April 13, 2000
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549-0609
Re: File No. S7-31-99
Release Nos. 33-7787; 34-42259;
Selective Disclosure and Insider Trading
Dear Mr. Katz:
The Release provides a welcome review and creative approach to familiar old issues. This letter will seek to clarify the intent and certain of the consequences of the several regulations proposed, as a means of aiding the comment process.
1. Proposed Rule 10b5-1. Is it intended to apply to market makers trading for their own accounts? At least one of the leading Nasdaq market makers boasts superior performance based on superior market information that only it possesses. It has garnered a significant market share, enabling it through its confidential business relationships to see order flow and market direction which others cannot see. In the words of the Release, it benefits from an "informational disadvantage to other investors" that "cannot be overcome with research or skill." This material non-public information about issuers and their securities is clearly of Chiarella caliber. Is proposed Rule 10b5-1 intended to apply? Must the market maker "disclose or abstain"? The market maker clearly has possession of, is aware of and uses the information to the informational disadvantage of others. How does the proposed rule want to deal with this and similar situations?
2. Proposed Rule 10b5-1. Is it intended to apply to a securities analyst's institution? Under proposed Regulation FD and under existing practice, securities analysts often receive information under embargo. Prior to the analyst's publication of a new report, the analyst's sentiment is understood in the institution, although the specific information is not divulged. What is the intended effect of the proposed rule during this pre-publication period upon investment bankers, account managers and market makers working in the same institution? After the analyst's report is made public, the specific embargoed information may still not be made public. What is the intended effect of the proposed rule on the investment bankers, the account managers and the market makers working in the same institution - after publication of the report but while the analyst still has not divulged the specific material information?
3. Proposed Rule 10b5-1. Does the converse of the proposed rule equate to non-violation? If one does not fall within the proposed rule's definition of "on the basis of," and thereby does not violate the rule, has one avoided all "on the basis of" violation of Section 10(b) and Rule 10b-5? Does the proposed rule occupy the field of "on the basis of"? Preempt the field?
4. Proposed Rule 10b5-1. Is breach of a commitment to purchase or sell intended to also constitute a violation? The proposed rule makes clear that breach of the commitment to purchase or sell would render the affirmative defense of commitment unavailable. But if this breach of commitment is based on the use of material non-public information, does the proposed rule intend that such use of material non-public information to avoid a loss is also a violation? Would it depend on whether there were another party identified on the other side of the committed transaction?
5. Proposed Rule 10b5-1. Is reversal of an instruction to purchase or sell intended to also constitute a violation? The proposed rule makes clear that reversal of the instruction to purchase or sell would render the affirmative defense of prior instruction unavailable. But if this reversal of instruction were based on the use of material non-public information, does the proposed rule intend that such use of material non-public information to avoid a loss is also a violation? Would it depend on whether there were another party identified on the other side of the instructed transaction?
6. Proposed Rule 10b5-1. Is deviation from a plan for purchases or sales of securities intended to also constitute a violation? The proposed rule makes it clear that such deviation would render the affirmative defense of prior plan unavailable. But does the proposed rule intend to legitimize such use of material non-public information?
7. Proposed Rule 10b5-1. Is the institutional defense (lack of awareness; segregation of information) intended to apply beyond the affirmative defenses of (c)? The institutional defense is located within subsection (c) which sets forth the affirmative defenses. Does this mean that the institutional defense is intended to be available only in situations described in the affirmative defenses of commitment, instruction and plan (subsections A, B, C and D) and is not intended to be available where these particular defenses are not invoked?
8. Proposed Rule 10b5-2. Is the fact of a confidentiality agreement - ubiquitous is many industries - intended always to create "duties of trust or confidence"? Is this intended to cover the generality of vendor, supplier, customer and consultant arrangements where confidentiality clauses or agreements are customarily used?
9. Proposed Rule 10b5-2. Is it intended that the proposed Rule's "duty of trust or confidence" expand the contours or present law or simply restate and clarify these contours? Is it intended that the obligation of vendors, suppliers, customers and consultants be different than what it has been up to now?
