[Federal Register Volume 65, Number 165 (Thursday, August 24, 2000)]
[Rules and Regulations]
[Pages 51716-51740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21156]
[[Page 51715]]
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Part IV
Securities and Exchange Commission
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17 CFR Parts 240, 243, and 249
Selective Disclosure and Insider Trading; Final Rule
Federal Register / Vol. 65, No. 165 / Thursday, August 24, 2000 /
Rules and Regulations
[[Page 51716]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240, 243, and 249
[Release Nos. 33-7881, 34-43154, IC-24599, File No. S7-31-99]
RIN 3235-AH82
Selective Disclosure and Insider Trading
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission is adopting new rules
to address three issues: the selective disclosure by issuers of
material nonpublic information; when insider trading liability arises
in connection with a trader's ``use'' or ``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. The rules are designed to
promote the full and fair disclosure of information by issuers, and to
clarify and enhance existing prohibitions against insider trading.
EFFECTIVE DATE: The new rules and amendments will take effect October
23, 2000.
FOR FURTHER INFORMATION CONTACT: Richard A. Levine, Sharon Zamore, or
Jacob Lesser, Office of the General Counsel at (202) 942-0890; Amy
Starr, Office of Chief Counsel, Division of Corporation Finance at
(202) 942-2900.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission today
is adopting new rules: Regulation FD,\1\ Rule 10b5-1,\2\ and Rule 10b5-
2.\3\ Additionally, the Commission is adopting amendments to Form 8-
K.\4\
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\1\ 17 CFR 243.100-243.103.
\2\ 17 CFR 240.10b5-1.
\3\ 17 CFR 240.10b5-2.
\4\ 17 CFR 249.308.
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I. Executive Summary
We are adopting new rules and amendments to address the selective
disclosure of material nonpublic information by issuers and to clarify
two issues under the law of insider trading. In response to the
comments we received on the proposal, we have made several
modifications, as discussed below, in the final rules.
Regulation FD (Fair Disclosure) is a new issuer disclosure rule
that addresses selective disclosure. The regulation provides that when
an issuer, or person acting on its behalf, discloses material nonpublic
information to certain enumerated persons (in general, securities
market professionals and holders of the issuer's securities who may
well trade on the basis of the information), it must make public
disclosure of that information. The timing of the required public
disclosure depends on whether the selective disclosure was intentional
or non-intentional; for an intentional selective disclosure, the issuer
must make public disclosure simultaneously; for a non-intentional
disclosure, the issuer must make public disclosure promptly. Under the
regulation, the required public disclosure may be made by filing or
furnishing a Form 8-K, or by another method or combination of methods
that is reasonably designed to effect broad, non-exclusionary
distribution of the information to the public.
Rule 10b5-1 addresses the issue of when insider trading liability
arises in connection with a trader's ``use'' or ``knowing possession''
of material nonpublic information. This rule provides that a person
trades ``on the basis of'' material nonpublic information when the
person purchases or sells securities while aware of the information.
However, the rule also sets forth several affirmative defenses, which
we have modified in response to comments, to permit persons to trade in
certain circumstances where it is clear that the information was not a
factor in the decision to trade.
Rule 10b5-2 addresses the issue of when a breach of a family or
other non-business relationship may give rise to liability under the
misappropriation theory of insider trading. The rule sets forth three
non-exclusive bases for determining that a duty of trust or confidence
was owed by a person receiving information, and will provide greater
certainty and clarity on this unsettled issue.
II. Selective Disclosure: Regulation FD
A. Background
As discussed in the Proposing Release,\5\ we have become
increasingly concerned about the selective disclosure of material
information by issuers. As reflected in recent publicized reports, many
issuers are disclosing important nonpublic information, such as advance
warnings of earnings results, to securities analysts or selected
institutional investors or both, before making full disclosure of the
same information to the general public. Where this has happened, those
who were privy to the information beforehand were able to make a profit
or avoid a loss at the expense of those kept in the dark.
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\5\ The new rules and amendments were proposed in Exchange Act
Release No. 42259 (Dec. 20, 1999) [64 FR 72590].
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We believe that the practice of selective disclosure leads to a
loss of investor confidence in the integrity of our capital markets.
Investors who see a security's price change dramatically and only later
are given access to the information responsible for that move rightly
question whether they are on a level playing field with market
insiders.
Issuer selective disclosure bears a close resemblance in this
regard to ordinary ``tipping'' and insider trading. In both cases, a
privileged few gain an informational edge--and the ability to use that
edge to profit--from their superior access to corporate insiders,
rather than from their skill, acumen, or diligence. Likewise, selective
disclosure has an adverse impact on market integrity that is similar to
the adverse impact from illegal insider trading: Investors lose
confidence in the fairness of the markets when they know that other
participants may exploit ``unerodable informational advantages''
derived not from hard work or insights, but from their access to
corporate insiders.\6\ The economic effects of the two practices are
essentially the same. Yet, as a result of judicial interpretations,
tipping and insider trading can be severely punished under the
antifraud provisions of the federal securities laws, whereas the status
of issuer selective disclosure has been considerably less clear.\7\
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\6\ United States v. O'Hagan, 521 U.S. 642, 658 (1997) (citing
Victor Brudney, Insiders, Outsiders, and Informational Advantages
Under the Federal Securities Laws, 93 Harv. L. Rev. 322, 356
(1979)). See also H.R. Rep. No. 100-910 (1988) (``The investing
public has a legitimate expectation that the prices of actively
traded securities reflect publicly available information about the
issuer of such securities. . . . [T]he small investor will be--and
has been--reluctant to invest in the market if he feels it is rigged
against him.'')
\7\ See Proposing Release, part II.A. As discussed in the
Proposing Release, in light of the ``personal benefit'' test set
forth in the Supreme Court's decision in Dirks v. SEC, 463 U.S. 646
(1983), many have viewed issuer selective disclosures to analysts as
protected from insider trading liability, see, e.g., Paul P.
Brountas Jr., Note: Rule 10b-5 and Voluntary Corporate Disclosures
to Securities Analysts, 92 Colum. L. Rev. 1517, 1529 (1992). We have
brought a settled enforcement action alleging a tipping violation by
a corporate officer who was alleged to have acted with the motive to
protect and enhance his reputation. SEC v. Phillip J. Stevens,
Litigation Release No. 12813 (Mar. 19, 1991).
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Regulation FD is also designed to address another threat to the
integrity of our markets: the potential for corporate management to
treat material information as a commodity to be used to gain or
maintain favor with particular analysts or investors. As noted in the
[[Page 51717]]
Proposing Release, in the absence of a prohibition on selective
disclosure, analysts may feel pressured to report favorably about a
company or otherwise slant their analysis in order to have continued
access to selectively disclosed information. We are concerned, in this
regard, with reports that analysts who publish negative views of an
issuer are sometimes excluded by that issuer from calls and meetings to
which other analysts are invited.\8\
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\8\ See, e.g., Jeffrey M. Laderman, Who Can You Trust? Wall
Street's Spin Game, Stock Analysts Often Have a Hidden Agenda, Bus.
Wk., Oct. 5, 1998 and Amitabh Dugar, Siva Nathan, Analysts' Research
Reports: Caveat Emptor, 5 J. Investing 13 (1996).
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Finally, as we also observed in the Proposing Release,
technological developments have made it much easier for issuers to
disseminate information broadly. Whereas issuers once may have had to
rely on analysts to serve as information intermediaries, issuers now
can use a variety of methods to communicate directly with the market.
In addition to press releases, these methods include, among others,
Internet webcasting and teleconferencing. Accordingly, technological
limitations no longer provide an excuse for abiding the threats to
market integrity that selective disclosure represents.
To address the problem of selective disclosure, we proposed
Regulation FD. It targets the practice by establishing new requirements
for full and fair disclosure by public companies.
1. Breadth of Comment on the Proposal
The Proposing Release prompted an outpouring of public comment--
nearly 6,000 comment letters.\9\ The vast majority of these commenters
consisted of individual investors, who urged--almost uniformly--that we
adopt Regulation FD. Individual investors expressed frustration with
the practice of selective disclosure, believing that it places them at
a severe disadvantage in the market. Several cited personal experiences
in which they believed they had been disadvantaged by the practice.\10\
Many felt that selective disclosure was indistinguishable from insider
trading in its effect on the market and investors, and expressed
surprise that existing law did not already prohibit this practice.
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\9\ The public comments we received, and a summary of public
comments prepared by our staff, can be reviewed in our Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, in
File No. S7-31-99. Public comments submitted by electronic mail are
on our website, www.sec.gov.
\10\ See, e.g., Letters of Gary Aguirre, David Cambridge,
Malcolm Kirby, and Doug Wilmsmeyer.
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Other comments suggested that today's self-directed, online
investors do not expect to rely exclusively on research and analysis
performed by professionals, as was more common in the past. With
advances in information technology, most notably the Internet,
information can be communicated to shareholders directly and in real
time, without the intervention of an intermediary. This online
revolution has created a greater demand, expectation, and need for
direct delivery of market information. As many individual commenters
noted, under this paradigm, analysts still provide value for investors
by using their education, judgment, and expertise to analyze
information. On the other hand, investors are rightly concerned with
the use of information gatekeepers who merely repeat information that
has been selectively disclosed to them.
Noting that analysts predominantly issue ``buy'' recommendations on
covered issuers, investors also made the point that current selective
disclosure practices may create conflicts of interest; analysts have an
incentive not to make negative statements about an issuer if they fear
losing their access to selectively disclosed information. Thus, these
commenters suggested that a rule against selective disclosure could
lead to more objective and accurate analysis and recommendations from
securities analysts.
We also received numerous comments from securities industry
participants, issuers, lawyers, media representatives, and professional
and trade associations. Almost all of these commenters agreed that
selective disclosure of material nonpublic information was
inappropriate and supported our goals of promoting broader and fairer
disclosure by issuers. Some of these commenters believed the proposal
was a generally appropriate way to address the problem of selective
disclosure. Many others, however, expressed concerns about the approach
of Regulation FD and suggested alternate methods for achieving our
goals or recommended various changes to the proposal.
2. Need for Regulation
One fundamental issue raised by these commenters was whether
Regulation FD is necessary. Some commenters stated that there is
limited anecdotal evidence of selective disclosure. Others suggested
that it appears that issuer disclosure practices are generally
improving, so that we should refrain from rulemaking at this time, and
instead permit practices to evolve and encourage voluntary adherence to
``best practices'' of disclosure. We do not agree with these views.
It is, of course, difficult to quantify precisely the amount of
selective disclosure--just as it is difficult to quantify precisely the
amount of ordinary insider trading. Incidents of selective disclosure,
like insider trading, by definition are not conducted openly and in
public view. Nevertheless, we have noted numerous media reports in the
past two years alleging selective, exclusionary disclosure
practices.\11\ More generally, surveys of practices of issuer personnel
indicate significant acknowledgement of the use of selective disclosure
of material information.\12\ Based on these public reports, as well as
our staff's experience, it is clear to us that the problem of selective
disclosure is not limited, as some commenters have suggested, to just a
few isolated incidents.
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\11\ See, e.g., EDS Call By Merrill Spurs Warning: Call of the
Day, Bloomberg News, June 9, 2000, available in Bloomberg, Hush
List; Altera Steers Analysts' Revenue Forecasts: Call of the Day,
Bloomberg News, June 6, 2000, available in Bloomberg, Hush List;
Goldman Falls After Warning on 2nd-Quarter Profit, Bloomberg News,
May 26, 2000, available in Bloomberg, Hush List; Pepsi Bottling
Gives Select Group Early Look at Data, Bloomberg News, May 15, 2000,
available in Bloomberg, Hush List; Investors Back SEC Rule to Ban
Selective Disclosure, Bloomberg News, Apr. 27, 2000, available in
Bloomberg Equity CN; Richard McCaffery, Papa John's Investors: The
Last to Know, Motley Fool, Dec. 9, 1999 (http://www.fool.com/news/1999/pzza991209.html); Juniper Networks Doesn't Invite All Investors
to Product Call, Bloomberg News, Dec. 7, 1999, available in
Bloomberg, Hush List; Access Denied: Some Investors Lose When Kept
Out, Bloomberg News, Dec. 6, 1999, available in Bloomberg, Hush
List; Fred Barbash, Companies, Analysts a Little Too Cozy, Wash.
Post, Oct. 31, 1999, at H1; SEC's Levitt Seeks to Open Company
Conference Calls, Bloomberg News, Oct. 18, 1999, available in
Bloomberg, Hush List; Susan Pulliam, Abercrombie & Fitch Ignites
Controversy Over Possible Leak of Sluggish Sales Data, Wall St. J.,
Oct. 14, 1999, at C1; SEC May Propose Rule to Curb Selective
Disclosure, Bloomberg News, Oct. 7, 1999, available in Bloomberg,
Hush List; Idaho Conference of Moguls, Investors Boosts Stocks,
Bloomberg News, July 8, 1999, available in Bloomberg, Hush List;
ConAgra Excludes Investors From 3rd-Qtr Earnings Call, Bloomberg
News, Mar. 25, 1999, available in Bloomberg, Hush List; Susan
Pulliam and Gary McWilliams, Compaq is Criticized for How it
Disclosed PC Troubles, Wall St. J., Mar. 2, 1999, at C1; Miriam
Hill, Should Companies Play Favorites?, Philadelphia Inquirer, Feb.
2, 1999, at C1; Big Investors Get First Word With Market-Moving
News, Bloomberg News, Dec. 14, 1998, available in Bloomberg, Hush
List. We do not mean to suggest that all of these reports
necessarily involve selective disclosure of material nonpublic
information.
\12\ National Investor Relations Institute, A Study of Corporate
Disclosure Practices, Second Measurement, 18 (May 1998); Stephen
Barr, ``Back to the Future: What the SEC Should Really Do About
Earnings Management,'' CFO Magazine (Sept. 1999).
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Some commenters cited a February 2000 NIRI survey suggesting an
improvement in issuer disclosure
[[Page 51718]]
practices, in that most issuers responding to the survey now are
opening certain of their conference calls to individual investors.\13\
To the extent this demonstrates voluntary improvement in response to
our efforts to focus attention on the problem,\14\ we believe this is a
positive development. However, these voluntary steps, while laudable,
have been far from fully effective. We note, for example, that all of
the public reports of selective disclosure cited above occurred after
the Commission had begun to focus public attention on issuer selective
disclosure. Some occurred even after we proposed Regulation FD. This
suggests that the problematic practices targeted by Regulation FD are
continuing to occur. Finally, the overwhelming support from investors
for Regulation FD demonstrates a strong perception among the investing
public that selective disclosure is a significant problem, and shows a
corresponding need to prohibit this practice in order to bolster
investor confidence in the fairness of the disclosure process.
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\13\ NIRI Executive Alert, Most Corporate Conference Calls Are
Now Open to Individual Investors and the Media, Feb. 29, 2000.
\14\ See, e.g., Remarks of Chairman Arthur Levitt to the ``SEC
Speaks'' Conference, ``A Question of Integrity: Promoting Investor
Confidence by Fighting Insider Trading'' (Feb. 27, 1998); Remarks of
Commissioner Isaac C. Hunt, Jr., ``Navigating the Sea of
Communications'' (Feb. 26, 1999); Remarks of Commissioner Laura S.
Unger, ``Corporate Communications Without Violations: How Much
Should Issuers Tell Their Analysts and When'' (Apr. 23, 1999).
Copies of these speeches are available on the SEC's website at
www.sec.gov.
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Some commenters contended that rulemaking on this topic was an
inappropriately broad response to the issue.\15\ They suggested instead
that we use existing tools (namely, the law of insider trading) to
bring individual enforcement actions in those cases that appear to
involve significant selective disclosures. While we have considered
this approach--and of course we remain free to bring such cases where a
selective disclosure does violate insider trading laws--we do not agree
that this is the appropriate response to the legal uncertainties posed
by current insider trading law. In other contexts, we have been
criticized for attempting to ``make new law'' in an uncertain area by
means of enforcement action and urged instead to seek to change the law
through notice-and-comment rulemaking. We believe that this rulemaking
is the more careful and considered response to the problem presented by
selective disclosure.\16\
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\15\ See, e.g., Letters of the Securities Industry Association,
The Bond Market Association, and the American Bar Association.
\16\ We note, in addition, that if we were successful in
enforcement actions charging selective disclosures as a form of
fraudulent insider trading, the in terrorem effect of that success
(and the consequent chilling effect on issuers) would certainly be
far greater than the impact of the more measured approach we adopt
today.
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3. Effect of Regulation FD on Issuer Communications
One frequently expressed concern was that Regulation FD would not
lead to broader dissemination of information, but would in fact have a
``chilling effect'' on the disclosure of information by issuers.\17\ In
the view of these commenters, issuers would find it so difficult to
determine when a disclosure of information would be ``material'' (and
therefore subject to the regulation) that, rather than face potential
liability and other consequences of violating Regulation FD, they would
cease informal communications with the outside world altogether.\18\
Some of these commenters therefore recommended that the Commission not
adopt any mandatory rule prohibiting selective disclosure, like
Regulation FD, but instead pursue voluntary means of addressing the
problem, such as interpretive guidance, or the promotion of a ``blue
ribbon'' panel to develop best practices for issuer disclosure. Other
commenters recommended various ways that Regulation FD could be made
narrower or more well-defined, in order to ameliorate some of the
concerns about chilling. Other commenters, however, took issue with the
supposition that issuer disclosures would be chilled. As some
commenters stated, the marketplace simply would not allow issuers to
cease communications with analysts and security holders.\19\
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\17\ See, e.g., Letters of the Securities Industry Association,
Sullivan and Cromwell, the Association for Investment Management and
Research, Merrill Lynch, and the New York City Bar Association.
\18\ See, e.g., Letters of the Securities Industry Association,
the Association for Investment Management and Research, and Merrill
Lynch.
\19\ See, e.g., Letters of the United Kingdom Listing Authority,
Chris Kallaher, and Joseph L. Toenjes.
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We have considered these views carefully. As discussed in the
Proposing Release, we are mindful of the concerns about chilling issuer
disclosure; we agree that the market is best served by more, not less,
disclosure of information by issuers. Because any potential ``chill''
is most likely to arise--if at all--from the fear of legal liability,
we included in proposed Regulation FD significant safeguards against
inappropriate liability. Most notably, we stated that the regulation
would not provide a basis for private liability, and provided that in
Commission enforcement actions under Regulation FD we would need to
prove knowing or reckless conduct.
4. Revisions to Narrow the Scope of Regulation FD
Nevertheless, to provide even greater protection against the
possibility of inappropriate liability, and to guard further against
the likelihood of any chilling effect resulting from the regulation, we
have modified Regulation FD in several respects.
First, we have narrowed the scope of the regulation so that it does
not apply to all communications with persons outside the issuer. The
regulation will apply only to communications to securities market
professionals and to any holder of the issuer's securities under
circumstances in which it is reasonably foreseeable that the security
holder will trade on the basis of the information.
Second, we have narrowed the types of issuer personnel covered by
the regulation to senior officials and those persons who regularly
communicate with securities market professionals or with security
holders. The effect of these first two changes is that Regulation FD
will not apply to a variety of legitimate, ordinary-course business
communications or to disclosures to the media.
Third, to remove any doubt that private liability will not result
from a Regulation FD violation, we have revised Regulation FD to make
absolutely clear that it does not establish a duty for purposes of Rule
10b-5 under the Securities Exchange Act of 1934 (``Exchange Act''). The
regulation now includes an express provision in the text stating that a
failure to make a disclosure required solely by Regulation FD will not
result in a violation of Rule 10b-5.
