SPECIAL THANKS: The Regulation Fair Disclosure Exhibit is made possible through the generous support of primary sponsor, Deloitte & Touche, LLP, supporting partners Meredith B. Cross, Morrison & Foerster, LLP, and curator David Lynn.
On August 15, 2000, the Securities and Exchange Commission adopted Regulation Fair Disclosure, often referred to as Regulation FD. The rulemaking was controversial, and the vote of the Commissioners to approve Regulation FD was 3 to 1 in favor. The SEC’s Chairman at the time, Arthur Levitt, believed that Regulation FD was necessary to “level the playing field” for investors, by prohibiting the selective disclosure of material nonpublic information to market professionals. On the other side of the debate, some feared that Regulation FD would have a chilling effect on the communications between public companies and the market, while others worried that Regulation FD would lead to information overload, where public companies would be obligated to frequently disclose too many material developments.
Over the past twenty years, Regulation FD has significantly shaped the framework for public company communications. The SEC has enforced Regulation FD judiciously, seeking action in the most egregious cases to send a clear message to public companies about the conduct that is expected in accordance with the rules. Regulation FD has also adapted with the changing times, as the Commission has provided guidance on the dissemination of material nonpublic information through websites and social media channels. Today, Regulation FD stands as a key component of the regulation of corporate disclosure.
Under Regulation FD, if a public company, or any person acting on its behalf, discloses material nonpublic information to analysts, institutional investors, other market professionals and security holders, subject to certain exemptions, the company must disclose that information to the public using a broad, non‐exclusionary method for distributing the information. If the selective disclosure to any of the persons enumerated in the rule is intentional, then the public disclosure must be made simultaneously. If the selective disclosure to an enumerated person is unintentional, public disclosure must be made promptly thereafter.
The public disclosure may be made through a Current Report on Form 8‐K or through any method reasonably designed to effect broad, non‐exclusionary distribution of the information, such as a press release distributed through a widely circulated news, or wire service, webcast or teleconference that has been properly noticed and provides access to the public. In subsequent guidance, the Commission indicated that a public company’s website and social media accounts could be used to effect broad, non‐exclusionary distribution of the information under certain circumstances.
Regulation FD has the effect of encouraging public companies to disclose material nonpublic information broadly and to avoid selective disclosure to market professionals, given that an intentional selective disclosure must be accompanied by a simultaneous public disclosure in order to avoid a violation of the SEC’s reporting requirements. Unlike many of the SEC’s other disclosure rules that dictate the type of information that must be disclosed and how such information is to be presented, Regulation FD is strictly focused on the manner of public company communications.
On February 27, 1998, Chairman Levitt delivered a speech titled “A Question of Integrity: Promoting Investor Confidence by Fighting Insider Trading” at the Practising Law Institute’s SEC Speaks conference in Washington, DC. Levitt stated: “Trading based on privileged access to information can demoralize investors and destabilize investment. It has utterly no place in any fair-minded, law-abiding economy.” While some of the speech focused on traditional insider trading, Levitt highlighted the problem of selective disclosure of material information to analysts and institutional investors before the information was made available to the public. Levitt noted “[i]t is very clear to me - and to the S.E.C.'s Enforcement Division - that issuers should not selectively disclose information to certain influential analysts, in order to curry favor with them and reap a tangible benefit, such as a positive press spin.” He further commented “[l]egally, you can split hairs all you want. But, ethically, it’s very clear: If analysts or their firms are trading - knowing this information, and prior to public release – it’s just as wrong as if corporate insiders did it.”
Unfortunately for the SEC, during the 1980s and 1990s, it did not have the law on its side to prevent the selective disclosure problem that Levitt described in his speech. Prior to the adoption of Regulation FD, the SEC sought to address the problem of selective disclosure through insider trading law that applied to “tipping” material nonpublic information. For many years the SEC had advanced, and courts had accepted, a “parity of information” theory, whereby liability could arise from selective disclosure because traders should have equal access to information. This theory was first expressed in the SEC administrative proceeding Cady, Roberts & Co., 40 S.E.C. 907 (1961), and was adopted by the Second Circuit Court of Appeals in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (1968). By the 1980s, however, the parity of information theory was rejected by the U.S. Supreme Court in Chiarella v. U.S., 445 U.S. 222 (1980) and Dirks v. SEC, 463 U.S. 646 (1983). In Chiarella, the Court held that there must be a breach of fiduciary duty or special relationship of trust and confidence in order for the law to impose a duty to disclose or abstain from trading, explicitly rejecting the parity of information theory.
As a result of the Supreme Court’s decisions in Chiarella and Dirks, the law of insider trading could not be used to combat instances of selective disclosure. The SEC continued to observe that the practice of public companies selectively disclosing information to analysts and other market professionals was ongoing, but the Commission could do little about it within the existing legal framework. At the same time, widespread access to the Internet and the availability of online trading meant that individual investors were flocking to the public markets, bringing in stark relief the problem of selective disclosure. As Levitt noted in his speech, the lack of level playing field threatened to harm investors’ confidence in the markets.
On December 20, 1999, the SEC proposed Regulation FD and related amendments to existing rules (Release No. 34-42259). At the same time, the Commission proposed two insider trading rules, Rules 10b5-1 and 10b5-2, to address when insider trading liability arises in connection with a trader’s “use’ and “knowing possession” of material nonpublic information and when the breach of a family or other non-business relationship may give rise to liability under the “misappropriation” theory of insider trading.
