Regulation FD (Fair Disclosure) Requires Public Disclosure
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Regulation Fair Disclosure is a U.S. Securities and Exchange Commission (SEC) rule. It prohibits companies from selectively disclosing material non-public information (MNPI) to investment professionals or key shareholders. Sometimes as simply Reg FD, the rule states that companies cannot selectively share MNPI with certain individuals covered by Regulation FD unless the also share that information with the public.
The objective of the regulation is to promote full and fair disclosure of information by issuers. The purpose of Regulation FD is to level the playing field between individual investors and market professionals. Failure to comply with Regulation FD can result in insider trading liability.
Public Disclosure Obligation of Regulation FD
The selective and intentional disclosure of material information triggers an obligation by the company to promptly also provide this information to the public. “Promptly” generally means within 24 hours. Companies meet this requirement by submitting a Current Report on Form 8-K to the SEC. Alternatively, they can meet it through publication of a press release by the company. Posting the information on the company’s website or social media account can also qualify as adequate disclosure if the company intended the information to reach a general public audience.
Materiality of Information
According to the SEC, information is defined as “material” if there is “a substantial likelihood that a reasonable investor would consider the information important in making an investment decision or if the information would significantly alter the total mix of available information.” Thus, the determination of whether a particular piece of information arises to the level of materiality mandating disclosure is highly subjective.
Examples of material information that would likely require disclose by Regulation FD:
- Market/industry trends
- New products
- Significant changes in customers or suppliers
- Regulatory developments
- Revenues/earnings results
- Increases in indebtedness
- Securities events (i.e., stock splits, dividends, etc.)
- Changes in management
- Significant litigation
- Changes in auditors
- Information to correct misrepresentations in previous public disclosures
The issuer often holds earnings and forecasts conference calls with institutional investors and analysts. As a result of Regulation FD, companies match conference calls with analysts with simultaneous press release of the statements made during the call. Following these calls, the company must also issue recordings of the call that the general public can access.
The SEC Draws a Line
The SEC has drawn a line so that companies do not face penalties for disclosing immaterial information to financial analysts that the analysts might later piece together as material based on their unique industry knowledge and experience. For example, if a company tells an analyst that they had an hour-long meeting with the FDA, a reasonable ordinary investor would be unlikely to view this as material information. However, a financial analyst may deduce that the FDA meeting was successful based on past experiences evaluating healthcare companies.
As the SEC has noted with respect to Regulation FD, “since materiality is an objective test keyed to the reasonable investor, Reg FD will not be implicated where an issuer discloses immaterial information whose significance is discerned by the analyst. Analysts can provide a valuable service in sifting through and extracting information that would not be significant to the ordinary investor to reach material conclusions.”
Individuals Exempt from Regulation FD
Individuals exempted from the restrictions of Reg FD include lawyers, investment bankers, and accountants for the company. Since the individuals serving in these roles owe duties of trust or confidence to their client company, the restrictions do not apply in the context of selective disclosures. Additionally, individuals who expressly agree to hold the information in confidence are exempt from the restrictions.
SEC Enforcement of Regulation FD Violations
Although the SEC seldomly charges companies over Regulation FD violations, there are some notable exceptions. The SEC brought an enforcement action against TherapeuticsMD, a women’s healthcare and pharmaceutical company, for selectively disclosing information about a potential drug approval by the U.S. Food and Drug Administration (FDA). The company disclosed Information about approval of the drug in question, a hormone-replacement drug therapy, to sell-side analysts. In the absence of concurrent disclosure to the general public, this selective disclosure was a violation of Regulation FD. It also was deemed MNPI because it was a significant drug in the company’s pipeline and it meets the materiality criteria of there being a “substantial likelihood that a reasonable public investor would have considered the information important in making an investment decision.” TherapeuticsMD reached a settlement with the SEC in August 2019, whereby the company agreed to pay a $200,000 penalty.
Regulation FD was adopted in 2000. SEC enforcement actions under Regulation FD reached a peak in 2009 and 2010, as the United States was rebounding from the 2008 financial crisis. In recent years, charges against individual companies have been rare. The penalty against TherapeuticsMD in 2019 marked the first SEC action against an individual company in over five years.