10. Proposed Rule 10b5-2. Is the "duty of trust or confidence" established by a confidentiality agreement intended always to satisfy the "agreed to maintain such information in confidence" exception provided in proposed Regulation FD 100(b)?
11. Proposed Rule 10b5-2. Is it intended that a securities analyst may enter into a confidentiality agreement which meets both the "duty of trust or confidence" requirement of proposed Rule 10b-2 and the "agreed ... confidence" exception in proposed Regulation FD 100(b)?
12. Proposed Rule 10b5-2. Now that Vermont has established legal parity between traditional marriage and domestic partnership, what policy justification is intended by the Commission to place traditional marriage and domestic partnership on disparate legal footing for purposes of finding "duties of trust or confidence" in jurisdictions where parity, not disparity, has become the rule of law?
13. Proposed Rule 10b5-2. Is it intended that the traditional relationship of confidence between customer/broker/market-maker continue and be deemed sufficient to invoke the "duties of trust or confidence" articulated at least in proposed Rule 10b5-2(b)?
14. Proposed Regulation FD. Is Regulation FD intended to change current law? Under proposed Regulation FD, an agreement of confidentiality would exempt the registrant from having to make further public disclosure. This would produce no more disclosure than under current law. Sooo ... if a registrant is careful to be either (a) confidential or (b) sufficiently public, the proposed regulation FD would produce no change in result. [This is not bad.] Is this what is intended? If so, why go to the trouble of enacting an anxiety-producing new regulation?
15. Proposed Regulation FD. Does Regulation FD represent a "too easy" response to the underlying problem of crime in our securities markets? Does it seek to regulate the wrong party? Are we, in effect, legalizing [marijuana][cocaine][you name it], rather than dealing with the offender? Or banning purse-carrying rather than catching the purse-snatcher? Registrants do not constitute the criminal element in our securities markets; at most, they expose themselves to indirect liability for the acts of others. Registrants are already fearful of their potential liability as tippers. The proposed new Regulation FD seems to urge registrants to tip more, and to tip more publicly, so that criminals will have less opportunity for crime. Are we laying a bit too much on the citizenry of registrants, and perhaps too little on the criminals in the securities markets? Are we regulating the wrong party?
16. Proposed Regulation FD. Is Regulation FD meant to herald a new "parity of information" principle for our securities markets? If so, have the implications of this principle (which has traditionally been rejected as an imperative in every major context in which the securities laws have considered it) been vetted at the Commission? Parity does not exist today as between any buyer and any seller. Are we now to rethink the nature of our securities markets and the rules applicable to the players in them?
17. Proposed Regulation FD. In seeking to prevent selective disclosure, is the proposed regulation intended to be seen as a mandate for even more disclosure than before? Intended to trigger an onslaught of additional (perhaps defensive) information flow - with the perhaps unintended consequence that the "material" cannot be seen among the immaterial?
18. Proposed Regulation FD. Will the practicalities of compliance and the potential liabilities for noncompliance have the perverse effect of narrowing and shutting down current disclosure rather than making current disclosure more broadly available?
19. Proposed Regulation FD. Is Regulation FD intended to cover any persons or entities other than issuers? If not, why not? The Release stresses use of Commission authority to require "full and fair disclosure" from issuers. Is there to be inferred an intent that non-issuers in possession of material nonpublic information are to be treated according to a different legal standard? Or that non-issuers with disclosure duties equal to issuers should not be afforded an equivalent disclosure vehicle?
20. Proposed Regulation FD. If Regulation FD is not intended to cover any person or entity other than the issuer, how are other persons and entities - particularly market makers, institutional investors and securities analysts - intended to comply with their duty to "disclose or abstain" under Texas Gulf Sulphur? Certain market makers (see item 1 above) possess from their confidential relationships "unerodable informational advantages" that "cannot be overcome with research or skill." This informational advantage is of Chiarella-like proportions. Similarly, institutional investors and securities analysts must also face up to their duties under Texas Gulf Sulphur. How is it intended that these duties be complied with in an orderly manner which is intelligible to the market place?
21. Proposed Regulation FD. Is proposed Regulation FD intended to reclassify as "material" certain types of information which historically, under Texas Gulf Sulphur, TSC. v. Northway and their progeny, have not been considered "material" under the securities laws?