Fourth, we have made clear that where the regulation speaks of
``knowing or reckless'' conduct, liability will arise only when an
issuer's personnel knows or is reckless in not knowing that the
information selectively disclosed is both material and nonpublic. This
will provide additional assurance that issuers will not be second-
guessed on close materiality judgments. Neither will we, nor could we,
bring enforcement actions under Regulation FD for mistaken materiality
determinations that were not reckless.
Fifth, we have expressly provided that a violation of Regulation FD
will not lead to an issuer's loss of eligibility to use short-form
registration for a securities offering or affect security holders'
ability to resell under Rule 144
[[Page 51719]]
under the Securities Act of 1933 (``Securities Act''). This change
eliminates additional consequences of a Regulation FD violation that
issuers and other commenters considered too onerous.
We have made two other significant changes to the scope of
Regulation FD, which, while not specifically addressed to concerns
about chilling disclosure, narrow its scope. In response to concerns
about the interplay of Regulation FD with the Securities Act disclosure
regime, we have expressly excluded from the scope of the regulation
communications made in connection with most securities offerings
registered under the Securities Act. We believe that the Securities Act
already accomplishes most of the policy goals of Regulation FD for
purposes of registered offerings, and we will consider this topic in
the context of a broader Securities Act rulemaking. Also, we have
eliminated foreign governments and foreign private issuers from the
coverage of the regulation.
With these changes, we believe Regulation FD strikes an appropriate
balance. It 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. Regulation FD,
therefore, should promote full and fair disclosure of information by
issuers and enhance the fairness and efficiency of our markets.
B. Discussion of Regulation FD
Rule 100 of Regulation FD sets forth the basic rule regarding
selective disclosure. Under this rule, whenever:
(1) an issuer, or person acting on its behalf,
(2) discloses material nonpublic information,
(3) to certain enumerated persons (in general, securities market
professionals or holders of the issuer's securities who may well trade
on the basis of the information),
(4) the issuer must make public disclosure of that same
information:
(a) simultaneously (for intentional disclosures), or
(b) promptly (for non-intentional disclosures).
As a whole, the regulation requires that when an issuer makes an
intentional disclosure of material nonpublic information to a person
covered by the regulation, it must do so in a manner that provides
general public disclosure, rather than through a selective disclosure.
For a selective disclosure that is non-intentional, the issuer must
publicly disclose the information promptly after it knows (or is
reckless in not knowing) that the information selectively disclosed was
both material and nonpublic.
We have modified several of the key terms in the regulation that
serve to define its precise scope and effect. We discuss the key
provisions of the regulation below.
1. Scope of Communications and Issuer Personnel Covered by the
Regulation
As proposed, Regulation FD would have applied to any disclosure of
material nonpublic information made by an issuer, or person acting on
its behalf, to ``any person or persons outside the issuer.'' A number
of commenters stated that, as proposed, Regulation FD was too broad in
its coverage of disclosures to ``any person or persons outside the
issuer,'' and in its definition of ``person acting on behalf of an
issuer.'' We are persuaded that these comments have merit, and thus we
have modified the scope of the regulation in several respects.
a. Disclosures to Enumerated Persons. Commenters stated that if
Regulation FD applied to disclosures made to ``any person'' outside the
issuer, it would inappropriately interfere with ordinary-course
business communications with parties such as customers, suppliers,
strategic partners, and government regulators.\20\ In addition, several
media organizations and rating agencies commented that the regulation
should not apply to disclosures made to the press, or to rating
agencies for purposes of securities ratings.\21\ Overall, commenters
suggested various ways to narrow the scope of the regulation, including
providing specific exclusions for various types of recipients of
information,\22\ or expressly limiting the regulation's coverage to
persons such as securities analysts, market professionals,
institutional investors, or others who regularly make or would
reasonably be expected to make investment decisions involving the
issuer's securities.\23\
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\20\ See, e.g., Letters of the American Bar Association, the
American Corporate Counsel Association, the DC Bar, the American
Society of Corporate Secretaries, and the Securities Industry
Association.
\21\ Letters of Dow Jones, Moody's, and Standard and Poors.
\22\ See, e.g., Letters of Dow Jones (suggesting exclusion for
``bona fide news organizations''); Standard and Poors (suggesting
exclusion for the disclosure to rating agencies when information
provided in connection with rating process); and the Securities
Industry Association (suggesting exclusion for disclosure to
government recipients).
\23\ See, e.g., Letters of the American Corporate Counsel
Association, the American Society of Corporate Secretaries, the DC
Bar, and Sullivan Cromwell.
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In response to these comments, we have narrowed the coverage of the
final regulation. The regulation is designed to address the core
problem of selective disclosure made to those who would reasonably be
expected to trade securities on the basis of the information or provide
others with advice about securities trading. Accordingly, Rule 100(a)
of Regulation FD, as adopted, makes clear that the general rule against
selective disclosure applies only to disclosures made to the categories
of persons enumerated in Rule 100(b)(1).
Rule 100(b)(1) enumerates four categories of persons to whom
selective disclosure may not be made absent a specified exclusion. The
first three are securities market professionals--(1) broker-dealers and
their associated persons, (2) investment advisers, certain
institutional investment managers \24\ and their associated persons,
and (3) investment companies, hedge funds,\25\ and affiliated
persons.\26\ These categories will include sell-side analysts, many
buy-side analysts, large institutional investment managers, and other
market professionals who may be likely to trade on the basis of
selectively disclosed information. The fourth
[[Page 51720]]
category of person included in Rule 100(b)(1) is any holder of the
issuer's securities, under circumstances in which it is reasonably
foreseeable that such person would purchase or sell securities on the
basis of the information. Thus, as a whole, Rule 100(b)(1) will cover
the types of persons most likely to be the recipients of improper
selective disclosure, but should not cover persons who are engaged in
ordinary-course business communications with the issuer, or interfere
with disclosures to the media or communications to government
agencies.\27\
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\24\ Rule 100(b)(1)(ii) includes an ``institutional investment
manager'' as defined in Section 13(f)(5) of the Exchange Act (15
U.S.C. 78m(f)(5)) that filed a Form 13F for the most recent quarter
of the year. Generally, institutional investment managers are
required to report on Form 13F if they exercise investment
discretion with respect to accounts holding publicly traded equity
securities having an aggregate market value of at least $100
million. See Exchange Act Rule 13F-1, 17 CFR 240.13f-1.
\25\ Rule 100(b)(1)(iii) includes hedge funds by covering
persons who would be categorized as investment companies but for the
exclusions from the definition of investment company set forth in
Sections 3(c)(1) or 3(c)(7) of the Investment Company Act (15 U.S.C.
80a-3(c)(1) or 80a-3(c)(7)).
\26\ With one exception, we are using the definitions of these
terms provided in the federal securities laws. With respect to
investment companies and hedge funds, the definition of ``affiliated
person'' that we provide for purposes of Regulation FD is somewhat
narrower than the definition of that term provided in Section
2(a)(3) of the Investment Company Act (15 U.S.C. 80a-2(a)(3)). The
Regulation FD definition does not include the persons included in
Section 2(a)(3)(A) and (B)--i.e., persons who own or control 5% of
the voting securities of an investment company, or companies in
which the investment company owns or controls 5% of the voting
securities. We believe that these persons should not be included
among those to whom selective disclosure is prohibited, because they
are not ordinarily persons who will exercise influence or control
over an investment company's investment decisions, or be used as
conduits for transmission of selectively disclosed information.
\27\ While it is conceivable that a representative of a
customer, supplier, strategic partner, news organization, or
government agency could be a security holder of the issuer, it
ordinarily would not be foreseeable for the issuer engaged in an
ordinary-course business-related communication with that person to
expect the person to buy or sell the issuer's securities on the
basis of the communication. Indeed, if such a person were to trade
on the basis of material nonpublic information obtained in his or
her representative capacity, the person likely would be liable under
the misappropriation theory of insider trading.
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Rule 100(b)(2) sets out four exclusions from coverage. The first,
as proposed, is for communications made to a person who owes the issuer
a duty of trust or confidence--i.e., a ``temporary insider''--such as
an attorney, investment banker, or accountant. The second exclusion is
for communications made to any person who expressly agrees to maintain
the information in confidence.\28\ Any misuse of the information for
trading by the persons in these two exclusions would thus be covered
under either the ``temporary insider'' or the misappropriation theory
of insider trading. This approach recognizes that issuers and their
officials may properly share material nonpublic information with
outsiders, for legitimate business purposes, when the outsiders are
subject to duties of confidentiality.\29\
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\28\ This agreement to maintain confidentiality must be express.
However, this is not a requirement for a written agreement; an
express oral agreement will suffice. In addition, it will not be
necessary for the issuer to obtain a confidentiality agreement
before making the disclosure. An agreement obtained after the
disclosure is made, but before the recipient of the information
discloses or trades on the basis of it, will be sufficient. In this
manner, an issuer who has mistakenly made a selective disclosure of
material information may try to avoid any harm resulting from the
selective disclosure by obtaining from the recipient of that
disclosure an agreement not to disclose or trade on the basis of the
information.
\29\ These first two exclusions recognize that an issuer may
have a confidentiality agreement with, or be owed a duty of trust or
confidence by, an individual or group within a larger organization.
In that situation, the issuer can share material nonpublic
information with the individual or group that owes it the duty of
confidentiality, even though there may be other persons in the
organization who do not owe the issuer such a duty (and disclosure
to whom would be covered by Regulation FD). For example, if an
issuer shares information with an investment banker subject to a
duty of trust or confidence or an express confidentiality agreement,
the issuer will not be deemed to be sharing the information with
other parts of the investment banker's firm (e.g., sell-side analyst
or sales force personnel). Conversely, the fact that a duty of trust
or confidence or a confidentiality agreement specifically covers
disclosure to the investment banker does not permit disclosure to
others within the investment banker's firm.
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The third exclusion from coverage in Rule 100(b)(2) is for
disclosures to an entity whose primary business is the issuance of
credit ratings, provided the information is disclosed solely for the
purpose of developing a credit rating and the entity's ratings are
publicly available. As discussed by commenters,\30\ ratings
organizations often obtain nonpublic information in the course of their
ratings work. We are not aware, however, of any incidents of selective
disclosure involving ratings organizations. Ratings organizations, like
the media, have a mission of public disclosure; the objective and
result of the ratings process is a widely available publication of the
rating when it is completed. And under this provision, for the
exclusion to apply, the ratings organization must make its credit
ratings publicly available. For these reasons, we believe it is
appropriate to provide this exclusion from the coverage of Regulation
FD.
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\30\ Letters of The Bond Market Association, Moody's, and
Standard and Poors.
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The fourth exclusion from coverage is for communications made in
connection with most offerings of securities registered under the
Securities Act. We discuss this exclusion in greater detail in Part
II.B.6 below.
b. Disclosures by a Person Acting on an Issuer's Behalf. As
proposed, Regulation FD defined any ``person acting on behalf of an
issuer'' as ``any officer, director, employee, or agent of an issuer,
who discloses material nonpublic information while acting within the
scope of his or her authority.'' A number of commenters stated that
this definition was too broad and should be limited to ``senior
officials,'' to designated or authorized spokespersons, or in some
other manner.\31\ One commenter said that the definition should be
broader to prevent evasion.\32\ One commenter stated that if the scope
of Regulation FD were limited to disclosures to analysts and
institutional investors, then the definition of ``person acting on
behalf of an issuer'' would be appropriate.\33\
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\31\ Letters of the American Bar Association, the American
Corporate Counsel Association, and Cleary gottlieb.
\32\ Letter of PricewaterhouseCoopers.
\33\ Letter of the Business Roundtable.
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We have modified slightly the definition of ``person acting on
behalf of an issuer'' to make it more precise. We define the term to
mean: (1) Any senior official of the issuer\34\ or (2) any other
officer, employee, or agent of an issuer who regularly communicates
with any of the persons described in Rule 100(b)(1)(i), (ii), or (iii),
or with the issuer's security holders.\35\ By revising the definition
in this manner, we provide that the regulation will cover senior
management, investor relations professionals, and others who regularly
interact with securities market professionals or security holders.\36\
Of course, neither an issuer nor such a covered person could avoid the
reach of the regulation merely by having a non-covered person make a
selective disclosure. Thus, to the extent that another employee had
been directed to make a selective disclosure by a member of senior
management, that member of senior management would be responsible for
having made the selective disclosure. See Section 20(b) of the Exchange
Act. In addition, as was proposed, the definition expressly states that
a person who communicates material nonpublic information in breach of a
duty to the issuer would not be considered to be acting on behalf of
the issuer. Thus, an issuer is not responsible under Regulation FD when
one of its employees improperly trades or tips.\37\
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\34\ ``Senior official'' is defined in Rule 101(f) as any
director, executive officer, investor relations or public relations
officer, or other person with similar functions. See Section
II.B.3.b below. In the case of a closed-end investment company,
Regulation FD also defines the term ``person acting on behalf of an
issuer'' to include a senior official of the issuer's investment
adviser.
\35\ See Rule 101(c). For a closed-end investment company
subject to Regulation FD, an ``agent'' of the issuer would include a
director, officer, or employee of the investment company's
investment adviser or other service provider who is acting as an
agent of the issuer.
\36\ By including those who ``regularly'' communicate with
securities market professionals and security holders, the rule
focuses on those whose job responsibilities include dealing with
securities market professionals and security holders, acting in
those capacities. It does not cover every employee who may
occasionally communicate with an analyst or security holder. Thus,
if an analyst sought to ferret out information about an issuer's
business by quizzing a store manager on how business was going, the
store manager's response ordinarily would not trigger any Regulation
FD obligations. Similarly, an employee who routinely dealt with
customers or suppliers would not come within this definition merely
because one of these customers or suppliers also happened to be a
security holder of the issuer.
\37\ As noted in the Proposing Release, in such a case the
employee's potential liability will depend on existing insider
trading law and relevant doctrines of controlling person liability.
See, e.g., Sections 20A and 21A of the Exchange Act, 15 U.S.C. 78t-1
and 78u-1.
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[[Page 51721]]
2. Disclosures of Material Nonpublic Information
The final regulation, like the proposal, applies to disclosures of
``material nonpublic'' information about the issuer or its securities.
The regulation does not define the terms ``material'' and
``nonpublic,'' but relies on existing definitions of these terms
established in the case law. Information is material if ``there is a
substantial likelihood that a reasonable shareholder would consider it
important'' in making an investment decision.\38\ To fulfill the
materiality requirement, there must be a substantial likelihood that a
fact ``would have been viewed by the reasonable investor as having
significantly altered the `total mix' of information made available.''
\39\ Information is nonpublic if it has not been disseminated in a
manner making it available to investors generally.\40\
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\38\ TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976); see Basic v. Levinson, 485 U.S. 224, 231 (1988) (materiality
with respect to contingent or speculative events will depend on a
balancing of both the indicated probability that the event will
occur and the anticipated magnitude of the event in light of the
totality of company activity); see also Securities Act Rule 405, 17
CFR 230.405; Exchange Act Rule 12b-2, 17 CFR 240.12b-2; Staff
Accounting Bulletin No. 99 (Aug. 12, 1999) (64 FR 45150) (discussing
materiality for purposes of financial statements).
\39\ Id.
\40\ See, e.g., Texas Gulf Sulphur, 401 F.2d 833, 854 (2d Cir.
1968), cert, denied, 394 U.S. 976 (1969); In re Investors Management
Co, 44 S.E.C. 633, 643 (1971). For purposes of insider trading law,
insiders must wait a ``reasonable'' time after disclosure before
trading. What constitutes a reasonable time depends on the
circumstances of the dissemination. Faberge, Inc., 45 S.E.C. 249,
255 (1973), citing Texas Gulf Sulphur, 401 F.2d at 854.
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The use of the materiality standard in Regulation FD was the
subject of many comments. Some commenters supported the use of the
existing definition of materiality, noting that attempts to define
materiality for purposes of Regulation FD could have implications
beyond this regulation.\41\ Other commenters, however, including
securities industry representatives, securities lawyers, and some
issuers or issuer groups, stated that using a general materiality
standard in the regulation would cause difficulties for issuer
compliance.\42\ These commenters claimed that materiality was too
unclear and complex a standard for issuer personnel to use in making
``real time'' judgments about disclosures,\43\ and that this vagueness
would lead to litigation and a chilling effect on corporate disclosure
practices.\44\ These commenters offered a variety of recommendations to
address this issue.
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\41\ See, e.g., Letters of the Financial Executives Institute
and the North American Securities Administrators Association.
\42\ See, e.g., Letters of the American Bar Association, the
Association for Investment Management and Research, the Association
of Publicly Traded Companies, Bank One, Cleary Gottlieb, Goldman
Sachs, the Investment Company Institute, the New York City Bar
Association, the Securities Industry Association, and Sullivan and
Cromwell.
\43\ See Letter of the American Bar Association.
\44\ In the Proposing Release, we offered several suggestions
for mitigating these concerns, including: (1) Designating a limited
number of persons who are authorized to make a disclosures or field
inquiries from investors, analysts, and the media; (2) keeping a
record of communications with analysts; (3) declining to answer
sensitive questions until issuer personnel could consult with
counsel; or (4) seeking time-limited ``embargo'' agreements from
analysts in appropriate circumstances. Several commenters believed
that the first of these methods was a useful practice, which was
already in place at many issuers, but did not believe the other
suggestions would be practical. We did not intend to suggest that
issuers were required to implement any of these practices, but only
offered them as suggestions.
---------------------------------------------------------------------------
Some commenters suggested that the regulation include a bright-line
standard or other limitation on what was material for purposes of
Regulation FD, or identify in the regulation an exclusive list of types
of information covered.\45\ While we acknowledged in the Proposing
Release that materiality judgments can be difficult, we do not believe
an appropriate answer to this difficulty is to set forth a bright-line
test, or an exclusive list of ``material'' items for purposes of
Regulation FD. The problem addressed by this regulation is the
selective disclosure of corporate information of various types; the
general materiality standard has always been understood to encompass
the necessary flexibility to fit the circumstances of each case. As the
Supreme Court stated in responding to a very similar argument: ``A
bright-line rule indeed is easier to follow than a standard that
requires the exercise of judgment in the light of all the
circumstances. But ease of application alone is not an excuse for
ignoring the purposes of the securities acts and Congress' policy
decisions. Any approach that designates a single fact or occurrence as
always determinative of an inherently fact-specific finding such as
materiality, must necessarily be over-or underinclusive.''\46\
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\45\ See e.g., Letters of the American Bar Association, the
Association of Publicly Traded Companies, the Investment Company
Institute, and the DC Bar.
\46\ Basic Inc. v. Levinson, 485 U.S. 224, 236 (1988).
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Other suggestions from commenters included providing more
interpretive guidance about types of information or events that are
more likely to be considered material. While it is not possible to
create an exhaustive list, the following items are some types of
information or events that should be reviewed carefully to determine
whether they are material: (1) Earnings information; (2) mergers,
acquisitions, tender offers, joint ventures, or changes in assets; (3)
new products or discoveries, or developments regarding customers or
suppliers (e.g., the acquisition or loss of a contract); (4) changes in
control or in management; (5) change in auditors or auditor
notification that the issuer may no longer rely on an auditor's audit
report; (6) events regarding the issuer's securities--e.g., defaults on
senior securities, calls of securities for redemption, repurchase
plans, stock splits or changes in dividends, changes to the rights of
security holders, public or private sales of additional securities; and
(7) bankruptcies or receiverships.\47\
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\47\ Compare NASD Rule IM-4120-1. Some of these items are
currently covered in Form 8-K reporting requirements.
