The Securities and Exchange Commission
Washington, DC

In the Matter of
Proposed Rule
Selective Disclosure: Regulation FD
File No. S7-31-99

Comments of Gretchen Sprigg Wisehart

Gretchen Sprigg Wisehart
9 North Warner Avenue
Bryn Mawr, PA 191010
28 April, 2000

Summary of Position

This comment is written to address several concerns effected by the Proposed Rule Selective Disclosure: Regulation FD (the "Regulation"). The comment provides a summary of the issues involved in the imposition of liability for the practice of selective disclosure of material non-public information by corporations under the Securities Act of 1933 (the "Securities Act") and the Exchange Act of 1934 (the "Exchange Act") along with commentary designed to expose problems with the proposed rule in its current form. This comment also addresses some of the benefits of the proposed rule. This comment is divided up into sections based on the request for comments contained in Release Nos. 33-7787, 34-42259, IC-24209, File No. S7-31-99.

In summary, I conclude that in its current form the benefits of the Regulation outweigh the costs to issuers and reporting companies. The imposition of liability on corporations created by the proposed Regulation is not so onerous as to significantly impede the flow of information to the marketplace or cause corporations to adopt strategies for the release of information that will increase the costs of disclosure.

While the Proposed Rule will force many reporting corporations to fundamentally alter their strategies for the dissemination of information, this can only aid in creating a more equitable environment for the trading of securities. As a result, an impediment to the symmetry of information that the marketplace relies on to value securities will be removed. This will result in a more true valuation of securities in the market, and greater benefits across the board for all investors.

The clarification this Regulation provides in this area of federal securities law makes it easier for issuers and reporting companies to stay within the bounds of legitimacy when communicating material information. By clearly stating a policy in favor of public disclosure, and providing the means to enforce the policy, the Regulation takes the guesswork out of the hands of issuers and reporting companies and makes it easier to comply with the law. Companies will have distinct guidelines for the dissemination of information.

The Regulation breaks down the barriers between the wall-street "insider" and the individual investor, who is more and more likely to be making trading decisions without the aid of a broker or analyst. The Regulation purports to end the favoritism that has characterized the practice of selective disclosure. Currying favor with institutions and individuals by selectively releasing material information is no longer permitted under the Regulation, and the market can only be positively affected by such a reform.

For investors, the Regulation "levels the playing field" without jeopardizing the integrity of the market. The benefit to the market as a whole of eliminating the inefficiency caused by the asymmetry of information available under the practice of selective disclosure strengthens the attributes of the market as a whole. Insisting on broad public disclosure of information boosts investor confidence that the value of securities is based on full information.

Selective disclosure to securities analysts and investors taints the market. Arguments that securities analysts need access to material information in advance of the public in order to perform the complex analysis necessary to make full use of the information are compelling but not persuasive. While the role of securities analysts as sophisticated investigators and analysts of complex information is great in the complex market, the benefit of public disclosure does not dramatically undercut their importance. Analysts will still provide value for institutions and investors, the Regulation only requires that all investors have access to the same information simultaneously. It is up to the investor to decide whether to rely on his own analysis of the information, or to wait for a securities analyst to make a recommendation.

I. Introduction

Adopting Regulation FD would enhance the federal securities laws' approach to mandatory disclosure of material information. If the gathering of securities-related information, such as company earnings, management plans, and competitive conditions, were left to private means, the information would be inadequate for the functioning of an informed, efficient market. Private investors and traders would underproduce securities information because such information has the characteristics of a "public good." If one securities analyst undertakes the effort and expense to obtain relevant information (such as to verify a company's earnings), that information cannot be protected like other property rights since it becomes publicly discernable once the analyst advises clients who use it to trade. An analyst cannot exclude "free-riders" that have not paid for the information. Thus, securities analysts lack incentives to optimize the information they might extract from issuers, and securities information would be underproduced.

