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The Securities and Exchange Commission approved Regulation FD (Fair Disclosure) in disregard of warnings that it would chill communications to the marketplace. SeeSecurities Act Release No. 7881 (Aug. 15) (Adopting Release). Regulation FD is intended to make important corporate information more broadly available to the public by prohibiting public companies from selectively divulging material information to analysts, institutional investors and others, prior to its general release to the public. As noted in the Adopting Release, the SEC believes that the practice of selective disclosure, like the practice of insider trading, poses a serious threat to investor confidence in the fairness and integrity of the securities markets. The SEC noted that investors who are privy to material, nonpublic information, such as advance warnings of earnings results, are often able to make a profit or avoid a loss at the expense of investors who lack access to this information. Regulation FD is an attempt by the SEC to restore investor faith and confidence in the integrity of the securities markets. The new rule became effective Oct. 23. OVERVIEW Rule 100 of Regulation FD, as adopted, provides that (1) whenever an issuer, or a person acting on its behalf, (2) discloses material, nonpublic information, (3) to certain enumerated persons (in general, securities markets professionals or holders of the issuer’s securities who may well trade on the basis of that information), (4) the issuer must make public disclosure to the public of that same information simultaneously (for intentional disclosures) or promptly (for nonintentional disclosures). As a whole, Regulation FD requires that when an issuer makes an intentional disclosure of material, nonpublic information to a person covered by the regulation, it must do so in a manner that provides general public disclosure rather than only selective disclosure. For a selective disclosure that is nonintentional, the issuer must publicly disclose the information promptly after it knows (or is reckless in not knowing) that the information selectively disclosed was both material and nonpublic. Regulation FD applies to all issuers with securities registered under � 12 of the Securities Exchange Act of 1934, as amended (the Exchange Act), and to all issuers required to file reports under � 15(d) of the Exchange Act, including closed-end investment companies, but not including all other investment companies, foreign governments and foreign private issuers. SELECTIVE DISCLOSURES ADDRESSED BY REGULATION FD Rule 100(b)(1) of Regulation FD mandates public disclosure by issuers in the event that selective disclosure of material, nonpublic information is made to persons in any of the following four categories: (1) broker-dealers and their associated persons; (2) investment advisers, certain institutional investment managers and their associated persons; (3) investment companies, hedge funds and affiliated persons; and (4) any holder of the issuer’s securities, under circumstances in which it is reasonably foreseeable that the holder would purchase or sell securities on the basis of the information. The SEC is of the view that these persons could reasonably be expected to trade securities on the basis of material, nonpublic information that they receive or could provide others with advice about securities trading. On the other hand, the regulation is not intended to cover communications to persons who are normally engaged in ordinary-course business communications with the issuer or to interfere with either media disclosures or communications with government agencies. DISCLOSURE RECIPIENTS NOT COVERED BY REGULATION FD Rule 100(b)(2) provides that selective disclosures of material, nonpublic information to the following four categories of persons are not covered by the regulation (“excluded persons”): (1) “temporary insiders,” that is, persons who owe the issuer a duty of trust or confidence, such as an attorney, investment banker or accountant; (2) persons who expressly agree (orally or in writing) to maintain the information in confidence; (3) entities whose primary business is the issuance of credit ratings (provided the information is furnished to develop a rating, and the issuer’s ratings are publicly available); and (4) communications made in connection with many offerings of securities registered under the Securities Act of 1933 (Securities Act) (see below). Although communications to excluded persons are exempt from Regulation FD, the SEC warns that the misuse of material, nonpublic information by temporary insiders or by persons who agree to maintain corporate information in confidence could be subject to liability under the “temporary insider” or misappropriation theory of insider trading. REGISTERED OFFERING EXEMPTION With certain exceptions relating to various registered shelf offerings under Securities Act Rule 415, Regulation FD will not apply to disclosures made in connection with securities offerings that are registered under the Securities Act. The SEC noted that the mandated disclosure regime and the civil liability provisions of the Securities Act substantially reduce any meaningful opportunity for an issuer to make selective disclosure of material information in connection with a registered offering. The SEC cautioned, however, that Regulation FD does not exempt communications made in connection with unregistered offerings of securities. The SEC stated that issuers engaging in unregistered offerings should either publicly disclose material information that they disclose nonpublicly or protect against the misuse of this information by having recipients of the information agree to maintain its confidentiality. ISSUER PERSONNEL WHO MUST COMPLY WITH REGULATION FD Regulation FD, by its terms, applies to communications made by the issuer or by any persons acting on its behalf. Rule 101(c) of Regulation FD defines the phrase “persons acting on behalf of an issuer” as any senior official of