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By including this list, we do not mean to imply that each of these
items is per se material. The information and events on this list still
require determinations as to their materiality (although some
determinations will be reached more easily than others). For example,
some new products or contracts may clearly be material to an issuer;
yet that does not mean that all product developments or contracts will
be material. This demonstrates, in our view, why no ``bright-line''
standard or list of items can adequately address the range of
situations that may arise. Furthermore, we do not and cannot create an
exclusive list of events and information that have a higher probability
of being considered material.
One common situation that raises special concerns about selective
disclosure has been the practice of securities analysts seeking
``guidance'' from issuers regarding earnings forecasts. When an issuer
official engages in a private discussion with an analyst who is seeking
guidance about earnings estimates, he or she takes on a high degree of
risk under Regulation FD. If the issuer official communicates
selectively to the analyst nonpublic information that the company's
anticipated earnings will be higher than, lower than, or even the same
as what analysts have been forecasting, the issuer likely will have
violated Regulation FD. This is true whether the information about
earnings is communicated expressly or through indirect ``guidance,''
the meaning of which is apparent though implied. Similarly, an issuer
cannot render material information immaterial simply by breaking it
into ostensibly non-material pieces.
[[Page 51722]]
At the same time, an issuer is not prohibited from disclosing a
non-material piece of information to an analyst, even if, unbeknownst
to the issuer, that piece helps the analyst complete a ``mosaic'' of
information that, taken together, is material. Similarly, since
materiality is an objective test keyed to the reasonable investor,
Regulation FD will not be implicated where an issuer discloses
immaterial information whose significance is discerned by the analyst.
Analysts can provide a valuable service in sifting through and
extracting information that would not be significant to the ordinary
investor to reach material conclusions. We do not intend, by Regulation
FD, to discourage this sort of activity. The focus of Regulation FD is
on whether the issuer discloses material nonpublic information, not on
whether an analyst, through some combination of persistence, knowledge,
and insight, regards as material information whose significance is not
apparent to the reasonable investor.
Finally, some commenters stated that greater protection would be
afforded to issuers if we made clear that the regulation's requirement
for ``intentional'' (knowing or reckless) conduct also extended to the
judgment of whether the information disclosed was material.\48\ We
agree that this clarification is appropriate. As adopted, Rule 101(a)
states that a person acts ``intentionally'' only if the person knows,
or is reckless in not knowing, that the information he or she is
communicating is both material and nonpublic.\49\ As commenters
suggested, this aspect of the regulation provides additional protection
that issuers need not fear being second-guessed by the Commission in
enforcement actions for mistaken judgments about materiality in close
cases.
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\48\ See, e.g., Letter of Charles Schwab.
\49\ See also, Section II.B.3 below.
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3. Intentional and Non-intentional Selective Disclosures: Timing of
Required Public Disclosures
A key provision of Regulation FD is that the timing of required
public disclosure differs depending on whether the issuer has made an
``intentional'' selective disclosure or a selective disclosure that was
not intentional. For an ``intentional'' selective disclosure, the
issuer is required to publicly disclose the same information
simultaneously.\50\
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\50\ Rule 100(a)(1).
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a. Standard of ``Intentional'' Selective Disclosure. Under the
regulation, a selective disclosure is ``intentional'' when the issuer
or person acting on behalf of the issuer making the disclosure either
knows, or is reckless in not knowing, prior to making the disclosure,
that the information he or she is communicating is both material and
nonpublic.\51\ A number of commenters thought that the distinction
between intentional and non-intentional disclosures was
appropriate.\52\ Others, however, stated that the ``intentional''
standard should not include reckless conduct, because of the risk that
this standard, in hindsight, could be interpreted as close to a
negligence standard.\53\ Some commenters suggested that there be a safe
harbor for good-faith efforts to comply with Regulation FD or for good-
faith determinations that information was not material.\54\
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\51\ Rule 101(a).
\52\ See e.g., Letters of the American Corporate Counsel
Association, Charles Schwab, and Dow Chemical.
\53\ See, e.g., Letters of the American Society of Corporate
Secretaries and Credit Suisse First Boston.
\54\ See, e.g., Letters of the American Society of Corporate
Secretaries, the American Corporate Counsel Association, and J.P.
Morgan.
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After considering these comments, we have determined to adopt the
``intentional''/non-intentional distinction essentially as proposed. By
creating this distinction, Regulation FD already provides greater
flexibility as to the timing of required disclosure in the event of
erroneous judgments than do other issuer disclosure provisions under
the federal securities laws; it essentially incorporates the knowing or
reckless mental state required for fraud into this disclosure
provision. Since recklessness suffices to meet the mental state
requirement even for purposes of the antifraud provisions,\55\ we
believe it is appropriate to retain recklessness in Regulation FD's
definition of ``intentional'' as well. Further, in view of the
definition of recklessness that is prevalent in the federal courts,\56\
it is unlikely that issuers engaged in good-faith efforts to comply
with the regulation will be considered to have acted recklessly.
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\55\ See, e.g., Rolf v. Eastman Dillon & Co., 570 F.2d 38 (2d
Cir.), cert. denied, 439 U.S. 1039 (1978); McLean v. Alexander, 599
F.2d 1190 (3d Cir. 1979); Mansbach v. Prescott, Ball & Turben, 598
F.2d 1017 (6th Cir. 1979); SEC v. Carriba Air, Inc., 681 F.2d 1318
(11th Cir. 1982).
\56\ See, Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th
Cir. 1990), cert. denied, 499 U.S. 976 (1991); Sundstrand Corp. v.
Sun Chemical Corp., 553 F.2d 1033 (7th Cir.), cert. denied, 434 U.S.
875 (1977).
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As requested by several commenters, moreover, we emphasize that the
definition of ``intentional'' in Rule 101(a) requires that the
individual making the disclosure must know (or be reckless in not
knowing) that he or she would be communicating information that was
both material and nonpublic. Thus, in the case of a selective
disclosure attributable to a mistaken determination of materiality,
liability will arise only if no reasonable person under the
circumstances would have made the same determination.\57\ As a result,
the circumstances in which a selective disclosure is made may be
important. We recognize, for example, that a materiality judgment that
might be reckless in the context of a prepared written statement would
not necessarily be reckless in the context of an impromptu answer to an
unanticipated question.
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\57\ Of course, a pattern of ``mistaken'' judgments about
materiality would make less credible the claim that any particular
disclosure was not intentional.
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b. ``Prompt'' Public Disclosure After Non-intentional Selective
Disclosures. Under Rule 100(a)(2), when an issuer makes a covered non-
intentional disclosure of material nonpublic information, it is
required to make public disclosure promptly. As proposed, Rule 101(d)
defined ``promptly'' to mean ``as soon as reasonably practicable'' (but
no later than 24 hours) after a senior official of the issuer learns of
the disclosure and knows (or is reckless in not knowing) that the
information disclosed was both material and non-public. ``Senior
official'' was defined in the proposal as any executive officer of the
issuer, any director of the issuer, any investor relations officer or
public relations officer, or any employee possessing equivalent
functions.
Commenters expressed varying views on the definition of
``promptly'' provided in the rule. Some said that the time period
provided for disclosure was appropriate; \58\ others said it was too
short; \59\ and still others said that it was too specific, and should
require disclosure only as soon as reasonably possible or
practicable.\60\ We believe that it is preferable for issuers and the
investing public that there be a clear delineation of when ``prompt''
disclosure is required. We also believe that the 24-hour requirement
strikes the appropriate balance between achieving broad, non-
exclusionary disclosure and permitting issuers time to determine
[[Page 51723]]
how to respond after learning of the non-intentional selective
disclosure. However, recognizing that sometimes non-intentional
selective disclosures will arise close to or over a weekend or holiday,
we have slightly modified the final rule to state that the outer
boundary for prompt disclosure is the later of 24 hours or the
commencement of the next day's trading on the New York Stock Exchange,
after a senior official learns of the disclosure and knows (or is
reckless in not knowing) that the information disclosed was material
and nonpublic. Thus, if a non-intentional selective disclosure of
material, nonpublic information is discovered after the close of
trading on Friday, for example, the outer boundary for making public
disclosure is the beginning of trading on the New York Stock Exchange
on Monday.
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\58\ See Letters of the Chicago Board Options Exchange and
Gretchen Sprigg Wisehart.
\59\ See, e.g., Letters of Cleary Gottlieb, Credit Suisse First
Boston, Emerson Electric, and Morgan Stanley Dean Witter.
\60\ See, e.g., Letters of the American Bar Association, the
American Corporate Counsel Association, the National Investor
Relations Institute, and PR Newswire.
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Commenters also expressed differing views on the definition of
``senior official'' contained in the regulation. We are adopting this
definition as proposed.\61\ However, in response to comments, we have
provided greater clarity as to when the duty to make ``prompt''
disclosure begins. The requirement to make prompt disclosure is
triggered when a senior official of the issuer learns that there has
been a non-intentional disclosure of information by the issuer or a
person acting on behalf of the issuer that the senior official knows,
or is reckless in not knowing, is both material and non-public.\62\
Similar to the language contained in the definition of ``intentional,''
discussed above, this language is designed to make clear that the
requirements of the regulation are only triggered when a responsible
issuer official (1) learns that certain information has been disclosed,
(2) knows (or is reckless in not knowing) that the information
disclosed is material, and (3) knows (or is reckless in not knowing)
that the information disclosed is nonpublic.
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\61\ Rule 101(f).
\62\ Rule 101(d).
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4. ``Public Disclosure'' Required by Regulation FD
Rule 101(e) defines the type of ``public disclosure'' that will
satisfy the requirements of Regulation FD. As proposed, Rule 101(e)
gave issuers considerable flexibility in determining how to make
required public disclosure. The proposal stated that issuers could meet
Regulation FD's ``public disclosure'' requirement by filing a Form 8-K,
by distributing a press release through a widely disseminated news or
wire service, or by any other non-exclusionary method of disclosure
that is reasonably designed to provide broad public access--such as
announcement at a conference of which the public had notice and to
which the public was granted access, either by personal attendance, or
telephonic or electronic access. This definition was designed to permit
issuers to make use of current technologies, such as webcasting of
conference calls, that provide broad public access to issuer disclosure
events.
Commenters generally favored the flexible approach provided by Rule
101(e). The American Society of Corporate Secretaries and the Financial
Executives Institute, among others, agreed that the definition should
not stipulate particular means of technology used for public
disclosure. Individual investors supported the idea that issuers should
open their conference calls to the public through means such as
webcasting over the Internet. Some commenters, however, raised the
concern that conference calls or webcasts should not be permitted to
supplant the use of press releases as means of disclosing material
information.\63\ Others suggested that we provide that an issuer's
posting of information on its website should also be considered
sufficient Regulation FD disclosure.\64\
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\63\ See, e.g., Letters of Business Wire, the Society of
American Business Editors and Writers, PR Newswire, and the National
Federation of Press Women.
\64\ See, e.g., Letters of the American Corporate Counsel
Association, the American Society of Corporate Secretaries, the
Business Roundtable, Intel, and Dow Chemical.
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After considering the range of comments on this issue, we have
determined to adopt a slightly modified definition of ``public
disclosure'' that would provide even greater flexibility to issuers in
determining the most appropriate means of disclosure. As adopted, Rule
101(e) states that issuers can make public disclosure for purposes of
Regulation FD by filing or furnishing a Form 8-K, or by disseminating
information ``through another method (or combination of methods) of
disclosure that is reasonably designed to provide broad, non-
exclusionary distribution of the information to the public.''
a. Form 8-K Disclosure. Commenters generally opposed the proposed
new Item 10 of Form 8-K based, in large part, on a concern that people
would construe a separate Item 10 filing as an admission that the
disclosed information is material.\65\ In light of the timing
requirements for making materiality judgments under Regulation FD,
commenters wanted to be able to err on the side of filing information
that may or may not be material, without precluding a later conclusion
that the information was not material. Commenters recommended amending
Item 5 of Form 8-K to include required Regulation FD disclosures.\66\
Some commenters also suggested that Regulation FD submissions on Form
8-K should not be treated as ``filed'' for purposes of the Exchange
Act.
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\65\ See, e.g., Letters of the American Corporate Counsel
Association, the American Society of Corporate Secretaries, Cleary
Gottlieb, and the National Investors Relations Institute.
\66\ Item 5 is used for optional reporting of any information
not required to be reported by a company.
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In light of these comments, we provide that either filing or
furnishing information on Form 8-K solely to satisfy Regulation FD will
not, by itself, be deemed an admission as to the materiality of the
information. In addition, while we retain a separate Item, we also are
modifying Item 5 of Form 8-K to address commenters' concerns. As
revised, issuers may choose either to ``file'' a report under Item 5 of
Form 8-K or to ``furnish'' a report under Item 9 of Form 8-K that will
not be deemed ``filed.'' If an issuer chooses to file the information
on Form 8-K,\67\ the information will be subject to liability under
Section 18 of the Exchange Act. The information also will be subject to
automatic incorporation by reference into the issuer's Securities Act
registration statements, which are subject to liability under Sections
11 and 12(a)(2) of the Securities Act. If an issuer chooses instead to
furnish the information,\68\ it will not be subject to liability under
Section 11 of the Securities Act or Section 18 of the Exchange Act for
the disclosure, unless it takes steps to include that disclosure in a
filed report, proxy statement, or registration statement. All
disclosures on Form 8-K, whether filed or furnished, will remain
subject to the antifraud provisions of the federal securities laws.
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\67\ A company must designate in the Form 8-K that it is filing
under Item 5 in this case.
\68\ A company must designate in the Form 8-K that it is
furnishing information under Item 9 in this case.
---------------------------------------------------------------------------
b. Alternative Methods of Public Disclosure. We are recognizing
alternative methods of public disclosure to give issuers the
flexibility to choose another method (or a combination of methods) of
disclosure that will achieve the goal of effecting broad, non-
exclusionary distribution of information to the public.\69\
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\69\ Rule 101(e)(2).
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As a general matter, acceptable methods of public disclosure for
[[Page 51724]]
purposes of Regulation FD will include press releases distributed
through a widely circulated news or wire service, or announcements made
through press conferences or conference calls that interested members
of the public may attend or listen to either in person, by telephonic
transmission, or by other electronic transmission (including use of the
Internet). The public must be given adequate notice of the conference
or call and the means for accessing it. The regulation does not require
use of a particular method, or establish a ``one size fits all''
standard for disclosure; rather, it leaves the decision to the issuer
to choose methods that are reasonably calculated to make effective,
broad, and non-exclusionary public disclosure, given the particular
circumstances of that issuer. Indeed, we have modified the language of
the regulation to note that the issuer may use a method ``or
combination of methods'' of disclosure, in recognition of the fact that
it may not always be possible or desirable for an issuer to rely on a
single method of disclosure as reasonably designed to effect broad
public disclosure.
We believe that issuers could use the following model, which
employs a combination of methods of disclosure, for making a planned
disclosure of material information, such as a scheduled earnings
release:
First, issue a press release, distributed through regular
channels, containing the information; \70\
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\70\ We do not share the concerns of some commenters that
Regulation FD will lead to press releases being supplanted as a
regular means of corporate disclosure. In many cases, a widely-
disseminated press release will provide the best way for an issuer
to provide broad, non-exclusionary disclosure of information to the
public. Moreover, we note that self-regulatory organization
(``SRO'') rules typically require companies to issue press releases
to announce material developments. We believe that these rules are
appropriate, and do not intend Regulation FD to alter or supplant
the SRO requirements.
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Second, provide adequate notice, by a press release and/or
website posting, of a scheduled conference call to discuss the
announced results, giving investors both the time and date of the
conference call, and instructions on how to access the call; and
Third, hold the conference call in an open manner,
permitting investors to listen in either by telephonic means or through
Internet webcasting.\71\
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\71\ Giving the public the opportunity to listen to the call
does not also require that the issuer give all members of the public
the opportunity to ask questions.
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By following these steps, an issuer can use the press release to
provide the initial broad distribution of the information, and then
discuss its release with analysts in the subsequent conference call,
without fear that if it should disclose additional material details
related to the original disclosure it will be engaging in a selective
disclosure of material information. We note that several issuer
commenters indicated that many companies already follow this or a
similar model for making planned disclosures.\72\
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\72\ See Letters of Intel, Charles Schwab, and the Business
Roundtable.
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In the Proposing Release, we stated that an issuer's posting of new
information on its own website would not by itself be considered a
sufficient method of public disclosure. As technology evolves and as
more investors have access to and use the Internet, however, we believe
that some issuers, whose websites are widely followed by the investment
community, could use such a method. Moreover, while the posting of
information on an issuer's website may not now, by itself, be a
sufficient means of public disclosure, we agree with commenters that
issuer websites can be an important component of an effective
disclosure process. Thus, in some circumstances an issuer may be able
to demonstrate that disclosure made on its website could be part of a
combination of methods, ``reasonably designed to provide broad, non-
exclusionary distribution'' of information to the public.\73\
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\73\ We believe that if an issuer is using a webcast or
conference call as part of its method of effecting public
distribution, it should consider providing a means of making the
webcast or call available for some reasonable period of time. This
will enable persons who missed the original webcast or call to
access the disclosures made therein at a later time.
---------------------------------------------------------------------------
We emphasize, however, that while Rule 101(e) gives an issuer
considerable flexibility in choosing appropriate methods of public
disclosure, it also places a responsibility on the issuer to choose
methods that are, in fact, ``reasonably designed'' to effect a broad
and non-exclusionary distribution of information to the public. In
determining whether an issuer's method of making a particular
disclosure was reasonable, we will consider all the relevant facts and
circumstances, recognizing that methods of disclosure that may be
effective for some issuers may not be effective for others. If, for
example, an issuer knows that its press releases are routinely not
carried by major business wire services, it may not be sufficient for
that issuer to make public disclosure solely by submitting its press
release to one of these wire services; the issuer in these
circumstances should use other or additional methods of dissemination,
such as distribution of the information to local media, furnishing or
filing a Form 8-K with the Commission, posting the information on its
website, or using a service that distributes the press release to a
variety of media outlets and/or retains the press release.
We also caution issuers that a deviation from their usual practices
for making public disclosure may affect our judgment as to whether the
method they have chosen in a particular case was reasonable. For
example, if an issuer typically discloses its quarterly earnings
results in regularly disseminated press releases, we might view
skeptically an issuer's claim that a last minute webcast of quarterly
results, made at the same time as an otherwise selective disclosure of
that information, provided effective broad, non-exclusionary public
disclosure of the information.\74\ In short, an issuer's methods of
making disclosure in a particular case should be judged with respect to
what is ``reasonably designed'' to effect broad, non-exclusionary
distribution in light of all the relevant facts and circumstances.
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\74\ This is not to say, however, that an issuer may not change
its usual practices on an ongoing basis rather than in isolated
instances.
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5. Issuers Subject to Regulation FD
Regulation FD will apply to all issuers with securities registered
under Section 12 of the Exchange Act, and all issuers required to file
reports under Section 15(d) of the Exchange Act, including closed-end
investment companies, but not including other investment companies,
foreign governments, or foreign private issuers.
