Regulation Fair Disclosure
Isaac C. Hunt, Jr.
Commissioner, U.S. Securities & Exchange Commission
Before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises regarding Regulation Fair Disclosure
May 17, 2001
Chairman Baker and Ranking Member Kanjorski and Members of the Subcommittee:
I am pleased to have this opportunity to testify before this subcommittee regarding the Securities and Exchange Commission's Regulation Fair Disclosure. Regulation FD was designed to eliminate selective disclosure of material non-public information. While the goal of Regulation FD, to eliminate selective disclosure, is almost universally supported, the method employed by the Rule has been controversial from the very beginning. While the general public strongly supported the proposed regulation, corporations and Wall Street saw an overbroad regulation that would have imposed significant costs. I myself expressed grave reservations regarding the initial proposal. I believed that Regulation FD, as it was initially proposed, was overbroad. More importantly, however, I believed it violated one of the basic tenets of securities regulation that President Franklin D. Roosevelt first expressed in his letter to Congress urging the federal regulation of securities: "the purpose of this legislation . . . is to protect the public with the least possible interference to honest business. "
Regulation FD as originally proposed would have interfered with every communication by a public company where material information was provided. It would have caused companies to publicly disclose, simultaneously, any material non-public information provided to suppliers, customers, and yes, even the government. It would have applied to material non-public disclosures made by any and every employee in a public company. It would have inappropriately interfered in the public offering process, where companies seek to raise needed capital. In short, I believed Regulation FD as originally proposed would have interfered too much with honest business. The proposals, however, brought thoughtful public comments that helped the Commission, and its staff, to significantly narrow the effects of Regulation FD.
Accordingly, I believed that Regulation FD, as revised, appropriately targeted the selective disclosures that we thought presented a problem to the integrity of our securities markets. Specifically, we were trying to stop disclosure of material nonpublic information by issuers, or their representatives, to favored analysts or other market professionals who, in turn, often passed this information on to their favored clients. These favored clients would then use such information to obtain a trading advantage in the securities markets.
While I believe that Regulation FD, as revised, enhances the integrity of our markets, which is why I voted in favor of its adoption, I remain concerned about any unintended consequences, specifically the chilling of communications. At the Commission meeting adopting Regulation FD, I requested that the Commission's Office of the Chief Economist undertake a study to examine the effects of Regulation FD. The study should seek to determine whether Regulation FD is accomplishing its stated goal and whether there have been any unforeseen consequences, such as a chilling of communications or increased volatility. I have been advised that any study would need somewhere between a year and two years worth of data in order to properly evaluate the effects of Regulation FD. I have asked that the Commission publish the intended methodologies of the study so that we can obtain thoughtful public comment and make any necessary revisions, and I am hopeful that we will do that in the very near future.
Since the adoption of Regulation FD there have been a few surveys published regarding the effects of Regulation FD. These surveys have shown both positive changes and negative changes in behavior of public companies. Some companies appear to have increased the amount of information they provide to the market, including most notably forward-looking information, while others appear to have reduced the amount of information they provide to the market. In my opinion, all of these surveys have some shortcomings. Although they do not provide us with any definitive judgments on the effects of the Regulation, they do provide the Commission with certain red flags, indicating possible problems with the Regulation. It is now, I believe, incumbent upon us to explore and monitor these areas. We need to evaluate the landscape to see if these problems are anomalies relating to the limited time frame that Regulation FD has been in effect or if these problems are widespread and long-term. I believe the Commission has begun this process with our recent roundtable on Regulation FD.
On the issue of enforcement, I have publicly stated that the Commission is not looking for a test case. This Regulation was not adopted to provide our Division of Enforcement with another tool. In fact, I am hopeful that in time Regulation FD will be associated more with our Division of Corporation Finance than with our Division of Enforcement. I believe that it will take companies some time to adjust fully to this rule. After all, this rule intends to change what has been standard practice for over sixty years. Thus, there is an education process that must take place before we rush to judgment. Therefore, at this time, I, personally, would not support an enforcement action in a case that I did not find to be egregious.
Let me say, to date, the Commission has not brought a single case under Regulation FD. This does not mean, however, that our Division of Enforcement will not ask questions when it becomes aware of facts that suggest that the Regulation has been violated. I am aware that some have suggested that the mere asking of questions by our Division of Enforcement has, in some cases, caused companies to stop releasing information out of fear of violating Regulation FD. I do not make light of these concerns, but, in my opinion, just as it is incumbent upon us to monitor the negative effects of the rule, we cannot and must not ignore abuses of Regulation FD. Otherwise, I believe, we risk alleviating the negative consequences of the Regulation only at the cost of eliminating our desired goal.
I would, however, like the Commission to consider all of its alternatives when it finds cases where the Rule has been clearly violated. In order for the Regulation to have a prophylactic effect, I do not believe every case requires us to seek penalties.
In conclusion, I believe Regulation FD is an important and appropriate rule for maintaining the integrity of our markets, but it must be monitored carefully to ensure that it does not result in less information being disclosed. It is my current opinion that it is just too early to come to any final judgment on the rule. Companies are still becoming familiar with the rule and, as they become more accustomed to its application, I am hopeful that more, not less, information will be disclosed. I should note that specific guidance on any particular fact pattern can be obtained any day by calling our Division of Corporation Finance. Additionally, frequently asked questions and significant telephone interpretations can be obtained on our web site, 24 hours a day.
Thank you again for allowing me to testify on this important Regulation.