E arlier this month, the Securities and Exchange persons - PDF document

G Corporate Finance Alert September 2000 SEC Adopts Regulation FD to Combat Selective Disclosure of Material Non-Public Information to Market Professionals By John D. Hogoboom, Esq., Steven M. Skolnick, Esq. and Michael W. Valente, Esq. E arlier this month, the Securities and Exchange persons inadvertently. As discussed below, however, Commission adopted its controversial Regulation Regulation FD is likely to have far-reaching FD which is designed to eliminate the selective consequences for most communications by public disclosure of material non-public information to market companies. insiders. Regulation FD is likely to significantly change The Rule the ways in which public companies communicate with analysts and other market participants. Regulation FD Regulation FD does not mandate the disclosure of will be effective on October 23, 2000, although public material non-public information. However, Regulation companies would be well advised to alter the methods by FD requires issuers who intentionally disclose material which they disseminate material information non-public information to persons covered by the immediately. regulation to assure a simultaneous general disclosure of that information to the public. Regulation FD also Overview of Selective Disclosure and requires issuers to cure promptly unintentional Regulation FD disclosures of such information to covered persons. Overview Under Regulation FD, whenever: "Selective disclosure" occurs when an issuer voluntarily discloses material non-public information to a An issuer, or person acting on its behalf discloses limited number of persons — typically analysts or other material non-public information; to certain securities market professionals — prior to the release of enumerated persons (in general, securities market such information to the general public. Selective professionals or holders of issuer’s securities who may disclosure is viewed by many investors as being well trade on the basis of the information; the issuer indistinguishable from illegal "tipping." However, must make public disclosure of that same information: • because of quirks in the development of insider trading simultaneously (for intentional disclosure; or • promptly (for non-intentional disclosure) “Under existing case law, information is material if "there is a substantial likelihood that a reasonable Regulation FD applies to all issuers with securities shareholder would consider it important" in making registered under Section 12 of the Securities Exchange an investment decision.” Act of 1934, as amended, and all issuers required to file periodic reports under Section 15(d) thereof, subject to law, the legality of selective disclosure has been unclear. certain exceptions. Regulation FD is designed to address the most egregious Disclosure of Material Non-public instances of selective disclosure by requiring public Information companies to effect a broad general dissemination of material information that is disclosed to certain market Regulation FD applies to the disclosure of "material professionals or to promptly publicize material non-public" information. Under existing case law, information that has been selectively disclosed to such information is material if "there is a substantial This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G discussions with the media, promotional activities and likelihood that a reasonable shareholder would consider it important" in making an investment other non-market communications, although such communications were initially proposed to be covered decision. To fulfill the materiality requirement, there by the regulation. must be a substantial likelihood that a fact "would have been viewed by the reasonable investor as having Regulation FD specifically enumerates four significantly altered the ‘total mix’ of information made categories of persons to which the regulation applies, available." Information is "non-public" if it has not been disseminated in a manner making it available to absent an exclusion. Those persons are: • broker-dealers and their associated persons; investors generally. • investment advisors, certain institutional The lack of a bright line materiality test will make investment managers and their associated compliance with the regulation difficult for issuers person; because the determination of whether information is • investment companies, hedge funds and "material" is a judgment that is made on the basis of unique facts and circumstances. That determination affiliated persons; and • any holder of the issuer’s securities, under can be highly complex and, unfortunately, is frequently circumstances in which it is reasonably reviewed with the benefit of hindsight. In order to aid foreseeable that the person would trade in the issuers, the SEC included in the release discussing the issuer’s securities on the basis of the adoption of Regulation FD the following non-exclusive information. list of information and events that are likely to be material: • Regulation FD excludes communications to earnings information; • "temporary insiders" (professionals, such as lawyers, mergers, acquisitions, tender offers, joint accountants and investment bankers) who owe a duty of ventures, or changes in assets; • trust or confidence to the issuer. Regulation FD also new products or discoveries, or developments excludes disclosures made to persons who expressly regarding customers or suppliers (e.g., the acquisition or loss of a contract); agree to maintain the disclosed information in • confidence. Disclosures made to any entity whose changes in control or in management; • primary business is issuing credit ratings also are exempt, change in auditors or auditor notification that provided that the entity's ratings are publicly available the issuer may no longer rely on an auditor’s and the information is disclosed solely for the purpose of audit report; • developing a credit rating. Finally, as discussed more events regarding the issuer’s securities, such as defaults on senior securities, changes in fully below, disclosures made in connection with registered offerings under the Securities Act of 1933, as dividend policy, calls of securities for amended, are not subject to Regulation FD. redemption, repurchase plans, stock splits, changes to the rights of security holders, “Information is "non-public" if it has not been public or private sales of additional securities; disseminated in a manner making it available to and investors generally.” • bankruptcies and receiverships. Scope of the Regulation Regulation FD defines "any person acting on behalf of an issuer" as (i) any senior official of the issuer, Regulation FD applies only to communications of including any director, executive officer, investor information to those persons who would "reasonably be relations or public relations officer, or other person with expected to trade securities on the basis of the information or provide others with advice about similar functions; and (ii) any other officer, employee, or agent of the issuer who regularly communicates with securities trading." As a result, it does not cover