As written, proposed Regulation FD would have applied to foreign
sovereign debt issuers required to file reports under the Exchange Act.
Today's Regulation FD excludes these issuers from coverage. Proposed
Regulation FD also would have applied to foreign private issuers.
However, the Commission has determined to exempt foreign private
issuers at this time as it has in the past exempted them from certain
U.S. reporting requirements such as Forms 10-Q and 8-K. Today's global
markets pose new regulatory issues. In recognition of this fact, the
Commission will be undertaking a comprehensive review of the reporting
requirements of foreign private issuers.\75\ In the interim, we remind
foreign private issuers of their obligations to make timely disclosure
of material information pursuant to applicable SRO rules and
[[Page 51725]]
policies,\76\ and our expectation that the markets will enforce these
obligations. Also, while Regulation FD will not apply, foreign issuers
in their disclosure practices remain subject to liability for conduct
that violates, and meets the jurisdictional requirements of, the
antifraud provisions of the federal securities laws.\77\
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\75\ The Commisssion has asked the Division of Corporation
Finance to undertake this review.
\76\ See, e.g., NASDAQ Rules 4310(c)(16) and 4320(e)(14), and
NYSE Listed Company Manual, Sec. 2.
\77\ See Schoenbaum v. Firstbrook, 405 F.2d 200, 208 (2d Cir.)
rev'd on other grounds, 405 F.2d 215, 220 (2d Cir. 1968) (en banc).
See also discussion in Section II.B.7. infra.
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6. Securities Act Issues
a. The Operation of Regulation FD During Securities Offerings. As
proposed, Regulation FD would have applied to disclosures made by a
reporting company in connection with an offering under the Securities
Act. Commenters expressed a number of concerns about tensions they
perceived in the interplay of the disclosure requirements of Regulation
FD and those of the Securities Act.\78\
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\78\ See, e.g., Letters of the American Bar Association, the New
York City Bar Association, The Bond Market Association, Cleary
Gottlieb, Credit Suisse First Boston, and the Securities Industry
Association.
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With respect to public offerings, commenters worried that a public
disclosure mandated by Regulation FD could violate Section 5 of the
Securities Act. Section 5 places limitations on the type of disclosures
that may be made at various intervals during a registered offering.\79\
Commenters were concerned that public disclosures mandated by
Regulation FD would exceed those limitations. Commenters similarly
raised concerns about proposed Regulation FD's interrelationship with
unregistered offerings of securities. Here, the principal concern was
that public disclosure mandated by Regulation FD could conflict with
the conditions of the exemption from registration on which the issuer
was relying.
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\79\ For example, Section 5(c) prohibits offers prior to the
filing of a registration statement and Section 5(b)(1) prohibits the
use of written or broadcast communications that fall within the
``prospectus'' definition (except the preliminary Section 10
prospectus) until the final Section 10(a) prospectus has been
delivered.
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i. Registered Offerings Exemption. In light of the comments we have
received and our own further consideration, we have determined that our
concerns about selective disclosure in connection with registered
offerings under the Securities Act should not be addressed by
overlaying Regulation FD onto the system of regulation provided by that
Act. The mandated disclosure regime and the civil liability provisions
of the Securities Act reduce substantially any meaningful opportunity
for an issuer to make selective disclosure of material information in
connection with a registered offering. We are satisfied that the
Securities Act already accomplishes at least some of the policy
imperative of Regulation FD within the context of a registered
offering. Thus, with limited exceptions, Regulation FD as adopted does
not apply to disclosures made in connection with a securities offering
registered under the Securities Act.\80\
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\80\ See Rule 100(b)(2). Registered shelf offerings under Rule
415(a)(1)(i), (ii), (iii), (iv), (v), or (vi) are not excluded from
the operation of Regulation FD. Those offerings, which include
secondary offerings, dividend or interest reinvestment plans,
employee benefit plans, the exercise of outstanding options,
warrants or rights, the conversion of outstanding securities,
pledges of securities as collateral and issuances of American
depositary shares, are generally of an ongoing and continuous
nature. Because of the nature of those offerings, issuers would be
exempt from the operation of Regulation FD for extended periods of
time if the exclusion for registered offerings covered them. Public
companies that engage in these offerings should be accustomed to
resolving any Section 5 issues relating to their public disclosure
of material information during these offerings.
In light of the revisions we have made to Regulation FD to
exclude disclosures in connection with a registered offering, we are
not adopting proposed Rule 181. That proposed rule was designed to
address concerns that Regulation FD-required disclosures during a
registered offering could be nonconforming prospectuses that violate
Section 5(b)(1) of the Securities Act. Because Regulation FD will
not apply to disclosure in connection with registered offerings
(other than those of a continuous nature), we bleive that Rule 181
is no longer necessary.
---------------------------------------------------------------------------
In reaching this conclusion, we also note that our Division of
Corporation Finance is currently involved in a systematic review of the
Securities Act disclosure system as it relates to communications during
the offering process. To the extent selective disclosure concerns arise
in connection with registered offerings of securities, we believe it
would be more appropriate to consider that impact in the context of a
broader Securities Act rulemaking.
In creating the exclusion for registered offerings, we have defined
for purposes of Regulation FD when those offerings are considered to
begin and end.\81\ Communications that take place outside the periods
clearly specified would not be considered a part of the registered
securities offering to which the exemption from Regulation FD applies.
Communications that are not made in connection with a registered
offering also are not exempt.\82\
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\81\ See Rule 101(g).
\82\ For example, communications that a public company makes
about its future financial performance in one of its regularly
scheduled conference calls with analysts would not be considered to
be made in connection with an offering simply because the issuer was
in the midst of a registered offering at that time.
---------------------------------------------------------------------------
ii. Unregistered Offerings. Unregistered offerings are not subject
to the full public disclosure and liability protections that the
Securities Act applies to registered offerings. An issuer engaged in an
unregistered securities offering does not have the same discipline
imposed under the Securities Act to merge material information into its
public disclosure. While we have carefully considered the concerns
expressed by commenters, we believe that Regulation FD should not
provide an exception for communications made in connection with an
unregistered offering. We believe that reporting companies making
unregistered offerings should either publicly disclose the material
information they disclose nonpublicly or protect against misuse of that
information by having those who receive it agree to maintain it in
confidence.
If a reporting issuer releases material information nonpublicly
during an unregistered offering with no such understanding about
confidentiality, we believe that disclosure under Regulation FD is
appropriate. We believe this even if, as a result of such disclosure,
the availability of the Securities Act registration exemption may be in
question. Public companies undertaking unregistered offerings will need
to consider the impact their selective disclosure could have on any
exemption they use. Before an exempt offering begins, issuer's counsel
should advise the client of the potential complications that selective
disclosure of material nonpublic information could raise.
Issuers who undertake private unregistered offerings generally
disclose the information to the investors on a confidential basis.
Under Regulation FD, public companies will still have the ability to
avoid premature public disclosure in those cases. A public company need
not make public disclosure if anyone who receives the material,
nonpublic information agrees to maintain that information in
confidence.
b. Eligibility for Short-Form Registration and Rule 144. Commenters
observed that a failure to file a Form 8-K under Regulation FD when no
alternative qualifying public disclosure is made, would result in the
loss of availability of short-form Securities Act registration on Forms
S-2 and S-3.\83\
[[Page 51726]]
They pointed out that because the proposal did not contain any means to
alter that ineligibility, the issuer would be disqualified from using
Form S-2 or S-3 for at least a year from the date of the non-compliance
with Regulation FD. Commenters also noted that a failure to file a
required Form 8-K would render Rule 144 temporarily unavailable for
resale of restricted and control securities, and Form S-8 temporarily
unavailable for employee benefit plan offerings.\84\ They pointed out
that the loss of Rule 144 would primarily penalize shareholders
reselling or attempting to resell securities. They also noted that the
loss of Form S-8 could have a detrimental effect on employees.
---------------------------------------------------------------------------
\83\ See, e.g., Letters of the American Bar Association; the
American Corporate Counsel Association; the American Society of
Corporate Secretaries; the New York State Bar Association; the
Securities Industry Association; and Sullivan & Cromwell.
Form S-3 requires that the issuer be cureent and timely in
filing its reports under Sections 13, 14 and 15(d) for a period of
at least 12 calendar months prior to filing the registration
statement. Form S-2 requires the same except that the issuer must be
current in its reporting for the last 36 calendar months.
\84\ Rule 144 requires that for such a resale to be valid the
issuer of the securities must have made all filings required under
the Exchange Act during the preceeding 12 months. Form S-8 requires
that the issuer be current in its reporting for the last 12 calendar
months (or for such shorter period that the issuer was required to
file such reports and materials). Rule 144 and Form S-8 eligibility
would have been lost from the time of the failure to comply with
Regulation FD until the company disclosed the information under the
terms of the regulation.
---------------------------------------------------------------------------
The reporting status requirements in Forms S-2, S-3 and S-8 and
Rule 144, the commenters argued, were not intended to be linked to a
system for dissemination of discrete information outside of the
traditional periodic reporting obligations of companies. The commenters
were concerned that these consequences for the issuer and investors may
be unduly harsh and not in line with the purposes of Regulation FD.
We find merit in these concerns and are modifying this aspect of
the regulation. The purpose of Regulation FD is to discourage selective
disclosure of material nonpublic information by imposing a requirement
to make the information available to the markets generally when it has
been made available to a select few. We agree that the purpose is not
well served by negatively affecting a company's ability to access the
capital markets. Nor is it well served by penalizing the shareholders
or employees of the company. As discussed below, we have other adequate
enforcement remedies that will provide a proportionate response for a
violation and will have the desired effect on compliance. To implement
our approach, Rule 103 of the regulation as adopted states that an
issuer's failure to comply with the regulation will not affect whether
the issuer is considered current or, where applicable, timely in its
Exchange Act reports for purposes of Form S-8, short-form registration
on Form S-2 or S-3 and Rule 144.
7. Liability Issues
We recognize that the prospect of private liability for violations
of Regulation FD could contribute to a ``chilling effect'' on issuer
communications. Issuers might refrain from some informal communications
with outsiders if they feared that engaging in such communications,
even when appropriate, would lead to their being charged in private
lawsuits with violations of Regulation FD. Accordingly, we emphasized
in the Proposing Release that Regulation FD is an issuer disclosure
rule that is designed to create duties only under Sections 13(a) and
15(d) of the Exchange Act and Section 30 of the Investment Company Act.
It is not an antifraud rule, and it is not designed to create new
duties under the antifraud provisions of the federal securities laws or
in private rights of action.\85\
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\85\ In addition, because a violation of Regulation FD is not an
antifraud violation, it would not lead to loss of the safe harbor
for forward looking statements provided by the Private Securities
Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737.
See Securities Act Section 27A(b), 15 U.S.C. 77z-2(b); and Exchange
Act Section 21E(b), 15 U.S.C. 78u-5(b).
---------------------------------------------------------------------------
Most commenters who addressed this point believed that our decision
not to create private liability for Regulation FD violations was
appropriate. Several suggested, however, that the language in the
Proposing Release offered insufficient protection from private
lawsuits. In response to these comments, we have added to Regulation FD
a new Rule 102, which expressly provides that no failure to make a
public disclosure required solely by Regulation FD shall be deemed to
be a violation of Rule 10b-5.\86\ This provision makes clear that
Regulation FD does not create a new duty for purposes of Rule 10b-5
liability. Accordingly, private plaintiffs cannot rely on an issuer's
violation of Regulation FD as a basis for a private action alleging
Rule 10b-5 violations.
---------------------------------------------------------------------------
\86\ This provision is limited to Regulation FD disclosure
requirements and should be distinguished from other reporting
requirements under Section 13(a) or 15(d) which do create a duty to
disclose for purposes of Rule 10b-5.
---------------------------------------------------------------------------
Rule 102 is designed to exclude Rule 10b-5 liability for cases that
would be based ``solely'' on a failure to make a public disclosure
required by Regulation FD. As such, it does not affect any existing
grounds for liability under Rule 10b-5. Thus, for example, liability
for ``tipping'' and insider trading under Rule 10b-5 may still exist if
a selective disclosure is made in circumstances that meet the Dirks
``personal benefit'' test.\87\ In addition, an issuer's failure to make
a public disclosure still may give rise to liability under a ``duty to
correct'' or ``duty to update'' theory in certain circumstances.\88\
And an issuer's contacts with analysts may lead to liability under the
``entanglement'' or ``adoption'' theories.\89\ In addition, if an
issuer's report or public disclosure made under Regulation FD contained
false or misleading information, or omitted material information, Rule
102 would not provide protection from Rule 10b-5 liability.
---------------------------------------------------------------------------
\87\ See SEC v. Phillip J. Stevens, supra note 7.
\88\ See generally Backman v. Polaroid Corp., 910 F.2d 10 (1st
Cir. 1990) (en banc); In re Phillips Petroleum Sec. Litig., 881 F.2d
1236 (3d Cir. 1989).
\89\ See, e.g., Elkind v. Ligget & Myers, Inc., 635 F.2d 156 (2d
Cir. 1980); In the Matter of Presstek, Inc., Exchange Act Release
No. 39472 (Dec. 22, 1997).
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Finally, if an issuer failed to comply with Regulation FD, it would
be subject to an SEC enforcement action alleging violations of Section
13(a) or 15(d) of the Exchange Act (or, in the case of a closed-end
investment company, Section 30 of the Investment Company Act) and
Regulation FD. We could bring an administrative action seeking a cease-
and-desist order, or a civil action seeking an injunction and/or civil
money penalties.\90\ In appropriate cases, we could also bring an
enforcement action against an individual at the issuer responsible for
the violation, either as ``a cause of'' the violation in a cease-and-
desist proceeding,\91\ or as an aider and abetter of the violation in
an injunctive action.\92\
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\90\ Regulation FD does not expressly require issuers to adopt
policies and procedures to avoid violations, but we expect that most
issuers will use appropriate disclosure policies as a safeguard
against selective disclosure. We are aware that many, if not most,
issuers already have policies and procedures regarding disclosure
practices, the dissemination of material information, and the
question of which issuer personnel are authorized to speak to
analysts, the media, or investors. The existence of an appropriate
policy, and the issuer's general adherence to it, may often be
relevant to determining the issuer's intent with regard to a
selective disclosure.
\91\ Section 21C of the Exchange Act, 15 U.S.C. 78u-3. A failure
to file or otherwise make required public disclosure under
Regulation FD will be considered a violation for as long as the
failure continues; in our enforcement actions, we likely will seek
more severe sanctions for violations that continue for a longer
period of time.
\92\ Section 20(e) of the Exchange Act, 15 U.S.C. 78t(e).
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[[Page 51727]]
III. Insider Trading Rules
As discussed in the Proposing Release, the prohibitions against
insider trading in our securities laws play an essential role in
maintaining the fairness, health, and integrity of our markets. We have
long recognized that the fundamental unfairness of insider trading
harms not only individual investors but also the very foundations of
our markets, by undermining investor confidence in the integrity of the
markets. Congress, by enacting two separate laws providing enhanced
penalties for insider trading, has expressed its strong support for our
insider trading enforcement program.\93\ And the Supreme Court in
United States v. O'Hagan has recently endorsed a key component of
insider trading law, the ``misappropriation'' theory, as consistent
with the ``animating purpose'' of the federal securities laws: ``to
insure honest securities markets and thereby promote investor
confidence.'' \94\
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\93\ Insider Trading Sanctions Act of 1984, Pub. L. No. 98-376,
98 Stat. 1264; Insider Trading and Securities Fraud Enforcement Act
of 1988, Pub. L. No. 100-704, 102 Stat. 4677.
\94\ United States v. O'Hagan, 521 U.S. 642, 658 (1997).
---------------------------------------------------------------------------
As discussed more fully in the Proposing Release, insider trading
law has developed on a case-by-case basis under the antifraud
provisions of the federal securities laws, primarily Section 10(b) of
the Exchange Act and Rule 10b-5. As a result, from time to time there
have been issues on which various courts disagreed. Rules 10b5-1 and
10b5-2 resolve two such issues.
A. Rule 10b5-1: Trading ``On the Basis Of'' Material Nonpublic
Information
1. Background
As discussed in the Proposing Release, one unsettled issue in
insider trading law has been what, if any, causal connection must be
shown between the trader's possession of inside information and his or
her trading. In enforcement cases, we have argued that a trader may be
liable for trading while in ``knowing possession'' of the information.
The contrary view is that a trader is not liable unless it is shown
that he or she ``used'' the information for trading. Until recent
years, there has been little case law discussing this issue. Although
the Supreme Court has variously described an insider's violations as
trading ``on'' \95\ or ``on the basis of'' \96\ material nonpublic
information, it has not addressed the use/possession issue. Three
recent courts of appeals cases addressed the issue but reached
different results.\97\
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\95\ See Dirks v. SEC, 463 U.S. 646, 654 (1983).
\96\ See O'Hagan, 521 U.S. at 651-52.
\97\ Compare United States v. Teicher, 987 F.2d 112, 120-21 (2d
Cir.), cert. denied, 510 U.S. 976 (1993) (suggesting that ``knowing
possession'' is sufficient) with SEC v. Adler, 137 F.3d 1325, 1337
(11th Cir. 1998) (``use'' required, but proof of possession provides
strong inference of use) and United States v. Smith, 155 F.3d 1051,
1069 & n.27 (9th Cir. 1998), cert. denied, 525 U.S. 1071 (1999)
(requiring that ``use'' be proven in a criminal case).
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As discussed more fully in the Proposing Release, in our view, the
goals of insider trading prohibitions--protecting investors and the
integrity of securities markets--are best accomplished by a standard
closer to the ``knowing possession'' standard than to the ``use''
standard.\98\ At the same time, we recognize that an absolute standard
based on knowing possession, or awareness, could be overbroad in some
respects. The new rule attempts to balance these considerations by
means of a general rule based on ``awareness'' of the material
nonpublic information, with several carefully enumerated affirmative
defenses. This approach will better enable insiders and issuers to
conduct themselves in accordance with the law.
---------------------------------------------------------------------------
\98\ See Proposing Release at part III.A.1.
---------------------------------------------------------------------------
While many of the commenters on Rule 10b5-1 supported our goals of
providing greater clarity in the area of insider trading law, some
suggested alternative approaches to achieving these goals. In that
regard, a common comment was that the rule should not rely on exclusive
affirmative defenses. Commenters suggested that we should either
redesignate the affirmative defenses as non-exclusive safe harbors or
add a catch-all defense to allow a defendant to show that he or she did
not use the information.\99\
We believe the approach we proposed is appropriate. In our view,
adding a catch-all defense or redesignating the affirmative defenses as
non-exclusive safe harbors would effectively negate the clarity and
certainty that the rule attempts to provide. Because we believe that an
awareness standard better serves the goals of insider trading law, the
rule as adopted employs an awareness standard with carefully enumerated
affirmative defenses. As discussed below, however, we have somewhat
modified these defenses in response to comments that they were too
narrow or rigid, and that additional ones were necessary.
Some commenters stated that an awareness standard might eliminate
the element of scienter from insider trading cases, contrary to the
requirements of Section 10(b) of the Exchange Act,\100\ and that we
therefore lack the authority to promulgate the rule.\101\ These
comments misconstrue the intent and effect of the rule. As discussed in
the Proposing Release and expressly stated in the Preliminary Note,
Rule 10b5-1 is designed to address only the use/possession issue in
insider trading cases under Rule 10b-5. The rule does not modify or
address any other aspect of insider trading law, which has been
established by case law. Scienter remains a necessary element for
liability under Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, and Rule 10b5-1 does not change this.