Moreover, to the extent investors and securities analysts can protect their proprietary research and exclude others from exploiting it, a world of private research leads to unnecessary duplication as competing analysts gather essentially the same data. The Securities and Exchange Commission's (the "SEC") function of gathering and disseminating information for all securities participants avoids this wasteful duplication. Mandatory disclosure under the federal securities laws reduces the cost of doing business for professional securities analysts, who depend on the information subsidy provided by government regulation.

An optimal level of disclosure might occur because of management's incentives to establish a reputation with capital markets of honesty and trustworthiness. That is, it is suggested that a government mandate is not necessary (and is unnecessarily burdensome) because private incentives would produce optimal disclosure. This account fails, however, to deal with the many circumstances in which management and investors have different interests in information. According to the conventional explanation for mandatory disclosure, securities markets cannot depend on corporate management to provide information voluntarily because management lacks incentives to fully reveal information to investors. Whether at the time they sell securities or on a continuing basis afterward, issuers have numerous incentives to hide and delay bad news and to overemphasize good news. Moreover, the conventional explanation for mandatory disclosure assumes disequilibria in bargaining power between investors and issuers concerning investment information. For often self-serving reasons, corporate management will not voluntarily provide the level of information that investors collectively would have been willing to pay for. Unless compelled to reveal firm-specific information, management will generally underprovide it.

Finally, mandatory disclosure bolsters investment confidence in securities markets by providing assurances of effective government oversight and protection. The SEC for example, frequently justifies its existence by pointing to its role in assuring the "integrity" of the U.S. securities markets. The mandatory disclosure scheme offers reassurance that the markets are subject to oversight and that more than Adam Smith's "invisible hand" is at work.

Trading on inside information destroys the integrity of the market by giving an informational advantage to a select group of insiders. The practice is especially pernicious in light of the federal securities laws' thrust of full disclosure, which is designed to create and maintain an informed market. Unfortunately, the law regarding the use of nonpublic information when trading in shares has not developed systematically, nor has it evolved in such a way as to produce bright-line tests of when it is permissible to trade.¹ As yet, under the securities laws, there is no express statutory prohibition regulating trading on inside information. The problem with disclosure is enhanced by the fact that there is no specific prohibition against "selective disclosure" of material information to securities analysts, disclosure which critics charge is the equivalent of inside information. The use of this material information by selective analysts is charged to be the equivalent of trading on inside information, inuring inequitable benefits to the recipients of the information.

Selective disclosure affects everyone involved in the securities market. The purpose of Regulation SD is to "level the playing field" and impose a structure to the release of material information by issuers. By imposing rules as to the release of material information by companies subject to the federal securities laws, a critical loophole in the securities law is closed, and distortions in market efficiency are remedied. The Regulation brings SEC rules into line with National Investor Relations Institute's practice guidelines and the best practices of the National Association of Securities Dealers, among other institutions. Whether intentional or inadvertent, the disclosure of material, non-public information in a restricted forum is inappropriate, and the Regulation would ensure that the practice is ended.

II. Regulation FD

A. Disclosures by "An Issuer or Person Acting on Its Behalf"

The Regulation applies to all issuers with securities registered pursuant to Section 12 of the Exchange Act and those required to file reports under Section 15(d) of the Exchange Act. The application of the Regulation to both statements issued in the name of the issuer as well as by a "person acting on behalf of an issuer" in proposed Rule 101(c) is appropriate for the regulation.² A more narrow definition, for example, limited to executive officers and directors, and persons acting on their behalf, would exclude too many persons authorized to act on behalf on the issuer.

While officers, directors and persons acting on their behalf are likely targets for this Regulation, it ignores the fact that there are many individuals in a corporate setting who have access to material information, and who are authorized to make statements on behalf of a corporation. A narrower definition, for example, limiting the definition to executive officers or senior officials, may have the appearance of creating a more manageable situation for large organizations, but it would serve to eviscerate the Regulation. While senior officials and executive officers are more likely to be aware of their duties with respect to disclosure of material information, this should not relieve a corporation of the obligation to ensure that all employees acting on a corporation's behalf be aware of their duties with respect to disclosure of material information. If the purpose of the Regulation is to impede selective disclosure by employees of issuers, and impose liability on the issuer, than the definition of "an issuer or person acting on its behalf" must include those authorized to act for the issuer.

