SEC Proposes Selective Disclosure Restrictions and Rules Clarifying Insider Trading Laws

On December 15, 1999, the Securities Exchange Commission ("SEC") released proposed rules which, if enacted, would alter and/or clarify federal insider trading and securities laws. The SEC's proposed rules address three issues: (1) securities issuers' practice of selective disclosure of material non-public information to analysts, institutional investors and others, but not to the public at large; (2) whether insider trading liability requires the trader's "use," or just "knowing possession," of material nonpublic information; and (3) when the breach of a family or other non-business relationship may give rise to liability under the misappropriation theory of insider trading. According to the SEC, the proposed rules are designed to promote the full and fair public disclosure of information and foster investor confidence in the fairness and integrity of the market. Public comments on the new rule proposals must be submitted to the SEC on or before March 29, 2000.

Proposed Regulation FD

The SEC's new proposed Regulation FD, or Regulation "Fair Disclosure," if enacted, would require public disclosure whenever certain issuers, or persons acting on their behalf, disclose - either orally or in writing - material, nonpublic information to a corporate outsider, such as an analyst or institutional investor. If the disclosure of material, nonpublic information is intentional, the proposed rule would require simultaneous public disclosure of that information. If the disclosure is unintentional, then the proposed rule would require public disclosure of the information "promptly" or as soon as possible after discovery of the unintentional disclosure. Under the proposal, the public disclosure requirement could be satisfied by: (1) filing the required Form 8-K; (2) issuing a press release containing the material, nonpublic information through a widely circulated news or wire service; or (3) any other method reasonably designed to provide broad public access to the information.

Proposed Rule 10b5-1

The SEC also proposed rule 10b5-1 which, if enacted, would trigger insider trading liability whenever a person trades while "aware of" material, nonpublic information. Currently, insider trading laws make it illegal to trade a security "on the basis of material, nonpublic information about that security or issuer" The SEC noted, however, that a conflict exists within federal courts regarding whether "actual use" or mere "knowing possession" of material, nonpublic information is required for insider trading liability. The SEC claims that its 10b5-1 proposal is being made in an effort to settle that conflict; under the proposed rule, a trade would be deemed to be "on the basis of material, nonpublic information if the trader 'was aware of' the information when he or she made the purchase or sale."

The SEC's proposal, if enacted, also would provide four affirmative defenses to insider trading liability arising from knowing possession of insider information. Under the proposal, an affirmative defense could be established if, before the trader became aware of the material, nonpublic information, the trader in good faith:

The SEC's proposal also would afford an affirmative defense for entities that trade if such entities can demonstrate that: (1) the individual decisionmakers were not aware of the inside information; and (2) reasonable policies and procedures designed to prevent insider trading had been implemented.

Proposed Rule 10b5-2

The SEC's proposed rule 10b5-2, if enacted, would create a non-exclusive list of non-business relationships that could create a duty of trust or confidence for liability purposes under the misappropriation theory of insider trading. Specifically, the SEC identified the following three non-business relationships where a duty of trust or confidence could exist:

With regard to family relationships, the SEC noted that under the proposed rule the presumption of a duty of confidentiality could be rebutted if the family member demonstrates that the person communicating the information had no reasonable expectation of confidentiality because there was neither a history, pattern or practice of sharing confidences, nor an agreement or understanding to maintain such confidences.*

Selective Disclosure and Insider Trading, SEC Release Nos. 33-7787, 34-42259, 64 Fed. Reg. 72590 (Dec. 28, 1999), to be codified at 17 C.F.R. pts. 230, 240, 243 and 249 (proposed Dec. 15, 1999).

• SEC's Proposed Rules On Selective Disclosure and Insider Trading

• Proposed
  Regulation/Rule

• Addresses

• Proposed Requirements

• Regulation FD "Fair
  Disclosure"

• Selective disclosure to analysts, institutional investors

• Simultaneous disclosure to public of intentionally disclosed material non-public information

• Rule 10b5-1

• Whether insider trading liability requires "use" or mere "knowing possession" of material non-public information

• • Prompt disclosure of unintentionally disclosed material non-public information
    
    
  • Insider trading liability for trading while "aware of" material non-public information
    
    
  • Affirmative defenses available

• Rule 10b5-2

• Non-business relationships that may give rise to insider trading liability under the "misappropriation theory"

• Insider trading liability under the "misappropriation theory" where:

  • Express or implicit agreement of confidentiality exists;
    
    
  • History, pattern or practice of sharing confidences exists; or
    
    
  • Certain enumerated family relationships exist.