Monday, October 23, 2000
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 &
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.