The reality of the situation is that selective disclosure has been a mechanism used by executives and employees of issuers and reporting companies to essentially "tip off" certain analysts and investors with information between reporting periods.³ The SEC has not pursued this practice as insider trading. It has become a practice fairly widespread in the industry. In order to put an end to this practice and close this loophole in the law, it is necessary to cast a fairly broad net. Rule 10b-5 is available to prosecute individual insiders tipping off others and trading on material inside information for their own benefit. But if the Regulation is purporting to end the practice of selective disclosure by corporations, the Regulation must be sufficient to impose liability on a corporation for allowing its employees to practice selective disclosure, whether or not the disclosure is purposeful. This is beyond the scope of 10b-5, which only imposes liability on an individual who is involved in the sale or trade of a security.

A broad definition, for example, covering any person authorized to act on behalf of the issuer may be overly broad, however. While the goal of such a broad definition would be to prevent evasion, the practical effect of such a broad definition would be to cripple the enforcement of the regulation. There are mechanisms in place to enforce the prohibition on trading on inside information that would capture the corporate insider who uses material nonpublic information to his advantage.⁴ The thrust of the proposed regulation is to end the practice of selective disclosure, which amounts to providing inside information to selected individuals in the name of a corporation.

The definition has to be limited to a person acting on behalf of the issuer, not just any person authorized to act on behalf of the issuer. The distinction between the two captures the person acting on his own to inure benefits to himself, and the person acting on behalf of the corporation. While the difference is slight, it captures the essence of the Regulation. The Regulation is aimed at imposing liability on an issuer for practicing selective disclosure, not at the individual level. Rule 10b-5 is available to impose liability on the individual trading on material inside information for his own benefit, the Regulation is aimed at corporate practices.

There are many methods of limiting the information that is released by an issuer. Some methods cited in the Executive Summary, such as having an issuer limit the people who are authorized to act on behalf of the issuer; keeping records and transcripts of conversations with analysts, investors and the media; declining to answer questions which relate to material issues; and requiring confidentiality agreements from analysts to keep material information private until it is publicly disclosed, are sufficient in themselves to prevent inadvertent disclosure. Senior corporate officials and high ranking executives already have a heightened awareness of the limits of information that they are privileged to disclose. The foregoing methods would also assure companies that persons authorized to act on the company's behalf would avoid most material disclosures. Implementation of these methods can be effected institutionally without great effort. Caution dictates that corporations develop information policies, including the creation of an information ombudsman. It is wise to limit the issuer's personnel who are authorized to divulge information or respond to outside questions. It is likely that the implementation of any of the procedures and safeguards would require corporate officials to consult with counsel, especially when dealing with sensitive information, but it is unlikely that the costs of doing so will be prohibitive, or that the requirement of taking these extra safeguards will impede the flow of information to the market.

B. Disclosure of Material Nonpublic Information

The materiality of information depends on the costs that disclosure adds to business transactions, the availability of the same information through unregulated transactions, the availability of the same information through unregulated channels, and the effect that disclosure has on substantive regulation in other areas. In defining materiality, the Supreme Court has recognized the contextual nature of securities disclosure. Information is material if it would be viewed by the reasonable investor as having significantly altered the "total mix" of information available.⁵

The materiality of the information contemplated by the Regulation is presumed. Under the current law, general background material is not considered to be material. Thus, providing information to selected analysts and investors about the general operations and goals of an issuer are not covered by the regulation. On the other hand, information about sales projections, upcoming earnings, mergers and acquisitions would have a significant impact on an issuer's stock price. As such, the information would be considered material, and this type of information would be prohibited from selective disclosure under the Regulation.