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\99\ See, e.g., Letters of the Securities Industry Association,
the American Bar Association, Sullivan and Cromwell, and the DC Bar.
\100\ Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976);
Chiarella v. United States, 445 U.S. 222 (1980).
\101\ See Letters of the American Bar Association and Sullivan
and Cromwell.
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2. Provisions of Rule 10b5-1
We are adopting, as proposed, the general rule set forth in Rule
10b5-1(a), and the definition of ``on the basis of'' material nonpublic
information in Rule 10b5-1(b). A trade is on the basis of material
nonpublic information if the trader was aware of the material,
nonpublic information when the person made the purchase or sale.
Some commenters stated that a use standard would be
preferable,\102\ or suggested that the rule instead state that
awareness of the information should give rise to a presumption of
use.\103\ As noted above, we believe that awareness, rather than use,
most effectively serves the fundamental goal of insider trading law--
protecting investor confidence in market integrity. The awareness
standard reflects the common sense notion that a trader who is aware of
inside information when making a trading decision inevitably makes use
of the information.\104\ Additionally, a clear awareness standard will
provide greater clarity and certainty than a presumption or ``strong
inference'' approach.\105\ Accordingly, we have determined to adopt the
awareness standard as proposed.
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\102\ See, e.g., Letters of the American Bar Association, the
New York City Bar Association, the Investment Company Institute, the
DC Bar, and Sullivan and Cromwell.
\103\ Letters of the american Society of Corporate Secretaries
and Brobeck Phleger & Harrison.
\104\ See Teicher, 987 F.2d at 120.
\105\ Some commenters stated that ``aware'' was an unclear term
that may be interpreted to mean something less than ``knowing
possession.'' We disagree. ``Aware'' is a commonly used and well-
defined English word, meaning ``having knowledge; conscious;
cognizant.'' We believe that ``awareness'' has a much clearer
meaning that ``knowing possession,'' which has not been defined by
case law.
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The proposed affirmative defenses generated a substantial number of
[[Page 51728]]
comments. Some commenters suggested that the affirmative defenses in
the Proposing Release were too restrictive,\106\ or that additional
defenses were needed to protect various common trading mechanisms, such
as issuer repurchase programs and employee benefit plans.\107\ Some of
these commenters noted that the requirement that a trader specify
prices, amounts, and dates of purchases or sales pursuant to binding
contracts, instructions, or written plans left some common, legitimate
trading mechanisms outside the protection of the proposed affirmative
defenses. Additionally, some commenters questioned the Proposing
Release's exclusion of a price limit from the definition of a specified
``price.'' \108\ In consideration of these comments, we are revising
the affirmative defense that allows purchases and sales pursuant to
contracts, instructions, and plans. The revised language responds to
commenters' concerns by providing appropriate flexibility to persons
who wish to structure securities trading plans and strategies when they
are not aware of material nonpublic information, and do not exercise
any influence over the transaction once they do become aware of such
information.
---------------------------------------------------------------------------
\106\ See, e.g., Letter of the Securities Industry Association.
\107\ See Letters of LeBoeuf, Lamb, Greene, & MacRae (issuer
repurchases); the American Society of Corporate Secretaries, Brobeck
Phleger & Harrison (employee stock option plans); and L.B. Foster
Company (employee stock purchase plans).
\108\ See, e.g., Letter of the American Society of Corporate
Secretaries.
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As adopted, paragraph (c)(1)(i) sets forth an affirmative defense
from the general rule, which applies both to individuals and entities
that trade. To satisfy this provision, a person must establish several
factors.
First, the person must demonstrate that before becoming
aware of the information, he or she had entered into a binding contract
to purchase or sell the security, provided instructions to another
person to execute the trade for the instructing person's account, or
adopted a written plan for trading securities.\109\
---------------------------------------------------------------------------
\109\ Rule 10b5-1(c)(1)(i)(A).
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Second, the person must demonstrate that, with respect to
the purchase or sale, the contract, instructions, or plan either: (1)
Expressly specified the amount, price, and date; (2) provided a written
formula or algorithm, or computer program, for determining amounts,
prices, and dates; or (3) did not permit the person to exercise any
subsequent influence over how, when, or whether to effect purchases or
sales; provided, in addition, that any other person who did exercise
such influence was not aware of the material nonpublic information when
doing so.\110\
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\110\ Rule 10b5-(c)(1)(i)(B). We have removed the proposed
affirmative defense defense for purchases or sales that result from
a written plan for trading securities that is designed to tracck or
correspond to a market index, market segment, or group of
securities. We bleieve that the activity that was contemplated by
that provision is permissible under the defense as adopted.
Therefore, a separate defense is no longer necessary.
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Third, the person must demonstrate that the purchase or
sale that occurred was pursuant to the prior contract, instruction, or
plan. A purchase or sale is not pursuant to a contract, instruction, or
plan if, among other things, the person who entered into the contract,
instruction, or plan altered or deviated from the contract,
instruction, or plan or entered into or altered a corresponding or
hedging transaction or position with respect to those securities.\111\
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\111\ Rule 10b5-1(c)(1)(i)(C). However, a person acting in good
faith may modify a prior contract, instruction, or plan before
becoming aware of material nonpublic information. In that case, a
purchase or sale that complies with the modified contract,
instruciton, or plan will be considered pursuant to a new contract,
instruction, or plan.
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Under paragraph (c)(1)(ii), which we adopt as proposed, the
exclusion provided in paragraph (c)(1)(i) will be available only if the
contract, instruction, or plan was entered into in good faith and not
as part of a scheme to evade the prohibitions of this section.
Paragraph (c)(1)(iii) defines several key terms in the exclusion.
We are adopting, substantially as proposed, the definition of
``amount'',\112\ which means either a specified number of shares or a
specified dollar value of securities. We have revised the definition of
``price'' and added a definition of ``date.'' As adopted, ``price''
means market price on a particular date or a limit price or a
particular dollar price.\113\ ``Date'' means either the specific day of
the year on which a market order is to be executed, or a day or days of
the year on which a limit order is in force.\114\
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\112\ Rule 10b5-1(c)(1)(iii)(A).
\113\ Rule 10b5-1(c)(1)(iii)(B).
\114\ Rule 10b5-1(c)(1)(iii)(C).
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Taken as a whole, the revised defense is designed to cover
situations in which a person can demonstrate that the material
nonpublic information was not a factor in the trading decision. We
believe this provision will provide appropriate flexibility to those
who would like to plan securities transactions in advance at a time
when they are not aware of material nonpublic information, and then
carry out those pre-planned transactions at a later time, even if they
later become aware of material nonpublic information.\115\
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\115\ Some commenters raised questions about the treatment of
standardized options trading under the proposed rule. These
commenters suggested that the exercise of a standardized option
should be allowed, regardless of what information the trader was
aware of at the time of exercise, because the relevant investment
decision was made when the person purchased the standardized option.
We do not agree that the decision to exercise a standardized option
is not a separate investment decision. However, Rule 10b5-1, as
adopted, does not affect the analysis of whether it is a separate
investment decision. The rule could, however, affect options
transactions in that it permits a person to pre-arrange, at a time
when he or she is not aware of material nonpublic information, a
plan for exercising options in the future.
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For example, an issuer operating a repurchase program will not need
to specify with precision the amounts, prices, and dates on which it
will repurchase its securities. Rather, an issuer could adopt a written
plan, when it is not aware of material nonpublic information, that uses
a written formula to derive amounts, prices, and dates. Or the plan
could simply delegate all the discretion to determine amounts, prices,
and dates to another person who is not aware of the information--
provided that the plan did not permit the issuer to (and in fact the
issuer did not) exercise any subsequent influence over the purchases or
sales.\116\
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\116\ A person would not satisfy this provision of the rule by
establishing a delegation of authority under which the person
retained some ability to influence the decision about how, when, or
whether to purchase or sell securities.
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Similarly, an employee wishing to adopt a plan for exercising stock
options and selling the underlying shares could, while not aware of
material nonpublic information, adopt a written plan that contained a
formula for determining the specified percentage of the employee's
vested options to be exercised and/or sold at or above a specific
price. The formula could provide, for example, that the employee will
exercise options and sell the shares one month before each date on
which her son's college tuition is due, and link the amount of the
trade to the cost of the tuition.
An employee also could acquire company stock through payroll
deductions under an employee stock purchase plan or a Section 401(k)
plan. The employee could provide oral instructions as to his or her
plan participation,\117\ or proceed by means of a written plan.\118\
The transaction price could be computed as a percentage of market
price, and the transaction amount could be based on a percentage of
salary to be deducted under the plan.\119\ The date of a plan
transaction
[[Page 51729]]
could be determined pursuant to a formula set forth in the plan.\120\
Alternatively, the date of a plan transaction could be controlled by
the plan's administrator or investment manager, assuming that he or she
is not aware of the material, nonpublic information at the time of
executing the transaction, and the employee does not exercise influence
over the timing of the transaction.\121\
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\117\ Rule 10b5-1(c)(1)(i)(A)(2).
\118\ Rule 10b5-1(c)(1)(i)(A)(3).
\119\ Rule 10b5-1(c)(1)(i)(B)(2).
\120\ Id.
\121\ Rule 10b5-1(c)(1)(i)(B)(3).
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One commenter noted that the proposed Rule 10b5-1 defenses were not
co-extensive with exemptions from liability and reporting under Section
16 of the Exchange Act.\122\ The Section 16 exemptive rules do not
provide any exemption from liability under Section 10(b) and Rule 10b-
5. The adoption of Rule 10b5-1 does not change this principle. However,
we have drafted the Rule 10b5-1 defenses so that their conditions
should not conflict with the conditions of the Section 16 exemptive
rules.\123\
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\122\ See Letter of L.B. Foster Company addressing Rule 16b-
3(c), the exemption from Section 16(a) reporting and Section 16(b)
short-swing profit liability for most transactions under tax-
conditioned plans.
\123\ For example, it will be possible to set up a trust so that
the trust transactions will be eligible for both the Rule 16a-
8(b)(3) exemption and the Rule 10b5-1(c)(1)(i)(B)(3) defense. The
Rule 10b5-1(c)(1)(i)(B)(3) defense also will be available for
portfolio securities transactions in which a Section 16 insider is
not deemed to have a pecuniary interest by virtue of Rule 16a-
1(a)(2)(iii).
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The proposal included an additional affirmative defense available
only to trading parties that are entities. In response to comments, the
rule as adopted clarifies that this defense is available to entities as
an alternative to the other enumerated defenses described above.
Under this provision, an entity will not be liable if it
demonstrates that the individual making the investment decision on
behalf of the entity was not aware of the information, and that the
entity had implemented reasonable policies and procedures to prevent
insider trading.\124\ The American Bar Association commented that the
use in this rule of the term ``reasonable policies and procedures * * *
to ensure'' against insider trading differed from the standard provided
in Section 15(f) of the Exchange Act, which requires a registered
broker or dealer to establish, maintain, and enforce written policies
and procedures ``reasonably designed'' to prevent insider trading. As
we noted in the Proposing Release, we derived this provision from the
defense against liability codified in Exchange Act Rule 14e-3,
regarding insider trading in a tender offer situation. Rule 14e-3,
which pre-dates Exchange Act Section 15(f), also used the ``to ensure''
language. We are not aware, however, nor did commenters suggest, that
use of that language has created any problems of compliance with Rule
14e-3. We believe, in any event, that the standards should be
interpreted as essentially the same.\125\
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\124\ Rule 10b5-1(c)(2).
\125\ The Securities Industry Association commented that
paragraph (c)(2) would not allow institutions to engage in ``dynamic
hedging'' in circumstances where the institution's trading desk,
while managing its proprietary position through a hedge, also was
aware of material nonpublic information. We do not believe paragraph
(c)(2) should provide a defense in those circumstances, if the same
trader who is aware of the material information is making the
trading decisions for the firm. However, paragraph (c)(1), which
would allow a broker-dealer to manage risk by devising a formula for
hedging at a time when it is not aware of material nonpublic
information, could provide a defense for that activity.
Alternatively, the broker-dealer could segregate its personnel and
otherwise use information barriers so that the trader for the firm's
proprietary account is not made aware of the material nonpublic
information.
The Securities Industry Association also commented that the rule
could unintentionally impede market liquidity when broker-dealers
participate in shelf takedowns and other block transactions. The
concern was that the rule would create uncertainty about whether a
broker-dealer that held an order to execute a block transaction
could continue to conduct regular market making in that same
security. We believe that ordinary market making does not present
insider trading concerns if a customer who places an order with a
broker-dealer has an understanding that the broker-dealer may
continue to engage in market making while working the order. Thus, a
broker-dealer's ordinary market making would not be considered a
``misappropriation'' of the customer's information because it would
not involve trading on the basis of the information in a manner
inconsistent with the purpose for which it was given to the broker.
If, however, a broker-dealer engaged in extraordinary trading for
its own account when aware of unusually significant information
regarding a customer order, it is possible, based on the facts and
circumstances, that the broker-dealer would be held liable for
insider trading or for front-running as defined by SRO rules.
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B. Rule 10b5-2: Duties of Trust or Confidence in Misappropriation
Insider Trading Cases
1. Background
As discussed more fully in the Proposing Release, an unsettled
issue in insider trading law has been under what circumstances certain
non-business relationships, such as family and personal relationships,
may provide the duty of trust or confidence required under the
misappropriation theory.\126\ Case law has produced the following
anomalous result. A family member who receives a ``tip'' (within the
meaning of Dirks) and then trades violates Rule 10b-5. A family member
who trades in breach of an express promise of confidentiality also
violates Rule 10b-5. A family member who trades in breach of a
reasonable expectation of confidentiality, however, does not
necessarily violate Rule 10b-5.
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\126\ Proposing Release at part III.B.1.
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As discussed more fully in the Proposing Release, we think that
this anomalous result harms investor confidence in the integrity and
fairness of the nation's securities markets. The family member's
trading has the same impact on the market and investor confidence in
the third example as it does in the first two examples. In all three
examples, the trader's informational advantage stems from
``contrivance, not luck,'' and the informational disadvantage to other
investors ``cannot be overcome with research or skill.'' \127\
Additionally, the need to distinguish among the three types of cases
may require an unduly intrusive examination of the details of
particular family relationships. Accordingly, we believe there is good
reason for the broader approach we adopt today for determining when
family or personal relationships create ``duties of trust or
confidence'' under the misappropriation theory.
---------------------------------------------------------------------------
\127\ O'Hagan, 521 U.S. at 658-59.
---------------------------------------------------------------------------
Some of the commenters who submitted comment letters on Rule 10b5-2
supported the proposal.\128\ Some offered suggestions or alternative
approaches.\129\ Others expressed concern that the rule would erode
standards of personal and family privacy.\130\ As discussed in the
Proposing Release, the rule is not designed to interfere with
particular family or personal relationships; rather, its goal is to
protect investors and the fairness and integrity of the nation's
securities markets against improper trading on the basis of inside
information. Moreover, we do not believe that the rule will require a
more intrusive examination of family relationships than would be
required under existing case law without the rule. Current case law,
such as United States v. Chestman,\131\ and United States v. Reed,\132\
already establishes a regime under which questions of liability turn on
the nature of the details of the relationships between family members,
such as their prior history and
[[Page 51730]]
patterns of sharing confidences.\133\ By providing more of a bright-
line test for certain enumerated close family relationships, we believe
the rule will mitigate, to some degree, the need to examine the details
of particular relationships in the course of investigating suspected
insider trading.
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\128\ See, e.g., Letters of the American Society of Corporate
Secretaries, the American Corporate Counsel Association, and the
North American Securities Administrators' Association.
\129\ See, e.g., Letter of the Association for Investment
Management and Research.
\130\ See, e.g., Letters of the American Bar Association and the
New York City Bar Association.
\131\ 947 F.2d 551 (2d Cir. 1991) (en banc), cert. denied, 503
U.S. 1004 (1992).
\132\ 601 F. Supp 685 (S.D.N.Y.), rev'd on other grounds, 773
F.2d 447 (2d Cir. 1985).
\133\ Reed, for example, suggests that the types of confidences
previously exchanged by family members (e.g., whether or not they
were business confidences), may make a difference in determining
whether or not a confidential relationship exists.
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2. Provisions of Rule 10b5-2
We are adopting Rule 10b5-2 substantially as proposed. The rule
sets forth a non-exclusive list of three situations in which a person
has a duty of trust or confidence for purposes of the
``misappropriation'' theory of the Exchange Act and Rule 10b-5
thereunder.\134\
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\134\ As stated in the Proposing Release and in the Preliminary
Note to the rule, the law of insider trading is otherwise defined by
judicial opinions construing Rule 10b-5. This rule does not address
or modify the scope of insider trading law in any other respect.
---------------------------------------------------------------------------
First, as proposed, we provide that a duty of trust or confidence
exists whenever a person agrees to maintain information in
confidence.\135\
---------------------------------------------------------------------------
\135\ Rule 10b5-2(b)(1).
---------------------------------------------------------------------------
Second, we provide that a duty of trust or confidence exists when
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 person communicating the material nonpublic information
expects that the recipient will maintain its confidentiality.\136\ This
is a ``facts and circumstances'' test based on the expectation of the
parties in light of the overall relationship. Some commenters were
concerned that, as proposed, this provision examined the reasonable
expectation of confidentiality of the person communicating the material
nonpublic information rather than examining the expectations of the
recipient of the information and/or both parties to the
communication.\137\ We believe that mutuality was implicit in the
proposed rule because an inquiry into the reasonableness of the
recipient's expectation necessarily involves considering the
relationship as a whole, including the other party's expectations.
Nevertheless, we have revised the provision to make this mutuality
explicit.
---------------------------------------------------------------------------
\136\ Rule 10b5-2(b)(2).
\137\ Letters of the American Bar Association and the DC Bar.
---------------------------------------------------------------------------
Two commenters suggested that this part of the rule be limited to a
history, pattern, or practice of sharing business confidences.\138\
Although we have determined not to adopt such a limitation, we note
that evidence about the type of confidences shared in the past might be
relevant to determining the reasonableness of the expectation of
confidence.
---------------------------------------------------------------------------
\138\ Letters of the American Bar Association and the New York
City Bar Association.
---------------------------------------------------------------------------
Third, we are adopting as proposed a bright-line rule that states
that a duty of trust or confidence exists when a person receives or
obtains material nonpublic information from certain enumerated close
family members: spouses, parents, children, and siblings. An
affirmative defense permits the person receiving or obtaining the
information to demonstrate that under the facts and circumstances of
that family relationship, no duty of trust or confidence existed. Some
commenters noted that the enumerated relationships do not include
domestic partners, step-parents, or step-children. We have determined
not to include these relationships in this paragraph, although
paragraphs (b)(1) and (b)(2) could reach them. Our experience in this
area indicates that most instances of insider trading between or among
family members involve spouses, parents and children, or siblings;
therefore, we have enumerated these relationships and not others.
IV. Paperwork Reduction Act
Certain provisions of Regulation FD contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995.\139\ We published notice soliciting comments on
the collection of information requirements in the Proposing Release,
and submitted these requirements to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The titles for the collections are (1) Form 8-K, and (2) Reg
FD--Other Disclosure Materials.
