SEC bans selective disclosure.
The SEC voted in August to approve a rule prohibiting U.S. public companies from disseminating important information to securities analysts, institutional investors and others before releasing it to the general public. In the past, select groups sometimes benefited by investing on the basis of financial information they had received from companies before the public did.
Chairman Arthur Levitt of the SEC said the rule--known as regulation FD (for "fair disclosure")--will "bring all investors, regardless of the size of their holdings, into the information loop, where they belong." Sources familiar with the SEC's plans expect the rule will take effect later this year. It does not apply to foreign issuers of securities.
Because it increases public companies' communication responsibilities, the rule will affect CPAs in industry. And, by making it easier for individual investors to get breaking investment news, the rule also will have an impact on both CPAs who provide personal financial planning services and their clients.
After proposing a draft version of the rule in December 1999, the SEC received more than 6,000 comment letters and, in response, modified some of its original provisions so the rule would not affect special groups, such as journalists and corporate bond-rating organizations, whose efforts benefit all investors. The final rule also allows lower-rank company employees to privately discuss company information with journalists and securities analysts.
If company executives accidentally disclose important information to analysts or others, the rule requires them also to release it to the public within 24 hours.
While the rule does not interfere with the SEC's power to institute administrative proceedings or seek other remedies, which could include civil penalties, neither does it provide a legal basis for investor suits against companies that violate it.
Supporters as well as opponents of the final rule are apprehensive about it. Barbara Roper, director of investor protection at the Consumer Federation of America, said that while her advocacy group supports the rule, she is unsure whether its influence will be permanent. "It relies on effective SEC enforcement, which I think we'll get under the current leadership," she said, but also noted that changes in the political climate could weaken the rule's impact.
Others, however, are concerned the rule will be fully enforced and backfire, thwarting the SEC'S intent. They worry that companies fearful of violating the rule's provisions will immediately begin to reduce the amount of information they voluntarily release.
Margaret Draper, a spokesperson for the Securities Industry Association, a trade group, said, "This industry is based on getting information. By cutting off analysts' access to it, the rule will cause investors to get less information on which to base their investment decisions despite the SEC's noble intent."
Large investors don't necessarily agree. Ann Yerger spoke on behalf of the Council of Institutional Investors, a lobbying group. "We don't think this is going to put an end to communications between corporations and shareholders," she said. Earlier, in a comment letter to the SEC, the council said, "Issuers will find it nearly impossible to attract investors, large or small, if they refuse to communicate concerning their earnings, operations and other key developments within the company. We are confident that, in order to continue attracting capital, issuers will meet the market's demand for investment information even after the adoption of regulation FD."
A fact sheet and other information about the rule are available on the SEC Web site at www.sec.gov.
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|Title Annotation:||corporate communications; securities law|
|Publication:||Journal of Accountancy|
|Date:||Oct 1, 2000|
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