1415
barnesjam@bipc.com
Zsolt K. Bessks
(412) 562-8464
besskozk@bipc.com
Philadelphia
Brian S. North
(215) 665-3828
northbs@bipc.com
Harrisburg
Bradley J. Gunnison
(717) 237-4828
gunnisonbj@bipc.com