Regulation Fair Disclosure (Regulation FD)
Regulation FD was created in response to a number of situations in which companies were found to have given material non-public information, such as advance notice of earnings results, to a select few outsiders. The outsiders were able to use the information to make trades that placed them in an unfair competitive position in relation to other, less well-informed investors. Company managers were also allegedly able to manipulate analysts by giving advance information to those who portrayed the company favorably in their research reports.
To combat these issues, the SEC issued Regulation FD, which mandates that a company immediately release to the general public any material non-public information that it has disclosed to certain individuals outside of the company.
The following text from Regulation FD has been heavily edited to compress a large amount of legalese into a format that states the essence of the Regulation:
a. Whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to [a broker, dealer, investment advisor, investment company, or holder of the issuer’s securities], the issuer shall make public disclosure of that information:
1. Simultaneously, in the case of an intentional disclosure; and
2. Promptly, in the case of a non-intentional disclosure. Promptly means as soon as reasonably practical after a senior official of the issuer learns that there has been a non-intentional disclosure. In no event shall this public disclosure be later than the longer of 24 hours or the commencement of the next day’s trading on the New York Stock Exchange.
b. Paragraph (a) of this section shall not apply to a disclosure made:
1. To a person who owes a duty of trust or confidence to the issuer (such as an attorney, investment banker, or accountant);
2. To a person who expressly agrees to maintain the disclosed information in confidence;
3. In connection with a securities offering registered under the Securities Act, if the disclosure is by a registration statement, or an oral communication made in connection with the securities offering after filing the registration statement.
Note that the regulation is triggered by disclosures only to those individuals who are either investors or who work in the investment industry. There is no mention of disclosures to spouses or other family members, since such a requirement would call for a truly oppressive amount of information tracking by the investor relations staff.
Regulation FD states that “public disclosure” of material non-public information is considered to be a Form 8-K filing, or disseminating the information “through another method of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” Most companies deal with the situation by issuing a Form 8-K. Note that this is one of the rare occasions when you are not allowed the standard four business days in which to issue an 8-K. Instead, the expectation is that the 8-K will be released within 24 hours of a disclosure event coming to the attention of a senior official of the company.