Current standards define the term "nonpublic" information as information that has not been dispersed in a manner making it available to investors generally.⁶ This standard encompasses "soft information,"⁷ though such information has not generally been actionable. If the Regulation is to designed to capture predictions, projections and opinions made by persons authorized to act on an issuer's behalf, the definition is going to have to be expanded to encompass such soft information. Reliance on the old definition, which has generally excluded action on the basis of soft information would allow the flow of such information from issuers to selected recipients.

The definition of "public disclosure" provided in Rule 101(e) mandates the disclosure of the information to the public, but it does not address the existing standards for defining what is "nonpublic." As discussed previously, the nonpublic nature of information such as predictions, opinions and projections has not been the basis for liability. In order to force corporate insiders to stop releasing this type of information on a selected basis the definition of nonpublic has to encompass this information. Otherwise the leakage of this type of information will not be available as the basis for issuer liability. It is this very type of information that is being targeted by the Regulation. Corporate insiders are releasing information as to sales projections and upcoming earnings to selected individuals, who are then using the information to the benefit of their institutional clients or investors, just outside the reach of the federal securities laws. The definition of "public disclosure" does not sufficiently reach this information.

C. Selective Disclosure "To Any Other Person Outside the Issuer"

The Regulation covers appropriate categories of persons. "Any other person outside the issuer" is a global definition that should be a sufficient basis for liability. The definition is broad enough to encompass most situations where material information is disclosed on a selected basis. The exemption for disclosure to certain recipients allows for the free flow of necessary information in pertinent circumstances.

It is a necessary element of the Regulation to permit disclosures to outsiders who agree to confidentiality requirements, and to persons who owe a duty of trust or confidence to the issuer. This allows the issuer to engage in legitimate business communications with customers or suppliers, potential co-venturers, and others, without impeding the flow of information. It is often necessary in the course of this type of transaction to share material nonpublic information. In fact, the sharing of this information is likely to be crucial to the deal. Without the ability to share this type of information, business transactions would be seriously impeded. Purchasers in private offering who receive material nonpublic information are generally willing to sign confidentiality agreements. The confidentiality agreement protects both the seller and the buyer from outside influence on the price of securities. It prevents the distortion of the market price.

Confidentiality agreements should be required to be in writing. By requiring the agreement to be in written form there is less of a likelihood for misunderstanding or error on the part of any of the participants to the agreement. A uniform agreement would assure all participants to the agreement that any material nonpublic information shared would be protected. Preparation of a written form is not an onerous task, utilization of confidentiality agreements is a common business practice, and requiring one in the event of the contemplated purchase or sale of securities only further assures the participants that the value of the securities will not be affected by anyone privy to the information trading on the basis of the information.

D. Timing of Public Disclosure by Regulation FD

There should be a distinction between "intentional" and "non-intentional" disclosures for the purposes of the timing of public disclosure. The proposed definition of "intentional" disclosure draws an adequate distinction between "intentional" and "non-intentional" disclosure. An intentional disclosure is a much more serious violation than an unintentional disclosure, even though the effect of the disclosure on the market is likely to be the same. By delineating disclosure when the individual knew or was reckless in not knowing that he would be communicating information that was material and nonpublic from information that a individual communicated in the absence of scienter or with reckless disregard to the nature of the information, the Regulation allows an issuer to respond accordingly.

It is likely that it will take an issuer a longer period of time to discover and remedy a disclosure made unintentionally. The information disclosed in an unintentional communication may be more difficult to discern than in the case of an intentional disclosure, where the individual divulging the information either knows or should know that he is releasing material information. The ability of an issuer to recreate the information for public release is enhanced when the individual who made the communication is knowledgeable about the materiality of the information that he divulged.

