[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

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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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \30\ Letters of The Bond Market Association, Moody's, and 
Standard and Poors.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \47\ Compare NASD Rule IM-4120-1. Some of these items are 
currently covered in Form 8-K reporting requirements.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \48\ See, e.g., Letter of Charles Schwab.
    \49\ See also, Section II.B.3 below.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \50\ Rule 100(a)(1).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \57\ Of course, a pattern of ``mistaken'' judgments about 
materiality would make less credible the claim that any particular 
disclosure was not intentional.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \61\ Rule 101(f).
    \62\ Rule 101(d).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \69\ Rule 101(e)(2).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \72\ See Letters of Intel, Charles Schwab, and the Business 
Roundtable.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \112\ Rule 10b5-1(c)(1)(iii)(A).
    \113\ Rule 10b5-1(c)(1)(iii)(B).
    \114\ Rule 10b5-1(c)(1)(iii)(C).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \126\ Proposing Release at part III.B.1.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \165\ See Fishman and Hagerty; Manove, supra note 151.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \166\ See, e.g., Letters of Huntington Bancshares and Charles 
Schwab.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \180\ Letter of the American Bar Association.
    \181\ Letter of VirtualFund.com.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \182\ Letters of the American Society of Corporate Secretaries 
and the Securities Industry Association.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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