Citing reports of selective disclosure in the media during the 1990s, the Commission proposed Regulation FD as a means to level the playing field for investors and to address opportunities for analyst conflicts of interest that could arise when analysts “may be pressured to shade their analysis in order to maintain their access to corporate management.” Acknowledging that, after Chiarella and Dirks, “the antifraud provisions of the securities laws do not require that all traders possess equal information when they trade,” the Commission noted that “[t]he approach we propose does not treat selective disclosure as a type of fraudulent conduct or revisit the insider trading issues addressed in Dirks. Rather, we propose to use our authority to require full and fair disclosure from issuers, primarily under Section 13(a) of the Exchange Act, as a basis for proposed Regulation FD.”
As proposed, Regulation FD would have provided that whenever an issuer, or any person acting on its behalf, discloses material nonpublic information to any other person outside the issuer, the issuer must simultaneously (for intentional disclosures), or “promptly” (for non-intentional disclosures) make public disclosure of that same information. The proposal sparked a spirited debate over the need for regulation in this area and the scope of Regulation FD. The Commission received nearly 6,000 comment letters on the proposal, with the vast majority coming from individual investors, who urged the SEC to adopt Regulation FD. The Commission also received comments from securities industry participants, issuers, lawyers, media representatives and professional and trade associations.
The Regulation FD adopted by the Commission in August 2000 had narrower scope, most notably so that the rules prohibiting selective disclosure would not apply to all communications with persons outside the company, and instead would only apply to communications with securities market professionals or with security holders (Release 33-7881). The Commission believed that with the changes narrowing the scope of Regulation FD, it “strikes an appropriate balance.” In this regard, the Commission stated that Regulation FD as adopted “establishes a clear rule prohibiting unfair selective disclosure and encourages broad public disclosure. Yet it should not impede ordinary-course business communications or expose issuers to liability for non-intentional selective disclosure unless the issuer fails to make public disclosure after it learns of it.”
The debate about Regulation FD did not end with its adoption in the Summer of 2000. On April 24, 2001, Laura Unger, the Acting Chairman of the SEC, presided over a Regulation FD Roundtable in New York, New York. Unger had cast the only vote against the adoption of Regulation FD, and she noted at the roundtable “[m]y dissent from the Commission vote . . . was based on my concern about how the rule would impact the quantity and quality of information available to investors.” She said that the purpose of the roundtable was to hear “how FD has impacted the flow of information, and what the information landscape looks like since Regulation FD.” The participants at the roundtable included, in addition to Unger, Commissioner Isaac Hunt, members of the SEC staff, and representatives of public companies, law firms, media organizations, trade groups, institutional investors, brokerage firms and investor groups. No changes to Regulation FD were recommended or adopted after this roundtable.
Soon after Regulation FD was adopted, Richard Walker, Director of the SEC’s Division of Enforcement, began communicating though speeches and panel discussions the Division’s approach to enforcing Regulation FD. In a speech on November 1, 2000 to the Compliance & Legal Division of the Securities Industry Association, Walker stated “[w]e are not looking to frustrate the purpose of the rule – which is to promote broader and fairer disclosure of information to investors – by second-guessing reasonable disclosure decisions made in good faith, even if we don’t agree with them.” Walker went on to note “[t]here will be no FD Swat teams, and I do not envision any FD sweeps, unless, of course, there is widespread noncompliance with the rule, which I do not anticipate.”
In the first four years after the adoption of Regulation FD, the SEC brought only five enforcement proceedings, all of which settled. In one of these cases, the SEC did not impose sanctions but instead issued a report of investigation under Section 21(a) of the Securities Exchange Act of 1934. While the Commission did face some headwinds in one Regulation FD enforcement action that was litigated, the Commission continued to bring Regulation FD actions on a targeted basis over the ensuing fifteen years.
When Regulation FD was adopted, the Commission noted “technological developments have made it much easier for issuers to disseminate information broadly.” The Commission warned, however, that posting of new information on a public company’s own website “would not by itself be considered a sufficient method of public disclosure.” In the adopting release, the Commission left open the possibility that some public companies could effectively use the posting of information on the company’s website as “a component of an effective disclosure process.”
On August 1, 2008, the Commission published an interpretive release to provide guidance regarding the use of company websites under the Securities Exchange Act of 1934 and the antifraud provisions of the federal securities laws (Release No. 34-58288). The Commission acknowledged the advances in technology and addressed, among other issues, when information posted on a company website is “public” for purposes of the applicability of Regulation FD. The Commission then revisited the August 2008 guidance in the context of social media communications on April 2, 2013, when it confirmed in a Section 21(a) report regarding Netflix, Inc. and Reed Hastings that Regulation FD applies to social media and other emerging means of communication used by public companies the same way it applies to company websites.
This exhibit celebrating the twentieth anniversary of Regulation FD highlights the materials from the virtual museum and archive that describe the development, implementation and enforcement of Regulation FD. Through the papers, photos, oral histories and programs, you will hear from those who were involved in the SEC’s efforts to regulate selective disclosure of material nonpublic information.
This program provides a historical perspective on the development, implementation and enforcement of Regulation FD on its twentieth anniversary.
Featuring Thomas J. Kim, partner, Sidley Austin LLP
Featuring Steven Bochner, partner, Wilson, Sonsini, Goodrich and Rosati LLP
Featuring Joan McKown, partner, Jones Day
Featuring Lona Nallengara, partner, Shearman & Sterling
Paul Gonson began working at the SEC in 1961 and held a number of positions during his 37-year career at the agency. He started out in the Division of Corporate Regulation, then transferred in 1967 to the Office of General Counsel where he became primarily an appellate attorney. When David Ferber retired from his post as the Solicitor in 1979, Gonson was appointed to take his place. During the next 20 years, he worked on a number of enforcement cases, primarily insider trading, many of which he argued before the Supreme Court. In 1998, he retired from the SEC and joined the firm of Kirpatrick & Lockhart.
