--OFF TOPIC--
SEC Proposes Rule Aimed to Stop Selective Disclosure (Update2)
SEC Proposes Rule Aimed to Stop Selective Disclosure (Update2)
(Adds comments from securities lawyer, investor relations
group)
Washington, Dec. 15 (Bloomberg) -- The Securities and
Exchange Commission proposed a rule to stop companies from
disclosing market-moving information to securities analysts and
large investors before they release it to the general public.
The measure would require companies to issue a press release
or take other steps to inform the public at the same time they
discuss with analysts or institutional investors any information
that's likely to have an impact on share prices.
``The all-too-common practice of selectively disseminating
material information is a disservice to investors and undermines
the fundamental principle of fairness,' SEC Chairman Arthur
Levitt said, reading a prepared statement before the
commissioners voted to propose the rule. ``This practice leads to
potential conflicts of interest for analysts and undermines
investor confidence in our markets.'
The commission's proposal to rein in a practice known as
selective disclosure' will be put out for 90 days of public
comment before the SEC considers whether to approve it. The SEC
today proposed two other changes to adjust insider-trading
regulations, and adopted measures that encourage corporate
directors to take a more active role in ensuring the accuracy of
company financial reports.
The proposed selective disclosure rule raised immediate
concern in the securities industry that the changes would have a
``chilling effect' on a company's ability to share information
with analysts.
``We are concerned the proposal will end up restricting the
flow of information rather than encouraging it by imposing
detailed rules on companies, investors, and analysts,' said
Stuart J. Kaswell, general counsel of the Securities Industry
Association.
Securities laws are supposed to encourage ``entrepreneurism
in ferreting out information about companies to help investors
evaluate whether the company is a good investment opportunity,'
Kaswell said.
`More Cautious'
``Companies and their lawyers may be much more cautious
about having any one-on-one conversations with an analyst or even
a member of the media,' said securities lawyer John Olson, a
partner with the Gibson, Dunn & Crutcher firm in New York.
If adopted, the rule could ``cause a dumbing down of the
quality of the disclosure because companies may not be willing to
give sophisticated details with all the public listening,' Olson
said.
The proposal doesn't ban company officials from meeting
privately with brokerage analysts. Companies wouldn't be required
to publicly release information discussed in a closed-door
session if the material wouldn't be considered important to other
investors. If market-moving news is unexpectedly or inadvertently
disclosed in a private discussion, the rule would require
companies to provide the information to the public as soon as
possible.
`Stain' on Market
The selective disclosure proposal comes nearly two years
after Levitt started campaigning against selective disclosure,
which he once called a ``stain upon our market.'
Almost daily, companies from Clorox Co. to Apple Computer
Inc. to Abercrombie & Fitch Co. provide market-moving information
to analysts and large investors through one-on-one conversations,
conference calls, or closed-door meetings. The practice could
give some investors the chance to trade on the information before
others. Some companies have said it's too costly to include
everyone in conference calls, and others say they prefer for
small investors to get their news through Wall Street analysts
who have the expertise to sort through specialized information.
Disclosure Requirements
Under the SEC's selective disclosure proposal, a company
would be required to disclose important information to the public
one of three ways: By issuing a press release; by including it in
a filing with the commission, which would be almost immediately
available to the public through the SEC's electronic filing
disclosure system; or by providing public access to its
conference call or meeting by telephone or through the Internet.
The rule wouldn't forbid companies to hold conference calls
with select analysts or investors -- something SEC General
Counsel Harvey Goldschmid said goes beyond the SEC's legal
authority. Companies can hold such calls without any public
release as long as they don't distribute material information, he
said.
Levitt, though, reiterated his preference that companies
provide equal access to their meetings and conference calls.
``I urge companies to open up their conference calls to all
investors,' he said.
If a company unintentionally discloses market-moving
information at a private conference or on a conference call that
isn't open to the public, it would face SEC enforcement scrutiny
if it doesn't publicly announce that information as soon as
possible, Goldschmid said.
Goldschmid said companies have, ``a day, at the outside,'
to publicly release the information after an unintentional
selective disclosure.
The detailed proposal, approximately 85 pages long, isn't
yet available. The SEC expects to post it on the agency's Web
site in a few days, a spokesman said.
Legitimate Communication
Levitt and SEC staff members who proposed the rule change
said they don't expect it to stop the flow of legitimate
communication between companies and analysts.
``What's being chilled is selective disclosure,' said Meyer
Eisenberg, SEC deputy general counsel.
Louis Thompson, head of the National Investor Relations
Institute, which represents corporate investor-relations
executives, said the SEC proposal generally requires a disclosure
standard that his group already recommends its members follow.
He said the proposal does raise questions about the
threshold of what should be considered ``material' information
and therefore must be disclosed publicly.
``It will make people think more about what they say,'
Thompson said.
Enforcement Action
Violators of the proposed rule -- called Regulation FD, for
fair disclosure -- could face civil fines and other SEC
enforcement action, Goldschmid said.
The proposal would make it easier for the agency to take
action against companies. Now, the agency generally must prove
that a company expected to gain something in exchange for
selectively releasing important news.
The SEC hasn't filed a case alleging such violations by a
company or corporate official since March 1991, when the
commission alleged the founder of Ultrasystems Inc. improved his
standing with analysts by giving some of them advance notice of
company earnings.
Abercrombie & Fitch yesterday disclosed that the SEC is
conducting a formal inquiry into its release of a sales forecast
in October. The company's shares fell 13 percent on Oct. 8, when
news organizations have reported that a company executive warned
one analyst of sluggish fiscal third-quarter sales. Abercrombie &
Fitch made the forecast public Oct. 13.
Voluntary Disclosure
Still, Levitt has been pressing companies to voluntarily
avoid selective disclosure as disclosure practices have been
questioned at a number of companies.
For example, Papa John's International Inc.'s shares fell
almost 22 percent last Thursday after the fourth-largest U.S.
pizza chain told some brokerage analysts that fourth-quarter
sales would suffer because the Christmas holiday will cut weekend
pizza orders. Papa John's didn't tell the public about until well
after the market closed that day. A Papa John's spokeswoman
acknowledged that an official alerted some analysts so they would
have the same information given in response to questions from
another.
The rule doesn't affect initial public offerings, Goldschmid
said. The agency's staff separately is considering whether
additional rules are needed to address new issues, such those
regarding so-called roadshows, where companies give promotional
presentations that typically are restricted to analysts and
institutional investors, he said.
The selective disclosure rule, though, would apply to
roadshows for secondary stock offerings, corporate bond sales, or
any offering by a company whose shares are publicly traded.
Insider Trading
The rule proposal is the result of an SEC staff review of
selective disclosure in the context of insider trading rules.
That review resulted in two other changes being proposed today.
The first tries to clarify insider trading liability by
describing permissible sales of stock by an insider after he or
she learns of confidential, potentially market-moving events,
such as a merger discussion or unfavorable earnings.
Goldschmid said the SEC's message is: If you have inside
information and you trade, you'd better have a reason for why you
made the trade, such as it was part of a pre-existing plan,
contract or other instruction that was made in good faith.
The other insider trading rule the SEC proposed addresses
when a family or other non-business relationship gives rise to
liability. It would put more responsibility on a husband or wife
to make sure a spouse isn't engaging in inside trading or
providing confidential information to someone else who is.
The proposal says a person could be liable if he had agreed
to keep the information confidential or if the person involved
has a history of sharing confidences. |
