UNITED KINGDOM LISTING AUTHORITY
RESPONSE TO
SECURITIES AND EXCHANGE COMMISSION
PROPOSED RULE ON SELECTIVE DISCLOSURE
REGULATION FD (Fair Disclosure)
Re. File Number: S7-31-99
Introduction
In our response we have sought to share our experience, as United Kingdom Listing Authority ("UKLA"), of the effect of similar requirements in the United Kingdom ("UK"). The UKLA does not regulate the UK's secondary market in securities and we have therefore not commented on the proposals relating to insider trading.
Below we respond in turn to each of the questions set out in your consultation document, File Number S7-31-99, relating to the proposed rule on selective disclosure (the "Consultation Document").
First, it may be of assistance if we set out a summary of the regulatory position in the UK with regard to the selective disclosure of material nonpublic information (designated "unpublished price sensitive information" in the UK).
Regulation of the Disclosure of Unpublished Price Sensitive Information in the UK
The regulatory regime in the UK begins from a different standpoint to that proposed by Regulation FD. While you state that "Regulation FD does not mandate that issuers make public disclosure of all material developments when they occur", the general disclosure obligation set out in Listing Rules published by the UKLA is as follows:
"9.1 A company must notify the Company Announcements Office without delay of any major new developments in its sphere of activity which are not public knowledge which may:
(a) by virtue of the effect of those developments on its assets and liabilities or financial position or on the general course of its business, lead to substantial movement in the price of its listed securities;
(b) in the case of a company with debt securities listed, by virtue of the effect of those developments on its assets and liabilities or financial position or on the general course of its business, lead to substantial movement in the price of its listed securities, or significantly affect its ability to meet its commitments"
The Company Announcements Office ("CAO") operates the London Stock Exchange's Regulatory News Service, an electronic information dissemination service for publishing announcements required under the Listing Rules.
Paragraph 9.2 broadens this general requirement to encompass unpublished price sensitive information relating to changes in the issuer's financial condition, the performance of its business and the issuer's expectation of its performance. Paragraph 9.3A requires that any information so notified is complete and neither misleading, false or deceptive. Accordingly, the UKLA requires issuers to announce all material developments without delay.
The general requirement in paragraph 9.1(a) is derived from a European Community Directive. This is set out in Council Directive 79/279/EEC of 5 March 1979, Schedule C paragraph 5(a) and Schedule D paragraph A4(a), known as the "Admissions Directive", and accordingly it is essentially replicated throughout the European Union.
The Listing Rules also contain the following provision, which is the equivalent of your proposed Regulation FD:
"9.6 Information that is required to be notified to the Company Announcements Office must not be given to anyone else before it has been so notified, except as permitted by paragraphs 9.4 and 9.15."
Paragraph 9.6 of the Listing Rules is not derived from an EC Directive. The exceptions set out in paragraphs 9.4 and 9.15 of the Listing Rules relate to confidential matters in development or negotiation and to occasions when the CAO is closed, respectively. These exceptions are dealt with below, as they are pertinent to specific questions posed in the Consultation Document.
1. Disclosures by "An Issuer or Person Acting on its Behalf"
Is the definition of "person acting on behalf of an issuer" appropriate? Should it be broader or narrower?
We consider that the definition should be sufficiently broad so as to cover any person authorised to act on behalf of the issuer. If an individual has been authorised to act on behalf of an issuer, any statement by that individual can be legitimately seen as a statement by the issuer. Further, by authorising that person to act on its behalf the issuer is assuming a level of responsibility for his or her actions.
In the UK the definition is equally broad, and the current Guidance on the Dissemination of Price Sensitive Information (the "PSI Guide") published by the UKLA expressly states that an issuer's regulatory obligation covers "information which emanates from itself, its advisers or agents".
While this definition may seem to place an onerous responsibility on the issuer, it can mitigate this responsibility by ensuring that it has well established and publicised procedures for making statements. The PSI Guide states that:
"responsibility for communication with analysts, investors and the press should be clearly defined. Many problems have arisen because companies have not identified those responsible for communication. If a few employees are clearly identified who are aware of the company's policy and the legal and regulatory requirements, the senior management of a company will be better able to control the dissemination of information and reduce the chance of unauthorised or careless disclosure. Staff should be prohibited from communicating information if they are not nominated. Companies may find it helpful to identify to analysts and press those employees responsible for communications."