The definition of "promptly" should be further defined in the rule in order to provide an appropriate time period for the required public disclosure. The time period should be as brief as possible to ameliorate the effects of material disclosure. Defining the time period to be the same trading day is not unreasonable. In light of the advent of after hours trading, and technological advances that allow information to impact the value of securities with lightning speed, requiring a corporation to make a public disclosure within a trading day, if possible, or within 24 hours, is the only way to ensure that the proposed regulation has a real effect on the propensity to selectively disclose information, either advertently or inadvertently.

A longer time period for public disclosure, e.g. the next business/trading day or 48 hours later would take the teeth out of this regulation. Especially with after hours trading and modern trading techniques the delay of one day is enough to seriously affect the price of a share. Fortunes can be made and lost in a matter of minutes, the practical result of a longer period for public disclosure would be to allow individuals to trade on material inside information.⁸ This defeats the purpose of the regulation and allows the individual trading to exploit the information to the detriment of the uninformed.

As to the definition of "senior official" in Section 101(d)(2), the definition seems appropriate to the Regulation. The persons named in the definition, directors, executive officers, investor relations or public relations officers, or any other person with similar functions are the types of corporate employees who have a more refined knowledge of the duties of officials to maintain confidential material nonpublic information. They are also more likely to have access to the means to prepare and disseminate the information once they are aware of the disclosure. A narrower definition would exclude too many people in the corporate setting who are knowledgeable and capable of remedying the disclosure.

A broader definition than the one in Section 101(d)(2) (e.g., all employees) would make the rule unwieldy. If all employees were included, the ability to enforce the rule would be impeded. Not all employees are privy to information which would allow them to discern whether a disclosure was material or not, and whether a disclosure was of public or nonpublic information. As a result, employees would have an unreasonable burden of having to maintain a standard of vigilance with regard to the communications made by other employees. The SEC in itself would have a difficult time proving whether or not an employee knew or had access to the knowledge of whether a communication made by another employee was of material nonpublic information.

E. Definition of "Public Disclosure"

The Regulation should specify the means of providing for public disclosure. Reasonable methods would be an open press conference or press release, with the additional requirement that if the issuer has a website that it utilize the site to publish the information simultaneously. Specifying the means of providing for public disclosure provides issuers with certainty. By adhering to the methods specified in the Regulation, issuers are assured that they are complying with the law.

The standard press release is an effective way of providing the public with access to information. Information disclosed in this manner has a wide audience. Investors, analysts and the general public can be reached via this method. Open press conferences also are a traditionally effective way of providing the public with information about an issuer. Disclosure by these tried and true means has is the gold standard. The use of a company website to also post the information contained in a press release is an enhancement to this process.

With the wide availability of current technologies, such as websites and electronic filing by EDGAR, the costs for effecting public disclosure are decreased. Not only is the use of electronic filing a cost saving measure for most companies, but also it is an enhancement: it saves companies time and effort in preparing numerous documents, and provides quick access to the information. The current technologies discussed in the Regulation are widely available, anyone with access to a personal computer can maintain a website, file electronically, and prepare a press release. A telephone is all that is necessary to facilitate a conference call. The costs of using the Internet to broadcast information is also very cheap. A 45-minute web broadcast costs less than $600 and can reach thousands of investors.⁹ The cost of a conference call is a flat fee plus approximately thirty cents per line per minute, with additional charges for archiving the presentations and replays.¹⁰

The needs of most individual investors could be met by providing access to a taped replay of a conference call over a telephone line. Archiving the contents of a conference call with analysts or a press conference, then making a transcript available via a special phone number to investors is also a realistic way of making sure that there is public disclosure without making the conference call or press conference so large as to be unwieldy. Transcripts of conference call information, press releases or open press conferences can be made available upon request. The information could be made available by Internet, over the telephone or hard copy.

Small companies with less media and analyst coverage can provide for public disclosure by holding open press conferences and issuing press releases, both methods are relatively low cost and produce the results sought by the Regulation. The additional requirement that the company use Internet technology to post information is also a low-cost means of effecting public disclosure.

