The SEC's New Selective Disclosure and Insider Trading Rules

The Securities and Exchange Commission’s new rules that address the problem of selective disclosure of nonpublic information by publicly-held companies became effective October 23, 2000. The rules also clarify existing insider trading law.

Regulation FD requires: (1) for any non-intentional material selective disclosure, a company must make prompt (within 24 hours or by the opening of the next day’s trading) public disclosure, or (2) for any intentional (where the issuer knows or is reckless in not knowing that the information being disclosed is both material and nonpublic) material selective disclosure, a company must make simultaneous public disclosure.

Companies can make the required disclosure by filing the information with the SEC on Form 8-K, by press release or by any other non-exclusionary method of disclosure that is reasonably designed to provide broad public access.

• Provide open access to analyst conference calls or press conferences via the Internet according to the SEC’s model for making a planned disclosure of material information:

  Issue a press release containing the information,

  Provide adequate notice, by giving time, date and instructions on how to access the call, by press release and/or website posting, of a scheduled conference call to discuss the information, and

  Hold the conference call in an open manner, permitting investors to listen in either by telephone or through Internet webcasting.

• Adopt a broker and analyst policy that directly addresses the SEC’s concerns, including identification of information that is material, such as information regarding earnings, acquisitions or dispositions, events concerning the company’s securities, change in auditors and bankruptcies.

• Identify those individuals who are authorized and expected to communicate with analysts, investors and others covered by the Regulation and direct inquiries only to those people.

In addition, because Regulation FD specifically exempts any disclosure made to a person who expressly agrees to maintain information in confidence, all public companies should as a matter of course obtain confidentiality agreements from all potential investors in a non-public offering of the company’s securities.

A violation of the Regulation could subject the company to civil enforcement actions by the SEC. Although the SEC explicitly stated in Regulation FD that a violation of the Regulation will not automatically subject a company to Section 10b-5 fraud liability or private liability, no company should take much comfort in this exemption. Selective private disclosure will always provide an avenue for the plaintiff’s bar to bring a fraud action under Section10b-5 itself.

• Under new Rule 10b5-1, insider trading liability arises if a person is “aware” of material nonpublic information when making the purchase or sale with several exceptions and subject to certain affirmative defenses. It is not necessary to prove that the person “used” the information to trade, as some courts have previously required.

• Under new Rule 10b5-2, insider trading liability would arise for a person receiving confidential information when (1) the person agreed to keep the information confidential, (2) the persons involved had a history, pattern or practice of sharing confidences with a reasonable expectation of confidentiality, or (3) when the person providing the information was a spouse, parent, child or sibling of the person who received the information unless it is shown that there was no reasonable expectation of confidentiality.

Regulation FD and the final SEC release under which Regulation FD and the insider trading rules were adopted is available at the SEC’s website, as are the commission’s most recent interpretations relating to Regulation FD.