Consultation with issuers and their advisers has shown that many UK issuers have produced their own written guidance for their employees based on our PSI Guide. These issuers have found such practices highly beneficial.
However, if the issuer has authorised an individual to act on its behalf and has determined that he or she is a suitable custodian of its confidential information, the issuer should take responsibility for that individual's use of the confidential information. The issuer should therefore be answerable for the improper dissemination of its previously unpublicised information by that individual and correct any resulting imbalance of information in the market, even if that individual acted beyond the strict bounds of his or her authority.
2. Disclosure of Material Nonpublic Information
Though you have not requested a specific response on this point we would like to make a general comment on the definition of "material". You acknowledge in the Consultation Document that materiality judgements are difficult; this is despite the case law that your jurisdiction has on the subject. In the UK issuers have similar problems in determining whether information is "price sensitive".
We have not had the benefit of judicial guidance on the definition, but we have sought to assist issuers in this matter in our PSI Guide. Ultimately we acknowledge that there is no simple formula that can be used to make the decision and that the decision is one that has to be made by the issuer in consultation with its advisers. The decision remains difficult and we are exploring ways of enhancing our guidance on this point. Perhaps additional guidance can be provided for those who will have to comply with Regulation FD?
Would use of the proposed procedures for determining and dealing with materiality issues significantly reduce the risk of "chilling" the flow of corporate information to the marketplace?
The UKLA's own rules regarding the dissemination of material nonpublic information have been in place for a number of years. In our experience this has not noticeably "chilled" the flow of corporate information to the marketplace. Indeed, the CAO publishes, on average, some 600 announcements a day from well over 2,000 issuers on the London Stock Exchange's main market. Clearly, the UKLA's requirement that all material nonpublic information must be announced without delay is, to a great extent, responsible for maintaining a high number of announcements. Nevertheless, irrespective of the regulatory requirements placed upon them in the UK, experience has shown that very few issuers are reticent about announcing positive news, while some do struggle with the decision to issue negative news. This is despite our requirement that all material information must be announced without delay.
Regulation FD seeks to ensure that when either positive or negative information is released, it is done equitably. As Regulation FD does not mandate that issuers make public disclosure of all material developments when they occur, there would still be no obligation under Securities and Exchange Commission ("SEC") regulations to publish the news immediately, and it is this which might produce a "chill". Issuers listed on exchanges in the United States would still readily publish positive news as soon as practicable. However, the fact that they would no longer be permitted to control the flow of negative information, and yet would not be under a duty to issue such information on a timely basis, might delay its release. Of course, this would be mitigated by the rules of the exchanges themselves, such as the Nasdaq Stock Market Rules 4310(c)(16) and 4320(e)(14) which require that, except in unusual circumstances, Nasdaq issuers disclose promptly any material information which would reasonably be expected to affect the value of their securities or influence investor decisions.
In addition, issuers will still engage in regular briefing sessions with analysts and institutional investors. These relationships, in particular those between issuers and analysts, are in many ways symbiotic. For example, analysts require a flow of information from issuers and in return their reports can enhance the issuer's market performance. Issuers expect favourable reports from analysts when they are performing well and hope for sympathetic reports when they are less successful. However, issuers that have proved themselves to be unreliable in providing analysts or institutional investors with complete and accurate information when they are in difficulties have lost their trust and consequently any disposition they have to be sympathetic. It is unlikely that this situation would change on the adoption of Regulation FD.
On balance, we do not believe that Regulation FD will seriously "chill" the flow of corporate information. Our equivalent regulation does not appear to have had this effect and commercial factors will ensure that issuers will still find it necessary to brief analysts and institutional investors. Those same commercial pressures will encourage the briefings to be as frank as practicable.
With regard to the proposed procedures for determining and dealing with materiality issues, we feel that these would indeed help to reduce the risk of "chilling" the flow of corporate information. These proposed procedures are essentially mirrored in our PSI Guide and have been adopted by many UK issuers.
In addition, while we recognise that the need to obtain external advice can be an added burden on issuers we also advise them that:
"where appropriate, companies should make use of their advisers to assist in determining whether information is potentially price sensitive. Advisers have day to day experience of assessing market expectations and are obliged to keep information confidential. If, after discussion, doubt over the sensitivity of information remains, the company should avoid selective disclosure and make an announcement."
In our experience issuers have accepted this guidance and routinely contact their advisers before making an announcement. Furthermore, many issuers have advisers present at shareholder meetings and analysts' briefings and they rely on them to intervene if they are asked a question that may result in the selective dissemination of material nonpublic information.
