Regulation Fair Disclosure
By: Laura S. Unger
Acting Chair, U.S. Securities & Exchange Commission
Before the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises
Committee on Financial Services
U.S. House of Representatives
May 17, 2001
Chairman Baker, Ranking Member Kanjorski, and Members of the Subcommittee:
I appreciate the opportunity to testify before you today on behalf of the Securities and Exchange Commission ("SEC" or "Commission") regarding Regulation Fair Disclosure ("Reg FD"). Reg FD represents a sea change in the way issuers communicate with investors and the marketplace. It is a very timely topic, and we commend the Subcommittee for holding today's hearing.
Commissioner Paul Carey could not be here today, but has submitted a written statement for the record. Even though Commissioner Carey is not here, the Subcommittee still gets a quorum of the Commission as I am joined today by my colleague Commissioner Isaac Hunt.
Issuers selectively disclosing material nonpublic information to analysts and analysts' clients trading on that information undermines investor confidence in the fairness and integrity of our markets. Reasonable people may differ as to whether Regulation FD is the best cure, but no one disputes that the problem of selective disclosure is a serious one.
I dissented from the Commission's vote to adopt Reg FD because of the breadth of the rule. My dissent was not meant to minimize the problem of selective disclosure. But I was concerned that, in its attempt to eradicate actual trading by clients of analysts following a selective disclosure, Reg FD burdened the vast majority of issuers, who are good corporate citizens, with new disclosure requirements.
Regulation FD embraces a broad "parity of information" theory by prohibiting issuers from disclosing material nonpublic information to analysts (absent a confidentiality agreement) without disclosing it simultaneously to the rest of the world. I was not convinced that adopting a communication rule was the best way to cure a trading problem. I was also concerned about the quantity and quality of information in a post-FD world.
Now that the rule has been adopted, the Commission will enforce Regulation FD the same as any other rule or regulation.
During the Commission's meeting to adopt Regulation FD, I pledged to monitor the rule's impact on information flow. Last month, I convened a roundtable in New York to discuss with issuers, the media, analysts and investors how the rule is working.
I plan to issue a report on the roundtable discussion in the near future that will include the following observations:
- The time factor. There is clear consensus that it is too soon to assess the overall effectiveness of Reg FD.
- The quantity and quality of information. There is no question that Reg FD has increased the quantity of information provided by issuers. The rule's impact on the quality of information is less certain. Some participants were concerned that the rule has led to a decline in the quality of information provided. We were told that some issuers have used the rule as a shield to limit information flow. Other issuers, concerned about their top officials making on-the-spot determinations of materiality that may be second-guessed, have retreated to scripted conference calls and other presentations.
- The need for more guidance. Many issuers at the roundtable were confused about how to deal with questions of materiality under FD, expressing concern that the Commission may be overzealous in its enforcement of Reg FD. They called for additional guidance from the Commission on how the rule will be interpreted and enforced. I think it fair to say that, at this point, our enforcement efforts will be focused on clear-cut violations.
- The need for more information dissemination tools. Participants stated that the rules of the self-regulatory organizations, particularly the NYSE and NASD - which require the dissemination of a press release -- limit the methods of dissemination otherwise allowed by Reg FD. They urged the Commission to explore with the SROs ways to expand the range of tools available to meet the requirements of Reg FD.
- The regulation cannot be tied to current market volatility. At this point, it is impossible to draw any correlation between Reg FD and recent volatility in the securities markets.
It is clear from the roundtable discussion that more time is needed to assess the effectiveness of Regulation FD and whether any improvements or adjustments to the rule are appropriate. Although "FD" stands for fair disclosure, the title of today's hearing plays with the letters to ask whether they stand for "flawed disclosure." I think, however, the best use of the letters at this time is to note that "few days" have passed since enactment of the rule and "further discourse" is necessary to judge its effectiveness. In this regard, I assure you that the Commission will continue to monitor vigorously the effects of Regulation FD.