---------------------------------------------------------------------------
\139\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
We received two comments concerning our estimate that an issuer
would make five disclosures under Regulation FD per year. The Bond
Market Association stated that we provided no basis for our
estimate.\140\ The Securities Industry Association indicated that the
basis for the estimate is unclear and suggested that the estimate is
too low.\141\ In the Proposing Release, we stated that we believe that
issuers will make one disclosure per quarter plus, on average, one
additional disclosure per year under Regulation FD. While we recognize
that some issuers may make more than five annual FD disclosures, we
also believe that a substantial number of issuers will make fewer than
five FD disclosures annually.\142\ As discussed in the Proposing
Release, in many cases, information disclosed under Regulation FD would
be information that an issuer ultimately was going to disclose to the
public. Under Regulation FD, that issuer likely will not make any more
public disclosure than it otherwise would, but it may make the
disclosure sooner and now would be required to file or disseminate that
information in a manner reasonably designed to provide broad, non-
exclusionary distribution of the information to the public. We
therefore believe that our estimate that issuers will make five
disclosures per year under Regulation FD is appropriate.
---------------------------------------------------------------------------
\140\ See Letter of The Bond Market Association.
\141\ See Letter of the Securities Industry Association.
\142\ Many issuers, for example, do not have analyst coverage,
see Harrison Hong et al., Bad News Travels Slowly: Size, Analyst
Coverage, and the Profitability of Momentum Strategies, 55 J.
Finance 265 (2000), or do not have institutional shareholders.
---------------------------------------------------------------------------
The Bond Market Association also stated that the time required to
accomplish disclosure will be longer than our estimate of five hours,
but did not quantify how much longer.\143\ As discussed in the
Proposing Release, we estimated the average number of hours an entity
spends completing Form 8-K by contacting a number of law firms and
other persons regularly involved in completing the form. We therefore
believe that our estimate is appropriate. We additionally believe it is
reasonable to estimate that other forms of disclosure, such as a press
release, will require no more (and probably less) than the preparation
time of Form 8-K.
---------------------------------------------------------------------------
\143\ See Letter of The Bond Market Association.
---------------------------------------------------------------------------
OMB approved the regulation's information collection requirements.
Form 8-K (OMB Control No. 3235-0060) was adopted pursuant to Sections
13, 15, and 23 of the Exchange Act, and Regulation FD--Other Disclosure
Materials (OMB Control No. 3235-0536) was adopted pursuant to Sections
13, 15, 23, and 36 of the Exchange Act. We are not collecting
information pursuant to Regulation FD on Form 6-K (OMB Control No.
3235-0116), as initially proposed, because, as discussed in this
Release, we have modified Regulation FD to exclude foreign private
issuers from coverage. We have adopted Regulation FD with some
additional modifications to the regulation as proposed. None of these
modifications (other than the exclusion of foreign private issuers from
coverage), however,
[[Page 51731]]
has an impact on our burden hour estimate.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number. Compliance with the disclosure
requirements is mandatory. There is no mandatory retention period for
the information disclosed, and responses to the disclosure requirements
will not be kept confidential.
V. Cost-Benefit Analysis
A. Regulation FD: Selective Disclosure
Regulation FD requires that when an issuer intentionally discloses
material nonpublic information to securities market professionals or
holders of the issuer's securities who are reasonably likely to trade
on the basis of the information, it must simultaneously make public
disclosure. When the issuer's selective disclosure of material
nonpublic information is not intentional, the issuer must make public
disclosure promptly.
1. Benefits
Regulation FD will provide several important benefits to investors
and the securities markets as a whole. First, current practices of
selective disclosure damage investor confidence in the fairness and
integrity of the markets. When selective disclosure leads to trading by
the recipients of the disclosure or trading by those whom these
recipients advise, the practice bears a close resemblance to ordinary
``tipping'' and insider trading. The economic effects of the two
practices are essentially the same; in both cases, a few persons gain
an informational edge--and use that edge to profit at the expense of
the uninformed--from superior access to corporate insiders, not through
skill or diligence.\144\ Thus, investors in many instances equate the
practice of selective disclosure with insider trading.\145\
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\144\ A recent academic paper finds evidence that analyst
conference calls are associated with increased return volatility,
trading volume, and trade size. The authors interpret these results
as evidence that material information may be revealed in analyst
conference calls and that larger investors likely are taking
advantage of this information. Richard Frankel et al., An Empirical
Examination of Conference Calls as a Voluntary Disclosure Medium, 37
J. Acct. Res. 133 (1999). Two commenters questioned the reliability
of the assumptions made in the study. We believe the assumptions are
reasonable approximations, although not perfect. In any event, we
view these results as corroborative evidence, not as the basis for
our conclusions. See Letters of American Corporate Counsel
Association and The Bond Market Association.
\145\ See, e.g., Letters of Pieter Bergshoeff and Barbara Black.
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The Chicago Board Options Exchange also commented that selective
disclosure is extremely detrimental to the markets, in that the unusual
trading and increased volatility that result from selective disclosure
can cause market makers substantial losses and potentially lead to
wider and less liquid options markets.\146\ This argument can be
extended to the primary markets for the securities as well. Economic
theory and empirical studies have shown that stock market transaction
costs increase when certain traders may be aware of material,
undisclosed information.\147\ A reduction in these costs should make
investors more willing to commit their capital.
---------------------------------------------------------------------------
\146\ Letter of the Chicago Board Options Exchange.
\147\ See I. Krinsky and J. Lee, Earnings Announcements and the
Components of the Bid-Ask Spread, 51 J. of Fin. 1523 (1996); C.M.
Lee, B. Mucklow and M.J. Ready, Spreads, Depth and the Impact of
Earnings Information: An Intraday Analysis, 6 Rev. of Fin. Stud. 345
(1993); A.S. Kyle, Continuous Auctions and Insider Trading, 53
Econometrica 1315 (1985); L.R. Glosten and P. Milgrom, Bid, Ask and
Transaction Prices in a Specialist Market with Heterogeneously
Informed Traders, 14 J. of Fin. Econ. 71 (1985).
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The inevitable effect of selective disclosure, as indicated by
numerous comment letters we received, is that individual investors lose
confidence in the integrity of the markets because they perceive that
certain market participants have an unfair advantage.\148\ Although one
commenter questioned this investor confidence argument,\149\ we agree
with the common sense view--expressed by both the Supreme Court and the
Congress--that investors will lose confidence in a market that they
believe is unfairly rigged against them.\150\ Similarly, economic
studies have provided support for the view that insider trading reduces
liquidity, increases volatility, and may increase the cost of
capital.\151\
---------------------------------------------------------------------------
\148\ See, e.g., Letters of IBM, A.T. Bigelow, and Thomas
Brandon.
\149\ Letter of Joseph McLaughlin.
\150\ See United States v. O'Hagan, and H.R. Rep. No. 100-910,
supra, note 6.
\151\ See M.J. Fishman and K.M. Hagerty, Insider Trading and the
Efficiency of Stock Prices, 23 Rand J. of Econ. 106 (1992); M.
Manove, The Harm From Insider Trading and Informed Speculation, 104
Q.J. of Econ. 823 (1989).
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Given the similarity of selective disclosure practices to ordinary
tipping and insider trading, we believe that a regulation addressing
selective disclosure of material information will promote benefits
similar to insider trading regulation. Regulation FD will foster fairer
disclosure of information to all investors, and increase investor
confidence in market integrity. By enhancing investor confidence in the
markets, therefore, the regulation will encourage continued widespread
investor participation in our markets, enhancing market efficiency and
liquidity, and more effective capital raising.
Second, the regulation likely also will provide benefits to those
seeking unbiased analysis. This regulation will place all analysts on
equal footing with respect to competition for access to material
information. Thus, it will allow analysts to express their honest
opinions without fear of being denied access to valuable corporate
information being provided to their competitors. Analysts will continue
to be able to use and benefit from superior diligence or acumen,
without facing the prospect that other analysts will have a competitive
edge solely because they say more favorable things about issuers.\152\
---------------------------------------------------------------------------
\152\ The Securities Industry Association disputed the
significance of this benefit. Given the widespread reports, cited
above and in the Proposing Release, of analysts' concerns about
continuing access to corporate insiders, we continue to believe this
is a significant issue.
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2. Costs
The regulation will impose some costs on issuers. First, issuers
will incur some additional costs in making the public disclosures of
material nonpublic information required by the regulation. Regulation
FD gives issuers two options for making public disclosure. The issuer
can: (1) file or furnish a Form 8-K; \153\ or (2) disseminate the
information through another method or combination of methods of
disclosure that is reasonably designed to provide broad, non-
exclusionary distribution of the information to the public (press
release, teleconference, or web-conference).
---------------------------------------------------------------------------
\153\ 17 CFR 249.308.
---------------------------------------------------------------------------
Because the regulation does not require issuers to disclose
material information (just to make any disclosure on a non-selective
basis), we cannot predict with certainty how many issuers will actually
make disclosures under this regulation. For purposes of the Paperwork
Reduction Act, however, we base our estimate of the paperwork burden of
the regulation on our belief that issuers will make on average five
\154\ public disclosures under Regulation FD per year.\155\ Since there
are
[[Page 51732]]
approximately 13,000 issuers affected by this regulation, we estimate
that the total number of disclosures under Regulation FD per year will
be 65,000.
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\154\ We anticipate that many issuers will make one disclosure
each quarter under Regulation FD. We also assume that issuers will,
on average, make on additional disclosure per year.
\155\ In many cases, information disclosed under Regulation FD
would be information that an issuer was ultimately going to disclose
to the public. Under Regulation FD, that issuer is not going to make
any more public disclosure than it otherwise would, but it may make
the disclosure sooner and now would be required to file or
disseminate that information in a manner reasonably designed to
provide broad, non-exclusionary distribution of the information to
the public.
---------------------------------------------------------------------------
If an issuer files a Form 8-K, we estimate that the issuer would
incur, on average, five burden hours per filing. This estimate is based
on current burden hour estimates under the Paperwork Reduction Act for
filing a Form 8-K and the staff's experience with such filings. For the
purposes of the Paperwork Reduction Act, we estimate that in preparing
Form 8-Ks approximately 25% of the burden hours are expended by the
company's internal professional staff, and the remaining 75% by outside
counsel. Assuming a cost of $85/hour for in-house professional staff
and $175/hour \156\ for outside counsel, the total cost would be
$762.50 per filing. These assumptions reflect the greater reliance on
outside lawyers in preparing documents to be filed with the Commission.
---------------------------------------------------------------------------
\156\ In the Proposing Release, we assumed a cost of $125 per
hour for outside legal advice. We have revised that estimate and now
assume that outside legal advice will cost $175 per hour.
---------------------------------------------------------------------------
We have no direct data on which to base estimates of the costs of
the other disclosure options. However, we anticipate that other methods
of disclosure, such as press releases, may require less preparation
time than a Form 8-K and will be prepared primarily, if not
exclusively, by the company's internal staff.\157\ Moreover, if the
costs of another method of disclosure are less than the costs of filing
the Form 8-K, we presume issuers will choose another method of public
disclosure. Issuers may, however, choose to use methods of
dissemination with higher out-of-pocket costs, presumably because they
believe these methods provide additional benefits to the issuer or
investor for which they are willing to pay. Given that we estimate that
there will be 65,000 disclosures under Regulation FD per year at an
approximate cost ranging from $537.50 to $762.50 per disclosure, we
estimate that the total paperwork burden of preparing the information
for disclosure per year will be approximately $34,937,500 to
$49,562,500.\158\
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\157\ Accordingly, in the Proposing Release, we assumed that 25%
of the burden would be borne by outside counsel and 75% by in-house
professional staff. This balance reflects our belief that many
issuers will make disclosures by some disclosure option other than
by a Form 8-K that will require less time from outside lawyers.
Using these assumptions, the total approximate cost of a Regulation
FD disclosure would be $537.50.
\158\ In the Proposing Release, we estimated the total paperwork
burden to be approximately $33,250,000. In addition to the changes
noted above in notes 156 and 157, the revised figure also reflects a
reduction in paperwork burden due to the exclusion from coverage of
foreign private issuers under Regulation FD.
---------------------------------------------------------------------------
We received several comments concerning the costs of the disclosure
options provided by Regulation FD. Two commenters suggested that the
benefits of the regulation outweigh the costs of making
disclosure.\159\ One commenter suggested that the direct costs to
issuers of complying with the regulation will exceed the $33 million
that we estimated in the Proposing Release.\160\ This commenter
suggested that there is no basis for our estimate that issuers will
make on average five disclosures per year, and that our estimate that
it will take five hours to make disclosure under the regulation is too
low, due to legal involvement with each corporate communication. This
commenter additionally stated that the cost estimates for in-house and
outside legal advice do not reflect the current or future marketplace
and that the estimates do not consider all of the people involved in
the disclosure process or the costs of a decision not to make
disclosure.\161\ Another commenter stated that our estimate of, on
average, five disclosures per issuer per year is too low. This
commenter also said that it could not quantify the costs of Regulation
FD.\162\
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\159\ Letters of Stephen Jones and Gretchen Sprigg Wisehart.
\160\ Letter of the Bond Market Association.
\161\ Id.
\162\ Letter of the Securities Industry Association.
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Our estimate of five disclosures per issuer is based on several
factors. First, we believe that for a large group of issuers, five
disclosures reflects the need to make one FD disclosure per quarter,
and allows for one additional miscellaneous FD disclosure. At the same
time, however, we recognize that there will be a wide variation among
disclosure practices at different issuers. Some issuers may average
more annual FD disclosures. A substantial number of other issuers,
however, depending on their industry, shareholder composition, or level
of analyst coverage,\163\ may make fewer if any FD disclosures
annually. Thus, we believe the estimate adequately allows for a wide
variety of situations. We, therefore, believe that five is a reasonable
estimate of the average number of disclosures each issuer will make
annually under Regulation FD. We also believe it is reasonable to
assume that the costs of making disclosure via some other method, such
as a press release, will not be greater than the costs of filing a Form
8-K.
---------------------------------------------------------------------------
\163\ See Harrison Hong et al., supra note 142.
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While it is possible that issuers may incur some cost in connection
with the implementation of corporate policy relating to disclosure, as
well as decisions not to make disclosure under the regulation, we
believe that any additional costs would not be substantial. Many
issuers already consult with in-house and/or outside counsel regarding
their disclosure obligations under the federal securities laws.
Moreover, as we have narrowed the definition of ``persons acting on
behalf of the issuer'' to cover only those who regularly interact with
securities market professionals and security holders, the issuer
personnel whose disclosures will be covered by the regulation are those
who are most likely to be well-versed in disclosure issues and
practiced in making judgments on these issues. Further, to the extent
that issuers already have policies in place to cover the types of
disclosures those personnel can make, we expect the additional costs
associated with compliance to be small. Thus, after careful
consideration of the comments, we have determined that our estimates of
the costs of making disclosure are appropriate.
One commenter asserted that our cost-benefit analysis does not
consider indirect costs on capital formation.\164\ These costs,
according to this commenter, include less liquidity, missed market
opportunities, and the introduction of market inefficiencies. One such
market inefficiency, according to the commenter, might result from
confidentiality agreements becoming a regular practice, thereby
excluding some institutions that cannot or will not agree to the
restrictions in such agreements. This commenter also suggested a cost
resulting from issuers' involving their attorneys in each corporate
communication. This commenter did not quantify these purported costs.
---------------------------------------------------------------------------
\164\ Letter of The Bond Market Association.
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We believe that this comment does not adequately take into account
the flexibility provided in Regulation FD for issuer compliance. The
regulation gives issuers a variety of ways to comply, and we assume
that an issuer will be able to determine the least costly methods of
compliance for its particular circumstances. Moreover, as discussed in
the Release, we have significantly narrowed the scope of the regulation
in ways that should reduce both direct and indirect compliance costs;
for example, we have narrowed the types of
[[Page 51733]]
communications covered, and excluded communications made in connection
with most registered securities offerings. Further, as discussed above,
we believe that the regulation will encourage continued widespread
investor participation in our markets, which will enhance market
efficiency and liquidity, and foster more effective capital raising.
Thus, we have carefully considered whether the regulation will increase
the costs of capital formation, and we believe it may, in fact, reduce
such costs. \165\
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\165\ See Fishman and Hagerty; Manove, supra note 151.
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The regulation may also lead to some increased costs for issuers
resulting from new or enhanced systems and procedures for disclosure
practices. As indicated by some commenters,\166\ we believe that many,
if not most, issuers already have internal procedures for communicating
with the public; for many issuers, therefore, new procedures to prevent
selective disclosures will not be needed. There might be a cost to
these issuers, however, for enhancing and strengthening existing
procedures to safeguard against selective disclosures that are not
intentional to ensure prompt public release when such disclosures do
occur.
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\166\ See, e.g., Letters of Huntington Bancshares and Charles
Schwab.
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Some commenters suggested that disclosure methods utilizing
Internet technology impose minimal costs.\167\ In particular, one
commenter noted that there are several services that make the audio
signal from conference calls available over the Internet at no
cost.\168\ Another commenter disagreed, and stated that some of the
methods of making disclosure, such as webcasts, are costly.\169\ This
commenter suggested that additional costs might include those
associated with new technologies, but provided no quantitative data
associated with any such costs.\170\ As stated above, we believe that
making disclosure by a method other than a Form 8-K will likely be less
costly than making disclosure by filing a Form 8-K. We believe that
issuers will use new technology to the extent that it is cost-effective
to do so; in any event, no issuer will be required to expend more on
disclosures utilizing new technology than it would cost to make
disclosure by filing a Form 8-K.
---------------------------------------------------------------------------
\167\ See, e.g., Letters of Bradley Richardson and Scott Lawton.
\168\ Letter of Net2000.
\169\ Letter of the National Association of Real Estate
Investment Trusts.
\170\ Id.
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One potential cost of the regulation that we have identified is the
risk that the regulation might ``chill'' corporate disclosures to
analysts, investors, and the media. We recognized the concern that
issuers may speak less often out of fear of liability based on a post
hoc assessment that disclosed information was material, and that if
such a chilling effect resulted from Regulation FD, there would be a
cost to overall market efficiency and capital formation.
A number of commenters also raised the concern about a chilling
effect as a significant potential cost of Regulation FD, and several of
these suggested that we were underestimating this effect.\171\ A common
theme among these commenters was that the regulation would result in
the flow of less information to the marketplace, rather than more, and
that the cost of this effect would be greater surprise and
volatility.\172\ However, these commenters were unable to quantify
these costs. Moreover, other commenters, including issuers who would be
subject to the regulation, did not necessarily agree that their
communications would be significantly chilled.\173\
---------------------------------------------------------------------------
\171\ See, e.g., Letters of the Securities Industry Association,
The Bond Market Association, and the American Bar Association.
\172\ See, e.g., Letters of the Securities Industry Association
and The Bond Market Association.
\173\ See Letters of Charles Schwab and Net2000.
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In response to the concerns about a diminished flow of information,
as discussed elsewhere in this Release, we have made several
significant modifications that we believe reduce the likelihood of a
chilling effect. These modifications include narrowing the scope of the
regulation so that it does not apply to all communications with persons
outside the issuer, narrowing the types of issuer personnel covered by
the regulation to senior officials and those who would normally be
expected to communicate with securities market professionals or
security holders, and clarifying that where the regulation requires
``knowing or reckless'' conduct, liability will attach only when an
issuer's personnel know or are reckless in not knowing that the
information selectively disclosed is both material and nonpublic.