Should the existing standards for the term "nonpublic" be relied upon, or should further guidance be provided?
In the UK the equivalent provision requires that issuers release all material information via the CAO and this avoids any doubt over an issuer's compliance with requirement to publish the information to the whole market.
We consider that issuers should be given complete guidance on the term "nonpublic" and on the approved methods of making material information public to avoid any confusion or inadvertent selective disclosure.
3. Selective Disclosure "To Any Other Person Outside the Issuer"
Do the proposed regulations cover the appropriate categories of persons? Should other types of persons be enumerated in Rule 100(b) as proper recipients of material nonpublic information?
The UKLA's Listing Rules do provide exceptions to general obligation of disclosure:
"9.4 A company need not notify to the Company Announcements Office information about impending developments or matters in the course of negotiation, and may give such information in confidence to recipients within the categories described in paragraph 9.5. If the company has reason to believe that a breach of such confidence has occurred or is likely to occur, and, in either case, the development or matter in question is such that knowledge of it would be likely to lead to substantial movement in the price of its listed securities, the company must without delay notify to the Company Announcements Office at least a warning announcement to the effect that the company expects shortly to release information which may lead to such a movement."
9.5 The categories referred to in paragraph 9.4 are:
(a) the company's advisers and advisers of any other persons involved or who may be involved in the development or matter in question;
(b) persons with whom the company is negotiating, or intends to negotiate, any commercial, financial or investment transaction (including prospective underwriters or places of securities of the company);
(c) representatives of its employees or trades unions acting on their behalf; and
(d) any government department, the Bank of England, the Monopolies and Mergers Commission or any other statutory or regulatory body or authority.
The company must be satisfied that such recipients of information are aware that they must not deal in the company's securities before the relevant information is made public."
The UKLA has set out, in some detail, the categories of persons to whom confidential nonpublic material information can be given and the circumstances in which it can be given. We therefore agree with the general approach of Rule 100(b). However, we also consider that some further guidance of this nature might be given by the SEC so as to avoid possible confusion in the interpretation of Regulation FD.
For example, you say under the first of the key provisions discussed in the Consultation Document that "[t]he Rule also would not apply if an official disclosed information to another person who owed him or her a duty of trust or confidence - such as a medical professional." Then, under the third key provision you say "[t]o make clear the scope of the Regulation, paragraph (b) of Rule 100 expressly states that the Rule does not apply to disclosures of material information to persons who are bound by duties of trust or confidence not to disclose or use the information for trading."
We would suggest that the example of a medical professional might be inappropriate and should not fall within the category described under the third key provision. While there may be medical duties of confidentiality, these would principally relate to information that is of a medical nature and given in the context of a medical consultation. A medical professional would not necessarily understand the duty to keep confidential information about the activities of a patient's employer and may not understand that the information was not to be used for trading.
Accordingly, we consider that the general categories of individuals to whom nonpublic material information might legitimately be given in confidence should be expressly set out, as should the general circumstances in which the information might be given. We also believe that the categories of persons and the circumstances ought to be restricted to those that are essentially commercial or legal in nature and for legitimate business reasons. We understand that Rule 100(b) does specify individuals, but in the context of the dissemination of material nonpublic information, we consider the previous reference to medical professionals may be inappropriate.
We also consider that the reference to the early briefing of analysts on complex issues may be inappropriate. If the information is of such complexity that trained financial analysts need time to absorb and understand it, then anyone not present at the briefing will be disadvantaged. Even though those analysts privileged by an early view of the information may be required to keep that information confidential until a general release can be made, their preparation might put them in a position to brief their sales force and their clients as soon as the general release is made. Less privileged analysts and investors will have to wait until they have made sense of the information before acting upon it. This appears to be contrary to the aim of Regulation FD.
By permitting disclosures to outsiders who agree to confidentiality requirements, does the Regulation adequately permit issuers to engage in legitimate business communications with customers or suppliers, potential co-venturers, and others?
In our experience, the Exchange's equivalent requirements have not hindered any genuine commercial negotiations or discussions. Indeed, the very discussions that the exemption seeks to permit are typically highly confidential and bound by express confidentiality agreements. Alternatively, the participants to the discussion have general obligations of confidentiality, such as that between a legal adviser and his or her client. As a result we have not considered it necessary to make it a requirement of the Listing Rules that an express confidentiality agreement is in place for the exemption to apply.
