Selective Disclosure Of Information And Its Regulation

To address the problem of selective disclosure, SEC proposed RegulationFD. It targets the practice by establishing new requirements for full and fairdisclosure by public companies. Regulation FD (Fair Disclosure) is a new issuerdisclosure rule that addresses selective disclosure. The regulation provides thatwhen an issuer, or person acting on its behalf, discloses material nonpublicinformation to certain enumerated persons (in general, securities marketprofessionals and holders of the issuer's securities who may well trade on thebasis of the information), it must make public disclosure of that information. Thetiming of the required public disclosure depends on whether the selectivedisclosure was intentional or non-intentional; for an intentional selectivedisclosure, the issuer must make public disclosure simultaneously; for anon-intentional disclosure, the issuer must make public disclosure promptly.Under the regulation, the required public disclosure may be made by filing orfurnishing a Form 8-K, or by another method or combination of methods that isreasonably designed to effect broad, non-exclusionary distribution of theinformation to the public.Issuer selective disclosure bears a close resemblance in this regard toordinary "tipping" and insider trading. In both cases, a privileged few gain aninformational edge-and the ability to use that edge to profit—from theirsuperior access to corporate insiders, rather than from their skill, acumen, ordiligence. Likewise, selective disclosure has an adverse impact on marketintegrity that is similar to the adverse impact from illegal insider trading:investors lose confidence in the fairness of the markets when they know thatother participants may exploit "unerodable informational advantages" derived notfrom hard work or insights, but from their access to corporate insiders. Theeconomic effects of the two practices are essentially the same. Yet, as a result ofjudicial interpretations, tipping and insider trading can be severely punishedunder the antifraud provisions of the federal securities laws, whereas the status ofissuer selective disclosure has been considerably less clear.Regulation FD is also designed to address another threat to the integrity ofour markets: the potential for corporate management to treat material information as a commodity to be used to gain or maintain favor with particular analysts orinvestors. In the absence of a prohibition on selective disclosure, analysts mayfeel pressured to report favorably about a company or otherwise slant theiranalysis in order to have continued access to selectively disclosed information.Finally, technological developments have made it much easier for issuers todisseminate information broadly. Whereas issuers once may have had to rely onanalysts to serve as information intermediaries, issuers now can use a variety ofmethods to communicate directly with the market. In addition to press releases,these methods include, among others, Intemet webcasting and teleconferencing.Accordingly, technological limitations no longer provide an excuse for abidingthe threats to market integrity that selective disclosure represents.