Speech by SEC Staff:
Remarks at the 20th Annual Ray Garrett, Jr. Corporate and Securities Law Institute
by Commissioner Isaac C. Hunt Jr.
U.S. Securities & Exchange Commission
April 13, 2000
Good afternoon, it's a pleasure and honor to be here today. But before I begin I am obligated to give you the usual disclaimer that Commission members and employees must make when speaking publicly; which is that the views I express here today are my own and do not necessarily reflect those of the Commission, other Commissioners, or the Commission's staff.
I note that you have already had one panel discussion that dealt with selective disclosure, among other disclosure problems. I would also like to speak to you about selective disclosure. As you know, last December, the Commission issued for public comment rule proposals that attempt to reduce selective disclosure in our markets. As I have stated previously, I believe the proposals, if adopted, would be extremely costly to corporations and provide little benefit to investors. But to be fair, it is always easier to criticize than to provide helpful solutions.
To date, we have received over 1,000 comment letters, regarding these proposals, most coming from small investors. From "Go SEC go," to "God Bless you Levitt," the public support for ending selective disclosure could not be clearer. While I join them in hoping that a higher power does indeed bless the Chairman, I was hoping for a little more input regarding some of the questions the Commission raised in its proposing release. Unfortunately, most of these letters provide us with little more than what we already knew; that the Commission needs to do something about selective disclosure. I have come to realize that asking whether we should end selective disclosure is a little like asking: "Who wants to be a millionaire?"
But while the retail public has joined in support of the proposals, others have continued their mantra of "Just say no," or, more recently, "What's the rush?" I hope, as a result of my earlier criticisms of the proposals, I have not caused any confusion or provided false hope to those that would have the Commission do nothing in this area. Just in case, let me take this time to make myself absolutely clear: I think selective disclosure is a problem that the Commission should address today, not a year from now. My sympathies are with the small retail investors; our markets are not fair as long as selective disclosure continues. Now, having said that, I realize that this is not an easy problem to solve and that, in adopting a solution, I believe we should take some advice from the medical profession: "First, do no harm!"
Now to take some of my own medicine, rather than provide you with additional criticisms about the proposals, I thought I would try my hand at presenting an alternative solution to some of the problems that others and I have raised with regard to the proposals. I raise this alternative not as some master plan but rather as a point of discussion, to get both your feedback on my ideas as well as to encourage you to offer your own solutions to the problem of selective disclosure.
My alternative solution would change Regulation FD in two material aspects. I would reduce the scope to which Regulation FD would apply and revise the methods of public disclosure. I would reduce the scope of Regulation FD in three ways:
1. Regulation FD would apply only to material communications that were not made in connection with an offering of securities.
While I believe the Commission needs to address the area of communications made in connection with an offering of securities, such communications raise many more difficult questions than the traditional analyst conference call. Regulation FD, as proposed, would not just affect the disclosure of material nonpublic information by the issuer but it also would affect the protections afforded by Sections 5, 11, and 12 of the Securities Act.
For example, proposed Regulation FD would provide a safe harbor from Section 5(b) of the Securities Act. Could this safe harbor be used to circumvent the prohibition of written and broadcast offers during the waiting period? If we believe that an issuer needs a safe harbor from Section 5(b) of the Act then why would it not need a safe harbor from Section 5(c) of the Securities Act? By not providing such a safe harbor would the Commission be providing an incentive for issuers to delay disclosing material information to the market until after it files its registration statement? Regulation FD would also provide for the bifurcated treatment of roadshows. Roadshows conducted by reporting companies would be covered by regulation FD, but those conducted in connection with a company's initial public offering would not. Why not?
What effect would Regulation FD have on private offerings and the 144A market? Would it reduce liquidity if the purchaser were required to keep material nonpublic information confidential? These are just a few of the hard questions that arise when Regulation FD is applied to communications made in connection with securities offerings.
Accordingly, I believe at this time the better approach is to limit Regulation FD to non-offering related disclosures and then begin to look at issues surrounding the easing of restrictions on communications during the offering process. While the "aircraft carrier" may not be moving forward, many of the issues that it attempted to address remain. Therefore, I have asked the Chairman and David Martin, our relatively new Director of our Division of Corporation Finance, who is participating here today, to consider scheduling a series of roundtable discussions with members of the bar, corporations, brokerage firms, educators and investors, both small and large, regarding the easing of restrictions on communications made during the offering process. I believe such discussions would prove useful to the Commission before any proposals are developed.
2. Regulation FD would apply only to material communications made by an executive officer of the issuer and persons charged with the responsibility of either investor relations or public relations for the issuer.