Would purchasers in private offerings who receive material nonpublic information be willing to sign confidentiality agreements? How would this affect the resale market for private offerings and the flow of information in these transactions?
As stated above we do not require express confidentiality agreements, but purchasers in private offerings would be accustomed to operate under a duty of confidentiality. With regard to a private offering, the market would be restricted to the offerees and, as long as everyone in that group had equal information, it would not necessarily matter what information was available in the general market. Once the securities were available for resale, it would be essential that the market as a whole had information to be able to trade on a par with the initial offerees.
Would the proposals reduce liquidity in the 144A market? How should the Regulation account for practices in this market?
We do not have enough experience of this market to be able to comment.
Should we require that confidentiality agreements take any specific form - i.e., be written - or include certain required provisions?
As mentioned above, we do not believe that it is necessary for the Regulation to require a confidentiality agreement.
4. Timing of Public Disclosure Required by Regulation FD
We request comment on the distinction between "intentional" and "non-intentional" disclosures for the purposes of the timing of public disclosure. Does the proposed definition of "intentional" disclosure draw the appropriate distinction?
The UKLA's requirements are slightly different, as we require all material nonpublic information to be disclosed without delay unless it falls within an exemption, such as paragraph 9.4 (see above). A UK issuer covered by the exception in paragraph 9.4 may, however, find that the information that it was intending to keep confidential is selectively released in breach of this confidence. Under such circumstances we require that the information is released to the market as a whole without delay, but not simultaneously with the breach of confidence. Clearly, once a distinction is drawn between intentional and non-intentional selective disclosure there has to be a distinction between the timing of the full announcements. If the disclosure is made unintentionally the issuer will not know that it will be made, nor will it be prepared to issue a full announcement. It will therefore be impossible for it to make a full announcement simultaneously with the inadvertent selective announcement. Accordingly we agree that such a distinction is appropriate and is well made. We also believe that the definition of "intentional" is appropriate.
Does the definition of "promptly" provide an appropriate time period for the required public disclosure? Should the time period be shorter (e.g., same trading day); or longer (e.g., next business/trading day or 48 hours later)?
The UKLA's requirement is that such announcements are made "without delay", which is deemed to be as soon as practicable. The circumstances of each case will dictate exactly how quickly an announcement should be put out and when price sensitive information has leaked overnight, we may suspend the listing of an issuer that does not make an announcement before the market opens. In any event, we do not consider a possible 24-hour delay in making an announcement to be acceptable, unless there are extenuating circumstances, as the market could suffer from the effects of the disclosure in this period. If the issuer is unable to give immediately the full details in its announcement, we require a warning announcement to be issued, to inform the market that an announcement containing price sensitive information will be released shortly. In extreme circumstances, we would suspend the issuer's listing if it were not able to make the necessary announcement in time to prevent a false market in its securities occurring.
Is the definition of senior official appropriate, or should it be narrower?
The decision to make a regulatory announcement is generally made by the issuer's Board of directors which, in the UK, consists of both executive and non-executive directors. Accordingly, we would consider it necessary for the inadvertent disclosure to have been brought to the attention of a member of the Board before we required an announcement to be made without delay. However, an unreasonable delay in this information being brought to the attention of the issuer's Board might in itself constitute, or be evidence of, a breach of the Listing Rules.
5. Definition of "Public Disclosure"
Should we permit issuers to make Regulation FD disclosures on existing Item 5 of Form 8-K as an alternative to proposed new Item 10? Item 5 is not confined to material disclosures; accordingly, if a registrant used Item 5 it would not acknowledge that the information disclosed was necessarily material. Is this a preferable approach?
As a matter of general principle, we believe that material information should be brought to the attention of as many market participants as soon as possible. By disclosing material information in a section of a form not designed for this purpose it may not reach a sufficiently wide audience quickly enough.
The proposed Rule would not consider a website posting by itself to be a sufficient means of public disclosure. Will this limitation make issuers less willing to post information on their website?
The Listing Rules only consider the CAO to be a sufficient means of public disclosure, but in our experience this has not discouraged issuers from putting out information on their websites at the same time.
When an issuer is required to make public disclosure within 24 hours, the timing of a weekend or holiday may mean that EDGAR filing is not an available method of public disclosure. Issuers would therefore have to use one of the other methods. We solicit comment on whether this approach is workable, or whether we should alter the timing requirements of the Rule so that filing is always an available method?