Additionally, as discussed below, we have added an express provision in
the regulation's text designed to remove any doubt that private
liability will not result from a Regulation FD violation.
In addition, there are numerous practices that issuers may employ
to continue to communicate freely with analysts and investors, while
becoming more careful in how they disclose information. Moreover, the
regulation only covers the selective disclosure of material nonpublic
information; the level of non-material information available to the
market need not decrease. We believe issuers will have strong reasons
to continue releasing information given the market demand for
information and a company's desire to promote its products and
services. One economic study has found that more public disclosure is
associated with factors that have been shown to reduce the cost of
capital.\174\
---------------------------------------------------------------------------
\174\ R.J. Lundholm and M.H. Lang, Corporate Disclosure Policy
and Analyst Behavior, 71 The Acct. Rev. 467 (1996).
---------------------------------------------------------------------------
Finally, commenters expressed concern that the regulation would
increase the risk of private liability. Regulation FD is designed to
create duties only under Sections 13(a) and 15(d) of the Exchange Act
and Section 30 of the Investment Company Act, and does not create new
duties under Section 10(b) of the Exchange Act. As discussed, we have
added an express provision to the regulation stating that a failure to
make a disclosure required solely by Regulation FD will not result in a
violation of Rule 10b-5.
B. Rule 10b5-1: Trading ``On The Basis Of'' Material Nonpublic
Information
Rule 10b5-1 would define when a sale or purchase of a security
occurred ``on the basis of'' material nonpublic information. Under the
rule, a person trades ``on the basis of'' material nonpublic
information if the person making the purchase or sale was aware of the
material nonpublic information at the time of the purchase or sale.
However, the rule provides exclusions for certain situations in which a
trade resulted from a pre-existing plan, contract, or instruction that
was made in good faith.
1. Benefits
We anticipate two significant benefits arising from Rule 10b5-1.
First, the rule should increase investor confidence in the integrity
and fairness of the market because it clarifies and strengthens
existing insider trading law. Second, the rule will benefit corporate
insiders by providing greater clarity and certainty on how they can
plan and structure securities transactions. The rule provides specific
guidance on how a person can plan future transactions at a time when he
or she is not aware of material nonpublic information without fear of
incurring liability. We believe that this guidance will make it easier
for corporate insiders to conduct themselves in accordance with the
laws against insider trading.
[[Page 51734]]
2. Costs
The rule does not require any particular documentation or
recordkeeping by insiders, although it would, in some cases, require a
person to document a particular plan, contract, or instruction for
trading if he or she wished to demonstrate an exclusion from the rule.
Some commenters suggested that the proposed affirmative defenses did
not allow for certain commonly used mechanisms for trading securities,
such as issuer repurchase plans. If the rule prohibited, for example,
issuers from repurchasing their securities, a cost might have resulted.
As discussed elsewhere in this Release, however, we have modified the
rule to provide appropriate flexibility to persons who wish to
structure securities trading plans and strategies when they are not
aware of material nonpublic information. Any entity that sought to rely
on the affirmative defense in paragraph (c)(2) for institutional
traders would be required to comply with the specific provisions of
that paragraph, including implementing reasonable policies and
procedures to prevent insider trading. We believe that most entities to
whom this affirmative defense would be relevant--i.e., broker-dealers
and investment advisers--already have procedures in place, because of
existing statutory requirements.\175\ Thus, as adopted, we do not
believe that any costs that may be imposed by Rule 10b5-1 will be
significant.\176\
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\175\ See Section 15(f) of the Exchange Act (15 U.S.C. 78o(f))
and Section 204A of the Investment Advisers Act (15 U.S.C. 80b-4a).
\176\ In the Proposing Release, we asked whether we should
require that contracts, instructions, or trading plans be approved
by counsel. Commenters noted that such a requirement would impose
costs. As adopted, the rule does not impose this requirement.
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C. Rule 10b5-2: Duties of Trust or Confidence in Misappropriation
Insider Trading Cases
1. Benefits
Rule 10b5-2 enumerates three non-exclusive bases for determining
when a person receiving information is subject to a ``duty of trust or
confidence'' for purposes of the misappropriation theory of insider
trading. Two principal benefits are likely to result from this rule.
First, the rule will provide greater clarity and certainty to the law
on the question of when a family relationship will create a duty of
trust or confidence. Second, the rule will address an anomaly in
current law under which a family member receiving material nonpublic
information may exploit it without violating the prohibition against
insider trading. By addressing this potential gap in the law, the rule
will enhance investor confidence in the integrity of the market.
2. Costs
We do not attribute any costs to Rule 10b5-2 and no commenter
suggested otherwise.
VI. Consideration of Impact on the Economy, Burden on Competition,
and Promotion of Efficiency, Competition, and Capital Formation
Sections 2(b) of the Securities Act, 3(f) of the Exchange Act, and
2(c) of the Investment Company Act require the Commission, when
engaging in rulemaking that requires it to consider or determine
whether an action is necessary or appropriate in the public interest,
also to consider whether the action will promote efficiency,
competition, and capital formation. As discussed above, we believe that
Regulation FD and Rules 10b5-1 and 10b5-2 will bolster investor
confidence in the integrity of the markets and the fairness of the
disclosure process. By enhancing investor confidence and participation
in the markets, these rules should increase liquidity and help to
reduce the costs of capital. Accordingly, the proposals should promote
capital formation and market efficiency.\177\
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\177\ We find that the exemption of issuers from the obligation
to make public disclosure by furnishing or filing Forms 8-K on the
condition that they disseminate the information through another
method that is reasonably designed to provide broad, non-
exclusionary distribution is necessary or appropriate in the public
interest and is consistent with the protection of investors.
---------------------------------------------------------------------------
Section 23(a) of the Exchange Act requires the Commission, when
adopting rules under the Exchange Act, to consider the impact on
competition of any rule it adopts. Several commenters suggested that
Regulation FD might have some effects on competition. One commenter
suggested that the regulation would have a negative effect on
competition because analysts operating independently of, and in
competition with, each other can more effectively pursue an independent
line of inquiry and ferret out negative information that management
would rather not disclose. According to this commenter, ``[l]eveling
the playing field for analysts, as among themselves and vis-a-vis the
general public, will undermine the great advantages of the current
system.'' \178\ We disagree. We believe, to the contrary, that the
regulation will encourage competition because it places all analysts on
equal competitive footing with respect to access to material
information. Analysts will continue to be able to use and benefit from
superior diligence or acumen, without facing the prospect that other
analysts will have a competitive edge simply because they have been
favored with selective disclosure. Additionally, analysts will be able
to express their honest opinions without fear of being denied access to
material corporate information.
---------------------------------------------------------------------------
\178\ Letter of the Securities Industry Association.
---------------------------------------------------------------------------
Some commenters also suggested that it would be anti-competitive
and unfair to exempt ratings agencies and/or the news media from the
regulation's coverage.\179\ According to these commenters, reporters
are competitors of analysts. We believe that there is a significant
difference between analysts and news reporters, and therefore disagree
with this comment. Reporters gather information for the purpose of
reporting the news and informing the public; generally, their reports
are widely disseminated. Similarly, ratings agencies make their ratings
reports public when completed. Analysts, by contrast, gather and report
information to be used for securities trading; their reports are
typically available to a limited, usually paying, audience.
---------------------------------------------------------------------------
\179\ Letters of the Securities Industry Association and Joseph
McLaughlin.
---------------------------------------------------------------------------
As discussed more fully above, we have decided to exclude foreign
private issuers from the Regulation FD disclosure requirements in light
of the fact that the Commission will be undertaking a comprehensive
review of the reporting requirements of foreign private issuers. To the
extent any anti-competitive effect may arise from exempting foreign
private issuers from the regulation, we believe any such burden would
be necessary and appropriate for the protection of investors. Overall,
we do not believe that the regulation and rules will have any anti-
competitive effects.
VII. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with the Regulatory Flexibility Act (``RFA'').
It relates to Regulation FD, Rule 10b5-1, and Rule 10b5-2 under the
Exchange Act, as amended. The regulation and rules address the
selective disclosure of material nonpublic information and clarify two
unsettled issues under current insider trading law.
A. Need for the Regulation and Rules
The new regulation and rules address three separate issues.
Regulation FD
[[Page 51735]]
addresses the problem of issuers making selective disclosure of
material nonpublic information to analysts or particular investors
before making disclosure to the investing public. Rules 10b5-1 and
10b5-2 address two unsettled issues in insider trading case law: (1)
when insider trading liability arises in connection with a person's
``use'' or ``knowing possession'' of material nonpublic information;
and (2) when a family or other non-business relationship can give rise
to liability under the misappropriation theory of insider trading. By
addressing these issues, we believe the new regulation and rules will
enhance investor confidence in the fairness and integrity of the
securities markets.
Regulation FD requires that when an issuer intentionally discloses
material nonpublic information it do so through public disclosure, not
selective disclosure. When an issuer has made a non-intentional
selective disclosure, Regulation FD requires the issuer to make prompt
public disclosure thereafter. The regulation provides for several
alternative methods by which an issuer can make the required public
disclosure. We believe that this new regulation will provide for fairer
and more effective disclosure of important information by issuers to
the investing public.
Rule 10b5-1 provides a general rule that liability arises when a
person trades while ``aware'' of material nonpublic information. Rule
10b5-1 also provides affirmative defenses from the general rule to
allow persons to structure securities trading plans and strategies when
they are not aware of material nonpublic information, and follow
through with the trades pursuant to those plans and strategies even
after they become aware of material nonpublic information. We believe
Rule 10b5-1 clarifies an important issue in insider trading law, and
will enhance investor confidence in market integrity.
Rule 10b5-2 defines the scope of ``duties of trust and confidence''
for purposes of the misappropriation theory in a manner that more
appropriately serves the purposes of insider trading law. Rule 10b5-2
will have no direct effect on small entities.
B. Significant Issues Raised by Public Comment
In the Proposing Release, we solicited comments on the Initial
Regulatory Flexibility Analysis (``IRFA''). In particular, we requested
comments regarding: (i) The number of small entity issuers that may be
affected by the proposed regulation and rules; (ii) the existence or
nature of the potential impact of the proposed regulation and/or rules
on small entity issuers discussed in the analysis; and (iii) how to
quantify the impact of the proposed regulation and rules. Commentators
were asked to describe the nature of any impact and provide empirical
data supporting the extent of the impact.
We did not receive any comments addressing the IRFA for proposed
Regulation FD and Rules 10b5-1 and 10b5-2. We did receive several
comments addressing the potential impact of proposed Regulation FD on
small entity issuers and whether Regulation FD should treat them the
same as other issuers.
One issue affecting small entities on which we received significant
comment was the method of ``public disclosure'' required by Regulation
FD. One commenter said that Regulation FD's public disclosure
requirement should recognize the particular circumstances of the
issuer; in this commenter's view, because smaller issuers often have
more difficulty obtaining coverage, Regulation FD's public disclosure
requirement could be qualified to require those efforts reasonable
under the circumstances of the issuer and the market for its
securities. This commenter noted that it would help address this issue
if Regulation FD's public disclosure requirement could be satisfied by
a website posting.\180\ Another commenter said that Regulation FD's
provision for public disclosure through a press release is not
appropriate because this method does little, if anything, to provide
investors with information regarding smaller companies.\181\
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\180\ Letter of the American Bar Association.
\181\ Letter of VirtualFund.com.
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In response to these comments and others, we have modified the
definition of ``public disclosure'' in the final regulation. The final
regulation provides greater flexibility to an issuer to determine what
is an appropriate means of making public disclosure in light of its
particular circumstances. The final regulation permits issuers,
including small entity issuers, to choose a method (or a combination of
methods) of public disclosure reasonably designed to provide broad,
non-exclusionary distribution of information to the public.
With respect to the regulation's application to disclosures of
``material'' nonpublic information, two commenters noted that what
might be material to a small company might not be material to a large
company.\182\ As noted elsewhere in the Release, the general
materiality standard has always been understood to encompass the
necessary flexibility to fit the circumstances of each case. Thus, we
believe the use of a materiality standard in Regulation FD
appropriately takes into account the differences between small and
large issuers.
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\182\ Letters of the American Society of Corporate Secretaries
and the Securities Industry Association.
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C. Small Entities Subject to the Regulation and Rules
Regulation FD will affect issuers and closed-end investment
companies that are small entities.\183\ We estimate there are between
approximately 1,000 to 2,000 issuers subject to the reporting
requirements of the Exchange Act that satisfy the definition of small
entity.\184\ We also estimate that there are approximately 62 closed-
end investment companies that may be considered small entities subject
to Regulation FD.\185\
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\183\ Exchange Act Rule 0-10(a) defines an issuer, other than an
investment company, to be a ``small business'' or ``small
organization'' if it had total assets of $5 million or less on the
last day of its most recent fiscal year 17 CFR 240.0-10(a).
Investment Company Act Rule 0-10(a) defines an investment company as
a ``small business'' or ``small organization'' if it, ``together
with other investment companies in the same group of related
investment companies, has net assets of $50 million or less as of
the end of its most recent fiscal year.'' 17 CFR 270.0-10(a).
\184\ In the IRFA, we estimated the number of issuers, other
than investment companies, that may be considered small entities as
approximately 830. The FRFA number represents the increased number
of issuers filing Exchange Act reports pursuant to the NASD's new
requirements implemented under Rule 6530 during the last 18 months.
\185\ The Commission bases its estimate on information from
Lipper Directors' Analytical Data, Lipper Closed-End Fund
Performance Analysis Service, and reports in investment companies
file with the Commission on Form N-SAR.
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Rule 10b5-1 will apply to any small entities that engage in
securities trading while aware of inside information and therefore are
subject to existing insider trading prohibitions of Rule 10b-5. This
could include issuers, broker-dealers,\186\ investment advisers,\187\
and investment companies. We estimate that there are approximately 913
broker-dealers that may be considered small entities.\188\ We estimate
that there are approximately
[[Page 51736]]
1,500 investment advisers that may be considered small entities.\189\
We estimate that there are approximately 241 investment companies that
may be considered small entities.\190\ The Commission cannot estimate
with certainty how many small entities engage in securities trading
while aware of inside information and no comments were received on this
point.
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\186\ Exchange Act Rule 0-10(c) defines a broker-dealer as a
small entity if it had total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal
year as of which its audited financial statements were prepared and
it is not affiliated with any person (other than a natural person)
that is not a small entity. 17 CFR 240.0-10(c).
\187\ Investment Advisers Act Rule 0-7 defines an investment
adviser as a small entity if it: (i) manages less than $25 million
in assets, (ii) has total assets of less than $5 million on the last
day of its most recent fiscal year, and (iii) is not in a control
relationship with another investment adviser that is not a small
entity. 17 CFR 275.0-7.
\188\ The Commission bases its estimate on information from
FOCUS Reports.
\189\ The Commission bases its estimate on information from the
Commission's database of registration information.
\190\ The Commission bases its estimate on information from
Lipper Directors' Analytical Data and reports investment companies
file with the Commission on Form N-SAR.
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D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
1. Regulation FD
When an issuer, large or small, discloses material nonpublic
information, Regulation FD requires it to file or furnish a Form 8-K,
or to otherwise make public disclosure of information through another
method (or combination of methods) of disclosure that is reasonably
designed to provide broad, non-exclusionary distribution of the
information to the public.
The regulation's ``public disclosure'' requirement would give small
entity issuers flexibility in how to disseminate information (such as
via telephonic or Internet conference calls). This flexible performance
element enables small entity issuers the freedom to select the method
(or combination of methods) of public disclosure that best suits their
business operations while achieving broad dissemination of the
information. Accordingly, we do not think the requirement will have a
disproportionate affect on small entity issuers. In addition, by
allowing an issuer to use a method ``or combination of methods'' of
disclosure, Regulation FD recognizes that it may not always be possible
for an issuer to rely on a single method of disclosure as reasonably
designed to effect broad non-exclusionary public disclosure.
2. Rule 10b5-1
Rule 10b5-1 does not directly impose any recordkeeping or
compliance requirements on small entities. To the extent that an entity
engaged in securities trading wished to rely on an affirmative defense,
it might document the existence of a pre-existing plan to trade. More
generally, any entity, large or small, that sought to rely on the
affirmative defense in paragraph (c)(2) for institutional traders would
be required to comply with the specific provisions of that paragraph,
including implementing reasonable policies and procedures to prevent
insider trading. We believe that most entities to whom this affirmative
defense would be relevant--i.e., broker-dealers and investment
advisers--already have procedures in place, because of existing
statutory requirements.\191\
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\191\ See Section 15(f) of the Exchange Act (15 U.S.C. 78o(f))
and Section 204A of the Investment Advisers Act (15 U.S.C. 80b-4a).
---------------------------------------------------------------------------
3. Rule 10b5-2
Rule 10b5-2 affects individuals and not entities. Accordingly, we
believe that Rule 10b5-2 would not have a significant economic impact
on a substantial number of small entities.
E. Agency Action To Minimize Effect on Small Entities
As required by Sections 603 and 604 of the RFA, the Commission has
considered the following alternatives to minimize the economic impact
of Regulation FD and Rule 10b5-1 on small entities: (a) The
establishment of differing compliance or reporting requirements or
timetables that take into account the resources available to small
entities; (b) the clarification, consolidation, or simplification of
compliance and reporting requirements under the regulation and the rule
for small entities; (c) the use of performance rather than design
standards; and (d) an exemption from coverage of the regulation or
rule, or any part thereof, for small entities.
With respect to Regulation FD, we continue to believe that
different compliance or reporting requirements or timetables for small
entities would interfere with achieving the primary goal of protecting
investors. For the same reason, we believe that exempting small
entities from coverage of Regulation FD, in whole or part, is not
appropriate. In addition, we have concluded that it is not feasible to
further clarify, consolidate, or simplify the regulation for small
entities. We have, however, used performance elements in Regulation FD
in two ways. Regulation FD does not require that an issuer satisfy its
obligations in accordance with any specific design, but rather allows
each issuer, including small entities, flexibility to select the method
(or combination of methods) of compliance that is most efficient and
appropriate for its business operations. First, each issuer can select
what method(s) to use to avoid selective disclosure (e.g., by
designating which authorized official(s) will speak with analysts).
Second, each issuer can choose what method(s) to use for ``public
disclosure'' (e.g., filing or furnishing a Form 8-K, issuing a press
release, holding a conference call transmitted telephonically or over
the Internet, etc.). We do not believe different performance standards
for small entities would be consistent with the purpose of Regulation
FD.
We have made a number of changes to proposed Regulation FD that we
believe decrease its impact on all issuers, including small entity
issuers.
First, we have narrowed the scope of communications covered by
Regulation FD so it does not apply to all communications to persons
outside the issuer. As revised, the regulation applies only to
communications made to securities market professionals and to holders
of the issuer's securities under circumstances in which it is
reasonably foreseeable that the security holder will trade on the basis
of the information.
Second, we have narrowed the definition of ``person acting on
behalf of the issuer'' to senior officials and those persons who
normally would be expected to communicate with securities market
professionals or with holders of the issuer's securities.
Third, to remove any doubt that private liability will not result
from a Regulation FD violation, we have added an express provision in
the regulation text that a failure to make a disclosure required solely
by Regulation FD will not result in a violation of Rule 10b-5.
Fourth, to clarify that a reasonable, but mistaken, determination
that information was not material will not be second-guessed, the
regulation text has been revised to provide that the materiality
determination is subject to a recklessness standard.
