June 9, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Re: Selective Disclosure and Insider Trading (December 20, 1999)
File No. S7-31-99
Dear Mr. Katz:
The New York Stock Exchange ("NYSE") is pleased to take this opportunity to comment on the proposals made by the Commission in the above release regarding selective disclosure and insider trading.
The SEC's desire to improve the transparency and timeliness of financial disclosure is to be commended. The proper and timely dissemination of information is important to the quality and integrity of the markets, and the NYSE is very concerned that listed companies communicate as much information as they can as often and widely as possible. This serves our common goal, to insure investors have the fairest, most efficient market possible.
As the release notes, the NYSE's Listed Company Manual provides direction to listed companies regarding the need to widely publicize material corporate information, and specifies what the Exchange believes is the best process for accomplishing that objective. The NYSE, of course, devotes considerable resources to monitoring the trading in its listed stocks. We consult with our companies when we observe trading patterns which are not readily explained by public information or generalized market movements. When necessary, we can halt trading and secure an announcement from the company that will address the unusual activity, or at least inform the market that the company is not aware of developments that could be responsible.1 As a result, we have considerable understanding of the pressures and difficulties under which public companies operate in determining whether and when widespread public disclosure is desirable or necessary.
Given our experience, we are concerned that the Commission's proposed regulation may not be the best means to insure timely disclosure. It would be undesirable if the proposal were to inadvertently discourage free and open dissemination of information rather than enhance it. To the extent companies over-react by refusing to communicate with analysts, for example, we do not believe that the market or the public will be well served.2 We also traditionally stress immediate disclosure by press release, which we still consider the best way to reach the widest audience quickly. The standards in the proposed rule - release within twenty four hours for unintentional selective disclosure, and acceptance of an 8-K filing as suitable public disclosure - are probably as strict as can be prescribed by law. However, they do not in our view serve the market's need to have significant information disseminated as quickly and widely as possible.
While these concerns obviously cover all NYSE listed companies, we note that the Commission has received significant comment on the rule generally, and particularly on its impact on U.S. companies. We believe we may be able to make our greatest contribution to the discussion if we focus on the effect of the proposal on non-U.S. issuers. We now list over 400 foreign private issuers representing forty-five separate countries. Consequently, we have long experience in determining how best to apply to non-U.S. issuers both our corporate governance requirements and our disclosure policies.
We have long known that it is impractical and counterproductive to ask our foreign private issuers to comply with all of our corporate governance requirements. Their home country and home market practices often differ from the analogous requirements here. Accordingly, our Listed Company Manual is quite specific that compliance with home country corporate governance requirements will suffice. The Commission likewise has long recognized the need to accommodate home market governance practices, exempting foreign private issuers from proxy regulation, Section 16 reporting and short swing profits recovery, and the detailed, individualized executive compensation disclosure required of U.S. registrants. The Commission also accepts home country interim reporting practices in place of the mandated quarterly and 8-K reports required of U.S. companies under the Exchange Act. These longstanding accommodations recognize that the foreign issuers entering the U.S. market are already subject to home country regulatory regimes and have home market expectations and practices that they must meet. Over the last decade, the Commission and the NYSE have successfully reached out to the international community of companies, encouraging them to enter the U.S. capital markets. The success of this effort is due in no small part to the Commission's regulatory and administrative initiatives to reassure these companies of the openness, flexibility and certainty of U.S. regulation. We are greatly concerned that the application of Regulation FD to foreign private issuers will be viewed by the international community as a serious departure from the existing regulatory reliance on home country disclosure policies and practices and a substantive interference with their home market disclosure practices.
With regard to our timely disclosure policy, it is true that historically the NYSE has not found it necessary to differentiate formally between foreign and U.S. issuers. However, that is primarily due to the generality of our policy and the practicality of time zones, and does not reflect a specific decision that no differentiation is possible or appropriate.
Our policy calls for a company "to release quickly to the public any news or information which might reasonably be expected to materially affect the market for its securities." (Listed Company Manual section 202.05) While we amplify our policy with specific examples in the following section of the Manual, 202.06, ours is a general and ultimately subjective standard. In fact, we believe it to be quite similar to the standards our foreign private issuers find in their home country markets.
For many non-U.S. companies, the business day does not overlap with our trading day, or overlaps with it only partially. Those companies present far fewer timely disclosure issues than a domestic company. Even those non-U.S. companies domiciled in our own hemisphere present timely disclosure issues relatively infrequently. For all these reasons we have limited opportunities or need to interact in real time with our overseas issuers on timely disclosure matters.
Perhaps most important from the company's point of view, however, is the fact that the U.S. government can impose far more draconian sanctions than can the NYSE. We consider our policies to be very important and take them quite seriously. But our best and most often used remedy is to halt trading until we perceive that adequate disclosure has been made. This is extremely effective, but it does not involve legal sanctions on the company or its officers or employees, and that is an important distinction.
Accordingly, as we consider the impact of the proposed rules on foreign private issuers, we should appreciate that the proposal will subject them to a regulatory regime that will be, and will be perceived to be, considerably more stringent than anything to which they have heretofore been subject. As noted above, we fear that it could be perceived by the companies to be a signal that reasonable accommodations such as have been traditionally made to foreign private issuers in recognition of their differences may be coming to an end. We at times find it difficult to convince non-U.S. companies that U.S. regulation, and particularly the risk of litigation and liability in the U.S., is not disproportionate to the benefit of being registered and listed here. This proposal will make that task considerably more difficult, without adding significantly to investor protection and without a history of selective disclosure problems among the foreign private issuer community to justify the intervention.
We believe that the oversight brought to bear by the NYSE to trading in the U.S. in its listed securities has been sufficient to provide comfort regarding the level of disclosure available with respect to our listed issuers. In addition, investors may be reassured by knowing that the NYSE listed issuer has demonstrated compliance with listing standards which establish its place in the business community. If the Commission does determine to implement the proposed rule generally, we suggest that the Commission exempt foreign private issuers that are listed on the NYSE, or on another U.S. market with comparable trading surveillance and policies regarding timely disclosure of significant information.
We trust our observations will be useful to the Commission. We would be pleased to answer any questions or provide any further information that you may find helpful.
Sincerely,Daniel Parker Odell Assistant Secretary
1 It is not unusual for us to be told by a listed company, particularly a U.S. listed company, that it is its policy not to comment in such situations. We do urge our companies to make an announcement, but if they ultimately refuse in a no news situation, the NYSE itself will issue a press release to that effect. If there is news, and the company takes the position that it is unable to comment at that time, we can and do continue our trading halt until the information can be disclosed.
2 We also fear increased confusion among issuers over whether they can freely discuss non-public information with their assigned representative from the NYSE staff. We assure companies that NYSE staff consider themselves to be "insiders" and we encourage companies to give us advance warning of significant developments so that we can advise them regarding applicable NYSE requirements and be prepared ourselves to deal adequately with the impact of various developments on the trading market for a stock. It would be counterproductive if issuers were to consider themselves precluded from sharing information with the NYSE because the Exchange is "outside the company". If the Commission does adopt the proposed regulation, we urge the Commission to specify that disclosure of information to staff of an exchange on which the issuer is listed does not constitute selective disclosure.