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January 1, 2001

Full Disclosure and Traders

By Lee A. Pickard

Regulation FD, adopted by the Securities and Exchange Commission, forbids selective disclosure of material nonpublic information to market professionals by issuer companies. As a result, corporations and other issuer companies are tightening up the manner in which they disseminate information to broker dealers, investment advisers, investment companies and other institutional investors.

Regulation FD (shorthand for full disclosure') directly affects securities analysts and equity traders. Security analysts argue that the regulation will inhibit the flow of corporate and financial information to investors and lead to increasing volatility in stock prices as information is disseminated into the markets on a more "controlled" basis. Regulation FD may benefit equity traders, however, by providing more equitable access to significant market information.

Regulation FD covers the publicly traded company and someone acting on its behalf - such as senior officials and those who communicate with the public. It stipulates that they must disclose material nonpublic information to broker dealers, sellside analysts, many buyside analysts, institutional money managers including hedge funds and certain security holders.

Regulation FD applies to disclosures of material nonpublic information about the issuer or its securities. The regulation does not define the terms "material" or "nonpublic" but relies on existing case law definitions of those terms. Therefore, information is material for purposes of Regulation FD if "there is a substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision. Information is "nonpublic" if it has not been made available to investors generally.

The SEC has declined to adopt a bright-line test for materiality, but has cautioned issuers to review the important events carefully to determine whether they are material. One common practice that raises special concerns about selective disclosure is that of securities analysts seeking "guidance" from issuers about earnings forecasts. According to the SEC, an official of an issuer who engages in a private discussion with an analyst who is seeking guidance about earnings estimates takes on a high degree of risk of violating Regulation FD. The SEC states that if the issuer official discloses to an analyst nonpublic information as to whether the company's anticipated earnings are higher, lower, or even the same as that which analysts have been forecasting, the issuer likely will have violated Regulation FD.

The timing of an issuer's required disclosure under Regulation FD depends on whether the issuer's selective disclosure was intentional or non-intentional. If the selective disclosure is intentional, then the issuer must disclose the material information to the public "simultaneously." When an issuer makes a non-intentional disclosure of material nonpublic information, it is required to disclose the information to the public "promptly."

Issuers may satisfy their public disclosure obligations under Regulation FD by filing or furnishing a Form 8-K, or by disseminating 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."

These methods include press releases, or announcements 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. An issuer who failed to comply with Regulation FD would be subject to an SEC enforcement action. In appropriate cases, the SEC also could bring an enforcement action against an individual at the issuer who is responsible for the violation.

From an equity trader's perspective, Regulation FD could prove beneficial. Less material information will "leak" into the market on a selective basis. Instead, market participants are likely to learn of major financial events on a uniform and timely basis. Traders will less likely be blind-sided by market participants who gain special access to important information about a company before the information is public. Thus, Regulation FD will reduce the opportunities for those with access to important information about corporate issuers to take advantage of traders.

Lee A. Pickard is a partner in the Washington, D.C. law firm of Pickard and Djinis LLP and a former director of the SEC's Division of Market Regulation.