Fifth, Regulation FD has been revised so that a failure to comply
with its provisions will not disqualify an issuer from use of short-
form registration for securities offerings or affect security holders'
ability to resell under Securities Act Rule 144.
Sixth, Regulation FD has been revised to exclude communications
made in connection with most securities offerings registered under the
Securities Act.
With respect to Rule 10b5-1, we continue to believe that different
compliance requirements for small entities would interfere with
achieving the primary goal of protecting investors. For the same
reason, we believe that exempting small entities from coverage of Rule
10b5-1, in whole or part, is not appropriate. In addition, we have
concluded that it is not feasible to further clarify, consolidate, or
simplify the rule for small entities. First, the aspects of Rule 10b5-1
that indirectly involve compliance requirements are for
[[Page 51737]]
affirmative defenses to the general rule and therefore not required to
comply with Rule 10b5-1. Second, we have used performance elements for
the affirmative defense based on an institutional investor implementing
proper informational barriers set forth in paragraph (c)(2) of Rule
10b5-1. If an entity decides to assert this affirmative defense, Rule
10b5-1 does not require that it satisfy its obligations under the
affirmative defense in accordance with any specific design, but rather
allows it flexibility to select which measure(s) it wants to put in
place to satisfy the elements of the affirmative defense. We do not
believe different performance standards for small entities would be
consistent with the purpose of the rule.
We have made changes to Rule 10b5-1 that we believe will decrease
its impact on small entities. First, a person may use limit orders in a
pre-existing contract, plan, or instruction created while the person
was not aware of any inside information. Second, Rule 10b5-1 as adopted
provides that the price, amount, and date of a transaction do not have
to be specified where the purchase or sale that occurred was the result
of the pre-existing contract, plan, or instruction.
VIII. Statutory Bases and Text of Amendments
We are adopting Regulation FD, the amendments to Form 8-K, Rule
10b5-1, and Rule 10b5-2 under the authority set forth in Sections 10,
19(a), and 28 of the Securities Act, Sections 3, 9, 10, 13, 15, 23, and
36 of the Exchange Act, and Section 30 of the Investment Company Act.
List of Subjects
17 CFR Part 240
Fraud, Reporting and recordkeeping requirements, Securities.
17 CFR Parts 243 and 249
Securities, Reporting and recordkeeping requirements.
Text of Amendments
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, and
80b-11, unless otherwise noted.
* * * * *
2. Section 240.10b5-1 is added after Section 240.10b-5 to read as
follows:
Sec. 240.10b5-1 Trading ``on the basis of'' material nonpublic
information in insider trading cases.
Preliminary Note to Sec. 240.10b5-1: This provision defines when
a purchase or sale constitutes trading ``on the basis of'' material
nonpublic information in insider trading cases brought under Section
10(b) of the Act and Rule 10b-5 thereunder. The law of insider
trading is otherwise defined by judicial opinions construing Rule
10b-5, and Rule 10b5-1 does not modify the scope of insider trading
law in any other respect.
(a) General. The ``manipulative and deceptive devices'' prohibited
by Section 10(b) of the Act (15 U.S.C. 78j) and Sec. 240.10b-5
thereunder include, among other things, the purchase or sale of a
security of any issuer, on the basis of material nonpublic information
about that security or issuer, in breach of a duty of trust or
confidence that is owed directly, indirectly, or derivatively, to the
issuer of that security or the shareholders of that issuer, or to any
other person who is the source of the material nonpublic information.
(b) Definition of ``on the basis of.'' Subject to the affirmative
defenses in paragraph (c) of this section, a purchase or sale of a
security of an issuer is ``on the basis of'' material nonpublic
information about that security or issuer if the person making the
purchase or sale was aware of the material nonpublic information when
the person made the purchase or sale.
(c) Affirmative defenses. (1)(i) Subject to paragraph (c)(1)(ii) of
this section, a person's purchase or sale is not ``on the basis of''
material nonpublic information if the person making the purchase or
sale demonstrates that:
(A) Before becoming aware of the information, the person had:
(1) Entered into a binding contract to purchase or sell the
security,
(2) Instructed another person to purchase or sell the security for
the instructing person's account, or
(3) Adopted a written plan for trading securities;
(B) The contract, instruction, or plan described in paragraph
(c)(1)(i)(A) of this Section:
(1) Specified the amount of securities to be purchased or sold and
the price at which and the date on which the securities were to be
purchased or sold;
(2) Included a written formula or algorithm, or computer program,
for determining the amount of securities to be purchased or sold and
the price at which and the date on which the securities were to be
purchased or sold; or
(3) Did not permit the person to exercise any subsequent influence
over how, when, or whether to effect purchases or sales; provided, in
addition, that any other person who, pursuant to the contract,
instruction, or plan, did exercise such influence must not have been
aware of the material nonpublic information when doing so; and
(C) The purchase or sale that occurred was pursuant to the
contract, instruction, or plan. A purchase or sale is not ``pursuant to
a contract, instruction, or plan'' if, among other things, the person
who entered into the contract, instruction, or plan altered or deviated
from the contract, instruction, or plan to purchase or sell securities
(whether by changing the amount, price, or timing of the purchase or
sale), or entered into or altered a corresponding or hedging
transaction or position with respect to those securities.
(ii) Paragraph (c)(1)(i) of this section is applicable only when
the contract, instruction, or plan to purchase or sell securities was
given or entered into in good faith and not as part of a plan or scheme
to evade the prohibitions of this section.
(iii) This paragraph (c)(1)(iii) defines certain terms as used in
paragraph (c) of this Section.
(A) Amount. ``Amount'' means either a specified number of shares or
other securities or a specified dollar value of securities.
(B) Price. ``Price'' means the market price on a particular date or
a limit price, or a particular dollar price.
(C) Date. ``Date'' means, in the case of a market order, the
specific day of the year on which the order is to be executed (or as
soon thereafter as is practicable under ordinary principles of best
execution). ``Date'' means, in the case of a limit order, a day of the
year on which the limit order is in force.
(2) A person other than a natural person also may demonstrate that
a purchase or sale of securities is not ``on the basis of'' material
nonpublic information if the person demonstrates that:
(i) The individual making the investment decision on behalf of the
person to purchase or sell the securities was not aware of the
information; and
(ii) The person had implemented reasonable policies and procedures,
taking into consideration the nature of the person's business, to
ensure that individuals making investment decisions would not violate
the laws
[[Page 51738]]
prohibiting trading on the basis of material nonpublic information.
These policies and procedures may include those that restrict any
purchase, sale, and causing any purchase or sale of any security as to
which the person has material nonpublic information, or those that
prevent such individuals from becoming aware of such information.
3. Section 240.10b5-2 is added to read as follows:
Sec. 240.10b5-2 Duties of trust or confidence in misappropriation
insider trading cases.
Preliminary Note to Sec. 240.10b5-2: This section provides a
non-exclusive definition of circumstances in which a person has a
duty of trust or confidence for purposes of the ``misappropriation''
theory of insider trading under Section 10(b) of the Act and Rule
10b-5. The law of insider trading is otherwise defined by judicial
opinions construing Rule 10b-5, and Rule 10b5-2 does not modify the
scope of insider trading law in any other respect.
(a) Scope of Rule. This section shall apply to any violation of
Section 10(b) of the Act (15 U.S.C. 78j(b)) and Sec. 240.10b-5
thereunder that is based on the purchase or sale of securities on the
basis of, or the communication of, material nonpublic information
misappropriated in breach of a duty of trust or confidence.
(b) Enumerated ``duties of trust or confidence.'' For purposes of
this section, a ``duty of trust or confidence'' exists in the following
circumstances, among others:
(1) Whenever a person agrees to maintain information in confidence;
(2) Whenever the person communicating the material nonpublic
information and the person to whom it is communicated have a history,
pattern, or practice of sharing confidences, such that the recipient of
the information knows or reasonably should know that the person
communicating the material nonpublic information expects that the
recipient will maintain its confidentiality; or
(3) Whenever a person receives or obtains material nonpublic
information from his or her spouse, parent, child, or sibling;
provided, however, that the person receiving or obtaining the
information may demonstrate that no duty of trust or confidence existed
with respect to the information, by establishing that he or she neither
knew nor reasonably should have known that the person who was the
source of the information expected that the person would keep the
information confidential, because of the parties' history, pattern, or
practice of sharing and maintaining confidences, and because there was
no agreement or understanding to maintain the confidentiality of the
information.
4. Part 243 is added to read as follows:
PART 243--REGULATION FD
Sec.
243.100 General rule regarding selective disclosure.
243.101 Definitions.
243.102 No effect on antifraud liability.
243.103 No effect on Exchange Act reporting status.
Authority: 15 U.S.C. 78c, 78i, 78j, 78m, 78o, 78w, 78mm, and
80a-29, unless otherwise noted.
Sec. 243.100 General rule regarding selective disclosure.
(a) Whenever an issuer, or any person acting on its behalf,
discloses any material nonpublic information regarding that issuer or
its securities to any person described in paragraph (b)(1) of this
section, the issuer shall make public disclosure of that information as
provided in Sec. 243.101(e):
(1) Simultaneously, in the case of an intentional disclosure; and
(2) Promptly, in the case of a non-intentional disclosure.
(b)(1) Except as provided in paragraph (b)(2) of this section,
paragraph (a) of this section shall apply to a disclosure made to any
person outside the issuer:
(i) Who is a broker or dealer, or a person associated with a broker
or dealer, as those terms are defined in Section 3(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78c(a));
(ii) Who is an investment adviser, as that term is defined in
Section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C.
80b-2(a)(11)); an institutional investment manager, as that term is
defined in Section 13(f)(5) of the Securities Exchange Act of 1934 (15
U.S.C. 78m(f)(5)), that filed a report on Form 13F (17 CFR 249.325)
with the Commission for the most recent quarter ended prior to the date
of the disclosure; or a person associated with either of the foregoing.
For purposes of this paragraph, a ``person associated with an
investment adviser or institutional investment manager'' has the
meaning set forth in Section 202(a)(17) of the Investment Advisers Act
of 1940 (15 U.S.C. 80b-2(a)(17)), assuming for these purposes that an
institutional investment manager is an investment adviser;
(iii) Who is an investment company, as defined in Section 3 of the
Investment Company Act of 1940 (15 U.S.C. 80a-3), or who would be an
investment company but for Section 3(c)(1) (15 U.S.C. 80a-3(c)(1)) or
Section 3(c)(7) (15 U.S.C. 80a-3(c)(7)) thereof, or an affiliated
person of either of the foregoing. For purposes of this paragraph,
``affiliated person'' means only those persons described in Section
2(a)(3)(C), (D), (E), and (F) of the Investment Company Act of 1940 (15
U.S.C. 80a-2(a)(3)(C), (D), (E), and (F)), assuming for these purposes
that a person who would be an investment company but for Section
3(c)(1) (15 U.S.C. 80a-3(c)(1)) or Section 3(c)(7) (15 U.S.C. 80a-
3(c)(7)) of the Investment Company Act of 1940 is an investment
company; or
(iv) Who is a holder of the issuer's securities, under
circumstances in which it is reasonably foreseeable that the person
will purchase or sell the issuer's securities on the basis of the
information.
(2) Paragraph (a) of this section shall not apply to a disclosure
made:
(i) To a person who owes a duty of trust or confidence to the
issuer (such as an attorney, investment banker, or accountant);
(ii) To a person who expressly agrees to maintain the disclosed
information in confidence;
(iii) To an entity whose primary business is the issuance of credit
ratings, provided the information is disclosed solely for the purpose
of developing a credit rating and the entity's ratings are publicly
available; or
(iv) In connection with a securities offering registered under the
Securities Act, other than an offering of the type described in any of
Rule 415(a)(1)(i)-(vi) (Sec. 230.415(a)(1)(i)-(vi) of this chapter).
Sec. 243.101 Definitions.
This section defines certain terms as used in Regulation FD
(Secs. 243.100 -243.103).
(a) Intentional. A selective disclosure of material nonpublic
information is ``intentional'' when the person making the disclosure
either knows, or is reckless in not knowing, that the information he or
she is communicating is both material and nonpublic.
(b) Issuer. An ``issuer'' subject to this regulation is one that
has a class of securities registered under Section 12 of the Securities
Exchange Act of 1934 (15 U.S.C. 78l), or is required to file reports
under Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(d)), including any closed-end investment company (as defined in
Section 5(a)(2) of the Investment Company Act of 1940) (15 U.S.C. 80a-
5(a)(2)), but not including any other investment company or any foreign
government or foreign private issuer, as those terms are defined in
Rule 405 under the Securities Act (Sec. 230.405 of this chapter).
[[Page 51739]]
(c) Person acting on behalf of an issuer. ``Person acting on behalf
of an issuer'' means any senior official of the issuer (or, in the case
of a closed-end investment company, a senior official of the issuer's
investment adviser), or any other officer, employee, or agent of an
issuer who regularly communicates with any person described in
Sec. 243.100(b)(1)(i), (ii), or (iii), or with holders of the issuer's
securities. An officer, director, employee, or agent of an issuer who
discloses material nonpublic information in breach of a duty of trust
or confidence to the issuer shall not be considered to be acting on
behalf of the issuer.
(d) Promptly. ``Promptly'' means as soon as reasonably practicable
(but in no event after the later of 24 hours or the commencement of the
next day's trading on the New York Stock Exchange) after a senior
official of the issuer (or, in the case of a closed-end investment
company, a senior official of the issuer's investment adviser) learns
that there has been a non-intentional disclosure by the issuer or
person acting on behalf of the issuer of information that the senior
official knows, or is reckless in not knowing, is both material and
nonpublic.
(e) Public disclosure. (1) Except as provided in paragraph (e)(2)
of this section, an issuer shall make the ``public disclosure'' of
information required by Sec. 243.100(a) by furnishing to or filing with
the Commission a Form 8-K (17 CFR 249.308) disclosing that information.
(2) An issuer shall be exempt from the requirement to furnish or
file a Form 8-K if it instead disseminates the information through
another method (or combination of methods) of disclosure that is
reasonably designed to provide broad, non-exclusionary distribution of
the information to the public.
(f) Senior official. ``Senior official'' means any director,
executive officer (as defined in Sec. 240.3b-7 of this chapter),
investor relations or public relations officer, or other person with
similar functions.
(g) Securities offering. For purposes of Sec. 243.100(b)(2)(iv):
(1) Underwritten offerings. A securities offering that is
underwritten commences when the issuer reaches an understanding with
the broker-dealer that is to act as managing underwriter and continues
until the later of the end of the period during which a dealer must
deliver a prospectus or the sale of the securities (unless the offering
is sooner terminated);
(2) Non-underwritten offerings. A securities offering that is not
underwritten:
(i) If covered by Rule 415(a)(1)(x) (Sec. 230.415(a)(1)(x) of this
chapter), commences when the issuer makes its first bona fide offer in
a takedown of securities and continues until the later of the end of
the period during which each dealer must deliver a prospectus or the
sale of the securities in that takedown (unless the takedown is sooner
terminated);
(ii) If a business combination as defined in Rule 165(f)(1)
(Sec. 230.165(f)(1) of this chapter), commences when the first public
announcement of the transaction is made and continues until the
completion of the vote or the expiration of the tender offer, as
applicable (unless the transaction is sooner terminated);
(iii) If an offering other than those specified in paragraphs (a)
and (b) of this section, commences when the issuer files a registration
statement and continues until the later of the end of the period during
which each dealer must deliver a prospectus or the sale of the
securities (unless the offering is sooner terminated).
Sec. 243.102 No effect on antifraud liability.
No failure to make a public disclosure required solely by
Sec. 243.100 shall be deemed to be a violation of Rule 10b-5 (17 CFR
240.10b-5) under the Securities Exchange Act.
Sec. 243.103 No effect on Exchange Act reporting status.
A failure to make a public disclosure required solely by
Sec. 243.100 shall not affect whether:
(a) For purposes of Forms S-2 (17 CFR 239.12), S-3 (17 CFR 239.13)
and S-8 (17 CFR 239.16b) under the Securities Act, an issuer is deemed
to have filed all the material required to be filed pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)) or, where applicable, has made those filings in a timely
manner; or
(b) There is adequate current public information about the issuer
for purposes of Sec. 230.144(c) of this chapter (Rule 144(c)).
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
5. The authority citation for Part 249 is amended by adding the
following citations:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
Section 249.308 is also issued under 15 U.S.C. 80a-29.
* * * * *
Sec. 249.308 [Amended]
6. Section 249.308 is amended by revising the phrase ``Rule 13a-11
or Rule 15d-11 (Sec. 240.13a-11 or Sec. 240.15d-11 of this chapter)''
to read ``Rule 13a-11 or Rule 15d-11 (Sec. 240.13a-11 or Sec. 240.15d-
11 of this chapter) and for reports of nonpublic information required
to be disclosed by Regulation FD (Secs. 243.100 and 243.101 of this
chapter)''.
7. Form 8-K (referenced in Sec. 249.308) is amended:
a. in General Instruction A, by revising the phrase ``Rule 13a-11
or Rule 15d-11'' to read ``Rule 13a-11 or Rule 15d-11, and for reports
of nonpublic information required to be disclosed by Regulation FD (17
CFR 243.100 and 243.101)''.
b. by adding one sentence to the end of paragraph 1 of General
Instruction B;
c. in General Instruction B, by adding a new paragraph 2;
d. in General Instruction B.4., by revising the phrase ``other
events of material importance pursuant to Item 5,'' to read ``other
events of material importance pursuant to Item 5 and of information
pursuant to Item 9,'';
e. in General Instruction B. by adding a new paragraph 5;
f. in Item 5 of Information to be Included in the Report by adding
a new sentence at the end of the paragraph;
g. by adding a new Item 9 under ``Information to be Included in the
Report'', to read as follows:
Note: The text of Form 8-K does not, and these amendments will
not, appear in the Code of Federal Regulations.
Form 8-K
* * * * *
General Instructions
* * * * *
B. Events To Be Reported and Time for Filing of Reports
1. * * * A registrant either furnishing a report on this form under
Item 9 or electing to file a report on this form under Item 5 solely to
satisfy its obligations under Regulation FD (17 CFR 243.100 and
243.101) must furnish such report or make such filing in accordance
with the requirements of Rule 100(a) of Regulation FD (17 CFR
243.100(a)).
2. The information in a report furnished pursuant to Item 9 shall
not be deemed to be ``filed'' for the purposes of Section 18 of the
Exchange Act or otherwise subject to the liabilities of that section,
except if the registrant specifically states that the information is to
be considered ``filed'' under the Exchange Act or incorporates it by
[[Page 51740]]
reference into a filing under the Securities Act or the Exchange Act.
* * * * *
5. A registrant's report under Item 5 or Item 9 will not be deemed
an admission as to the materiality of any information in the report
that is required to be disclosed solely by Regulation FD.
* * * * *
INFORMATION TO BE INCLUDED IN THE REPORT
* * * * *
Item 5. Other Events and Regulation FD Disclosure.
* * * The registrant may, at its option, file a report under this
item disclosing the nonpublic information required to be disclosed by
Regulation FD (17 CFR 243.100-243.103).
* * * * *
Item 9. Regulation FD Disclosure.
Unless filed under Item 5, report under this item only information
the registrant elects to disclose through Form 8-K pursuant to
Regulation FD (17 CFR 243.100-243.103).
* * * * *
Dated: August 15, 2000.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-21156 Filed 8-23-00; 8:45 am]
BILLING CODE 8010-01-U