The UKLA requires that all announcements be made via the CAO. However, we accept that it is not always possible to comply with both this requirement and the one that announcements are made without delay. Accordingly, paragraph 9.15 of the Listing Rules provides the following:
"9.15 When an issuer is required by the listing rules to notify information to the Company Announcements Office at a time when the Company Announcements Office is not open for business, it must ensure that there is adequate coverage of the information by distributing it to not less than two national newspapers in the United Kingdom and two newswire services operating in the United Kingdom. In addition, the issuer must ensure that the information is notified to the Company Announcements Office, for release as soon as it re-opens."
We have found this system to be practical and it has been accepted by companies listed on our main market. We therefore consider that it should not be necessary to alter the timing requirements of the Regulation to fit around the SEC's business hours.
How else can we promote issuer flexibility and investor access?
We believe that the proposed method would be flexible and accessible for both issuers and investors.
We are also considering whether to require a delayed filing of a Form 8-K (within two business days) when an issuer chooses one of the other methods of making public disclosure. This would ensure that the information is part of the Commission's public files. Should we adopt this alternative approach? If so, is two business days the appropriate time period, or should it be shorter (e.g., one business day) or longer (e.g., five business days)?
As mentioned above, regulatory announcements in the UK must all be made centrally via the CAO simultaneously or prior to an announcement by any other method and we believe this has certain regulatory benefits. For example, market participants will have a central point where they can be assured of finding all regulatory announcements by all issuers. As an issuer might otherwise not need to be consistent in his choice of vehicle for making announcements, as long as he used any one of the approved methods, market participants tracking previous statements or anticipating new ones would have to cover all potential methods of public disclosure.
If there is to be a delay between a public announcement and filing, we would suggest that it be as short as possible (e.g., one business day rather than two). This would ensure that investors who could not receive the announcement by the issuer's alternative method would be on a level playing field with those who could by the time the market next opened.
Are the current technologies that we discuss available to all issuers, and/or prohibitively costly? Are there other methods? Should these methods be specified in the rule? Should we require information to be posted on an issuer's website?
We believe that the methods of dissemination you discuss are, or ought to be available to all issuers. Clearly, however, only those methods of dissemination that are also available to all, or at best most, investors should be specified as the goal is for the information to be disseminated to the public. Further, these specified methods of dissemination should be available to both domestic and foreign issuers and investors. We are examining the use of issuers' websites as a supplementary method of announcing information. However, as not all issuers will have a website nor all investors necessarily have access to the Internet, we would not yet require that information be disseminated in this way and it would not replace standard methods of disclosure. In addition, there are benefits to having a central repository of this information, as mentioned above.
Whatever method(s) are chosen we do consider it essential that the methods are specified in the rule, as to do otherwise would make it difficult to determine whether issuers have complied with the rule. We believe issuers will appreciate the added comfort of knowing that their efforts to comply with the regulation will not be misguided.
6. Issuers Covered by the Regulation
Would it be appropriate to exempt all foreign private issuers from compliance with Regulation FD?
The UKLA's policy is that both domestic and overseas issuers on its market should comply with the same rules for the disclosure of price sensitive information. Accordingly, issuers that are incorporated outside the UK, along with issuers that have only a secondary listing on the London Stock Exchange, must comply with essentially the same rules as primary listed English issuers in terms of the dissemination of material information. We consider this essential, as the objective of our rules on the dissemination of price sensitive information is the protection of investors, irrespective of the issuer's origin.
As a result, the Listing Rules' general obligations for the disclosure of material information are essentially the same for both domestic and overseas issuers. In addition to these requirements, the Listing Rules also contain the following:
"9.9 A company whose securities are also listed on any other stock exchange must ensure that equivalent information is made available at the same time to the market at the Exchange (by way of notification to the Company Announcements Office) and to the market at each of such other Exchanges."
We request comment on whether any investment companies should be covered by Regulation FD, and if so, which types of investment companies should be covered?
The UKLA does provide slightly modified disclosure rules for the different types of investment entity that it lists. In general, the basic disclosure requirements for price sensitive information equivalent to Regulation FD are applicable to all listed investment companies. But, for instance, open-ended investment companies need not disclose changes in issued capital or notify major interests in shares below 10%. We have found this to be a workable system that is accepted by our listed investment companies.
7. Liability Issues and Securities Act Implications
VI. Cost-Benefit Analysis
These are clearly issues that relate specifically to US legal matters, and the interpretation of US law, and we do not feel able to comment on such matters.