This reduction should not in any material way reduce the effectiveness of Regulation FD, since it would be rare for other employees to have material discussions with analysts or institutional investors. By limiting the application of Regulation FD to these employees, issuers should be in a better position to implement procedures for the disclosure of material nonpublic information. It is impossible to expect a large corporation to be able to monitor and control communications of all its employees. Accordingly, if a low level employee not authorized to speak for the company discloses material nonpublic information I would not subject the company to a violation of Regulation FD. This modification also should alleviate the need to distinguish between intentional and unintentional disclosure.
3. Regulation FD would apply only to material communications made to analysts or institutional investors.
As I have stated previously, I am unaware of any widespread problems involving trading on material nonpublic information by a company's customers or suppliers. I believe by narrowing and better defining the scope of Regulation FD companies will be in a better position to implement changes that would more effectively reduce selective disclosure. In defining "institutional investors," I would look to the definition of qualified institutional buyer in Rule 144A.
The second set of changes I would make to Regulation FD would be in the methods available and the timing associated with making public disclosure of the material nonpublic information.
4. A company may make public disclosure through the filing of a Form 8-K with the Commission.
Like proposed Regulation FD, the default requirement would be the filing of a Form 8-K, or Form 6-K in the case of foreign issuers. Unlike proposed Regulation FD, however, I would require the filing to be made either the same business day, if the disclosure was made before or while the markets were open, or the next business day if the disclosure were made at the close of the market. Like the current proposal, I would expect few companies to choose this option.
5. A company may make public disclosure by making a submission of the material information to the Commission within two business days, provided that the analyst or institutional investors have agreed to keep such information confidential for the earlier of two business days or until such submission has been made.
This modification attempts to address two problems that have been identified with proposed Regulation FD. First it would provide companies with the opportunity to continue to have one-on-one discussions with their analysts and institutional investors. I believe such discussions can provide valuable benefits to both companies and the market in general. I do not believe, however, that small investors should be asked to pay for these benefits. Therefore, while I would provide for the continuation of such discussions I would require that the analyst or institutional investors must first agree to an embargo on the information until it can be made public. I believe any problems associated with obtaining confidentiality agreements would be limited by the rather short duration during which these agreements would apply.
The second problem that this modification attempts to address is the liability that would attach if the disclosure were required to be filed. Rather than requiring that the material information conveyed in a one-on-one discussion be "filed" with the Commission and subject to additional liability, I would required that a submission be made similar to that which is required by Rule 12g3-2(b). Any material nonpublic information provided to the analyst or institutional investor would be submitted through EDGAR so that it could be made available to the general public through our web site. As opposed to a "filing," however, the submission would not be incorporated into any registration statements, thereby avoiding any liability under the Securities Act. Similarly, since it is not deemed "filed" with the Commission, it would not be subject to Section 18 liability under the Exchange Act. The only liability that would attach would be under Rule 10b-5, which would attach whether or not the information is submitted to the Commission.
6. A company may make public disclosure by allowing access to the conference call or presentation through its web site or through a toll-free telephone number, provided that a transcript or summary of the material information disclosed is submitted to the Commission within two business days.
While many of you may question the need for a submission, believing that providing access to one's conference call should be sufficient by itself, I am unconvinced. I am concerned that investors will not know when the conference call or presentation will occur. How does one provide effective notice of the time of the conference call?
I would agree that it may be possible to provide effective notice for a regularly scheduled conference call, but what about the surprise call? For example, the analysts following your company calls you at 3:00pm wanting to discuss a contract that your competitor recently signed with one of your major customers, or perhaps they want to discuss the recent results of an FDA study that appears to suggest that the market size of one of your major drugs may be radically reduced. Both events could lead them to downgrade their ratings of your company's stock. My guess is that you would have a hard time trying to convince those analysts to wait until your regularly scheduled conference call to discuss those events. So assume that you must talk to these analysts, how do you give your small investors effective notice of this unexpected conference call?
What if the small investor is not available, how long should the disclosure remain on your web site? One day? A week? A month? Most of us would agree that it depends on the company. The market may assimilate material information for a large corporation within minutes or hours; for a smaller company it could take days. While a two-day submission requirement is not perfect, I believe that it strikes the appropriate balance given the possibility of ineffective notice to the small investor.
Well these are just some of the ideas that I am thinking about. I am sure many of you here today have even better solutions to some of the problems associated with our current proposals. Or perhaps all of you like Regulation FD just as proposed and I am making a mountain out of a molehill. Whatever you may think I am interested in hearing from you. The goal of reducing selective disclosure is important not only to the Commission but to our markets as well, so please, rather than repeating the mantra that "it won't work" help us find the answers to the tough questions posed by selective disclosure. If you are still having difficulty in believing that we can find a solution that will "first, do no harm," stop, step back, and think of that children's book "The Little Engine That Could." Because, let's face it, this is not rocket science. If we can put a man on the moon, I have to believe we can make our markets fairer to all. Well, in closing, thank you for providing me with this wonderful opportunity to express some of my thoughts and ideas with such a distinguished audience.