(a) If hitherto secret litigation strategy (traditionally not considered "material" or subject to mandatory disclosure) is disclosed by an executive officer in a non-confidential context, is it intended that this information thereby become "material" and subject to disclosure under proposed Regulation FD?
(b) If a vendor, supplier, customer or consultant (irrespective of whether a breach of a duty of trust or confidence has occurred) should disclose in a non-confidential context an important secret of the registrant (product formula, computer code, marketing strategy - which historically has not been considered "material" and subject to disclosure), is it intended that this information thereby become "material" and subject to disclosure under proposed Regulation FD?
(c) If, in example (b) above, the source of the disclosure were an executive officer (whether intentionally or intentionally), is it intended that the information thereby become "material" and subject to disclosure under Regulation FD?
(d) If a securities analyst learns in a meeting with executive officers of the registrant that the CEO suffers from a serious mental or emotional condition, is it now intended that this information (which historically has not been considered "material" and subject to disclosure) thereby become "material" and subject to disclosure by the registrant under Regulation FD?
22. Proposed Regulation FD. Please address the real-life dilemmas in applying proposed Regulation FD described in the comment letter of Douglas J. Clark, Esq. dated March 14, 2000.
23. Proposed Regulation FD. Is it the intention to encourage or permit a flood of (possibly defensive) filings on Form 8-K whereby registrants file all press releases, transcripts of conferences and other sources of information about the registrant in an effort to avoid liability under Regulation FD?
24. Proposed Regulation FD. Is it intended that registrants be required to identify with particularity, or highlight, what is "material" and what is not "material"? Customarily, registrants make disclosure without making the finer distinctions between what is "material" what is not.
25. Proposed Regulation FD. The profession of "securities analyst" has come under much criticism over the past year. Is the securities analyst no longer intended to fulfill the role of timely intermediary or interpreter of events? What constructive and affirmative guidance can be given as to the proper role of the securities analyst in our modern securities markets?
26. Proposed Regulation FD. If publication on registrants' websites is not intended to fulfill the requirement of "public disclosure" under FD 100 (a) because of inadequate household access to the Internet (footnote 51), has the Commission established a process to determine that the same household inadequacy does not also apply to access to EDGAR filings of reports of Form 8-K?
27. Proposed Regulation FD. If publication on registrants' websites is not intended to fulfill the requirement of "public disclosure" under FD 100 (a), does the historic and current inclusion of material information on registrants' websites constitute selective disclosure which now requires re- publication in some other form meeting the requirements of FD 100(a)?
28. Proposed Regulation FD. Since Form 8-K is indicated as the presumptive vehicle of disclosure, is there any intention to disqualify registrants from the use of S-3 registration statements if they do not file, or do not file in timely fashion, reports of Form 8-K in response to Regulation FD?
29. Proposed Regulation FD. Since '33 Act liability often accompanies filings on Form 8-K through incorporation by reference, is it intended that disclosure in response to Regulation FD assume the fulsome, guarded and defensive posture characteristic of '33 Act filings which are drafted under the specter of absolute liability? Is it intended that the original disclosure need not be accompanied by such fulsome, guarded and defensive language but that the disclosure on Form 8-K be so accompanied?
30. Proposed Regulation FD. Where the securities analyst does not disclose in her report the specific material information disclosed to her by the registrant, is it intended that the registrant must nonetheless disclose the specific material information under Regulation FD?
The foregoing questions are designed to bring into sharp relief the intent of the several proposals and certain of the ambiguities and possible consequences of those proposals as they are presently drafted. We urge detailed consideration of the implications of these questions. We hope that these questions will aid the Commission's deliberations in the present process, and we appreciate the opportunity to present them.
Richard H. Troy
Senior Vice President, General Counsel and Secretary
Cc: The Honorable Arthur Levitt, Chairman
The Honorable Norman S. Johnson, Commissioner
The Honorable Isaac C. Hunt, Jr., Commissioner
The Honorable Paul R. Carey, Commissioner
The Honorable Laura S. Unger, Commissioner
David Becker, Esq., General Counsel
David Martin, Esq., Director, Division of Corporation Finance