The Securities and Exchange Commission's Regulation FD takes effect today to prevent publicly traded companies from selectively disclosing material information about their businesses to securities market professionals.

Reg FD is designed to stop companies from providing key information to investment professionals and others who could trade on it before that information is disseminated broadly. While the SEC's goal is to level the playing field between institutional and retail investors, it is impossible at this juncture to predict whether this will result only in a broad mass of equally ill-informed investors as companies become more circumspect about releasing information.

In the meantime, the regulation does seem bound in the near term to restructure what companies treat as material information, and will affect all manner of corporate communications including disclosures made in the course of private placements.

The SEC hopes to tread a fine line by stopping practices such as conference calls open only to analysts and institutional investors to discuss quarterly earnings, corporate acquisitions or pivotal clinical trial data. At the same time, the SEC has said that it does not want the new rule to cause companies to move in the opposite direction of providing only minimal information to everyone. And the agency has said that it wants to make sure that analysts and others are still able to gather the nonmaterial "mosaic" of details that help them build a significant picture of a company's business (see "Whys & Wherefores", A6).

Attorneys who provide securities law services to biotech companies told BioCentury that the SEC's basic nondisclosure law has not changed with the issuance of Reg FD. However, as a practical matter, they expect to step up their reviews of client data and events for material information (see "Gearing Up for Compliance", A4). Many also expect that conversations with analysts and other market professionals will drop off, at least in the short term, as companies read the regulation literally in the absence of other guidance from the SEC as to what behaviors the commission is trying to curb.

In issuing the rule, the SEC "changed things around the edges" of its disclosure requirements, said Nat Gardiner, a partner with Palmer & Dodge LLP in Boston. How it will enforce those changes will be seen only over time, making it difficult for companies and securities professionals to guess the extent to which their interactions will be targeted.

Some aspects of Reg FD are easy to implement, Gardiner said, including opening up earnings conference calls to all interested parties or using simultaneous webcasting. "There has been a pattern of that happening, but this rule in effect makes it required," he said. "By making the call open, you don't have to think about whether you are disclosing nonpublic information."

Offline talks and materiality

Less obvious is what to do about disclosure of information in other contexts, such as conversations with market professionals. Reg FD tells public companies that in situations where they will intentionally disclose material information to securities professionals, they must make a simultaneous disclosure to the public. In situations of unintentional disclosure, companies have until the later of 24 hours or the start of the next trading day on the New York Stock Exchange to make "prompt" public disclosure.