The use of Internet technology with webcasts or the release of information is one way of disseminating information to the public at a low cost. The recent phenomenon of "day traders" who use the Internet to trade in securities without relying on brokers or analysts proves that investors are accessing on-line information, synthesizing it and basing trading decisions on it.¹¹ Posting information on company websites or on commercially available sites that provide information on securities is one way of providing the public with sufficient access.

Merely requiring an open press conference is not sufficient to provide adequate dissemination on information in all circumstances. Requiring the additional posting of the information on a company website, if it has one, in addition to the other methods of publishing information assures investors that the information is more widely accessible. Utilization of a company's website is an efficient use of a means of communication available to an issuer. The costs of publishing the information on a company's website low and the benefits of disseminating the information immediately to the public are high.¹² While publication on a company website may not be the preferred or most effective means of releasing material information, it can work to accomplish the end of disseminating the information in tandem with more traditional methods of disclosure.

F. Issuers Covered by the Regulation

Limiting the application of Regulation FD to foreign issuers with equity securities listed on a national exchange and foreign private issuers whose numbers of U.S. shareholders exceeds 300 or volume of trading in our capital markets exceeds 5 million dollars is a practical solution to enforcement of the Regulation. By including issuers whose securities are traded on a national exchange the information available from issuers is symmetrical, and the market will function more efficiently. Exempting foreign issuers completely will eat at the heart of the Regulation. By allowing foreign issuers to engage in selective disclosure it provides an incentive for bias toward the foreign companies who engage in the practice of granting advance information to analysts and other interested individuals, to the detriment of other investors and other issuers as well.

The burden of public disclosure is not so great an additional reporting requirement that it would impose significant additional costs on foreign private issuers. Technological advances are such that anyone with access to a personal computer can prepare and disseminate a public statement. A simple press release, allowing access to a conference call, or making available immediately transcripts of disclosure to analysts and investors is not a high-cost burden on an issuer. Even the disclosure required in the event of inadvertent disclosure is not prohibitive. The information merely needs to be reviewed and collated in an accessible format so that investors generally can utilize the information. Maintaining investor confidence in the securities is a goal of foreign issuers, and by adhering to the same rules as domestic issuers, the foreign issuer is bolstering its own credibility.

G. Liability Issues and Securities Act Implications

Confidentiality agreements, whereby participants to the agreement agree not to use the information for trading purposes or to disclose it to persons who may in turn do so, are a practical solution for parties seeking to negotiate transactions or to discuss "lock-ups." Confidentiality agreements are an essential business tool to keep negotiations private, and have a long history in business practice. Most corporations are familiar with and utilize confidentiality agreements on a regular basis. They are a common practice when a company is initiating the sale of securities, promoting a business and discussing sales of assets, purchases and mergers of corporations. The use of such agreements allows for such discussions and transactions without breaching the privacy of the parties to the transaction, and protecting the deal. Under confidentiality agreements parties cannot divulge information or trade on the basis of the confidential information, therefore the agreement essentially blocks trading on material information, while protecting investor access to the information by shielding it from public view until it is disseminated to the public in general.

With respect to initial public offerings ("IPO"s), application of the Regulation would not impair a corporation's flexibility or activities. In the solicitation of underwriters and in the "roadshow" portion of the offering, issuers operate under confidentiality agreements. The regulation would not impair capital formation because it would merely bolster the effectiveness of the confidentiality agreement. Exempting IPOs would have the effect of allowing analysts and select recipients of the information to trade on the basis of material inside information, the direct opposite of what the regulation purports to prevent.

III. Conclusion

In sum, the Regulation is in tune with the best practice guidelines of leading market institutions, and is a necessary clarification to the federal securities laws. The Regulation will enhance the SEC's ability to maintain a fair and equitable trading market for all investors. The Regulation will close the loophole that has allowed trading on material, nonpublic information at the expense of many investors. It is in the spirit of the Securities Act of 1933 and the Exchange Act of 1934, a mechanism to level the playing field for all investors and assure the efficient operation of the United States securities market.