the issuer, [FOOTNOTE 1]or any other officer, employee or agent who regularly communicates with broker-dealers, investment advisers, institutional investment managers, investment companies or the issuer’s security holders (“covered persons”). Regulation FD does not apply to lower-level officers or employees of the issuer who regularly communicate with customers or suppliers. Regulation FD provides that neither the issuer nor its covered persons can avoid the reach of the regulation by having a noncovered person make a selective disclosure on their behalf. If a noncovered employee made a selective disclosure at the direction of a covered person, the covered person would be held responsible for the selective disclosure. On the other hand, if a person improperly trades or tips by making a selective disclosure of material, nonpublic information in breach of his or her duty to the issuer, the person will not be considered to have acted “on behalf of the issuer.” Thus, an issuer is not responsible under Regulation FD when one of its employees improperly trades or tips. ‘MATERIAL’ AND ‘NONPUBLIC’ INFORMATION Regulation FD does not define the terms “material” and “nonpublic” but relies on definitions established by relevant case law. Under applicable judicial precedents, information is generally deemed material if there is a “substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision. See TSC Industries v. Northway, 426 U.S. 438, 449 (1976). To be considered material, “there must be a substantial likelihood that the disclosure of a material fact would have been viewed by the reasonable investor as having significantly altered the �total mix’ of information made available.” See id. at 448-49. Information is nonpublic if it has not been disseminated in a manner making it available to investors generally. In response to requests by some commentators that the SEC provide interpretive guidance as to the types of information likely to be considered material, the SEC provided the following as examples: (1) earnings information; (2) mergers, acquisitions, tender offers, joint ventures or changes in assets; (3) new products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of a contract); (4) changes in control or in management; (5) a change in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report; (6) events regarding the issuer’s securities (e.g., defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders or of the public, or private sales of additional securities); and (7) bankruptcies or receiverships. The SEC explained that the items on this list are not per se material, and that the list is not exhaustive. The determination of whether a matter is material is fundamentally a fact-specific exercise in light of the facts and circumstances of the particular case, and there is no bright-line test for materiality. See Basic Inc. v. Levinson, 485 U.S. 224 (1988). BUSINESS PRACTICES THAT RAISE SPECIAL CONCERNS The SEC noted that there is a common circumstance that raises heightened concerns about selective disclosure, i.e., the practice of securities analysts seeking “guidance” from issuers regarding earnings forecasts. When an officer of an issuer engages in a private discussion with an analyst seeking guidance about earnings estimates, he or she takes on a higher degree of risk under Regulation FD. For example, if an issuer official communicates to a single analyst that the company’s anticipated earnings will be higher than, lower than or even the same as that which other analysts have forecasted, then the issuer will have likely violated Regulation FD, unless the issuer satisfies the public disclosure requirements. This is true whether the information about earnings is communicated expressly or through indirect or implied “guidance.” Similarly, the issuer cannot render material information immaterial simply by breaking the information into ostensibly nonmaterial pieces. Conversely, the SEC pointed out that issuers are not prohibited from disclosing nonmaterial information to analysts, even if, unbeknownst to the issuer, these pieces help the analyst complete a “mosaic” of information that, when taken together, is material, nonpublic information about the issuer. TIMING OF REQUIRED PUBLIC DISCLOSURE Regulation FD requires an issuer to make simultaneous public disclosure of material, nonpublic information that was intentionally disseminated by the issuer or its covered persons and to make prompt disclosure of the information if it was disclosed unintentionally. A covered person is deemed to have acted intentionally if the individual knew, or was reckless in not knowing, that he or she would be communicating information that was both material and nonpublic. Accordingly, in the case of a selective disclosure attributable to a mistaken determination of materiality, liability will arise only if a reasonable person under the circumstances would not have made the same determination. The circumstances in which the disclosure is made are very important. In this context, the SEC pointed out that it would distinguish between a materiality judgment made in the context of a prepared written statement and a materiality judgment made in the context of an impromptu answer to an unanticipated question. The SEC would more likely assert recklessness in the former situation. If an issuer makes a nonintentional disclosure of material, nonpublic information, it is required to make public disclosure “promptly.” For the purpose of Regulation FD, “promptly” means as soon as reasonably practicable after the senior official of the issuer learns that there has been a nonintentional disclosure of such information. However, the time period allowed for cure may not exceed either 24 hours or past the commencement of the next day’s trading on the New York Stock Exchange. Significantly, the issuer must cure nonintentional disclosures made by the issuer itself or by one of its covered persons that the senior official knows or is reckless in not knowing. For example, if a nonintentional selective disclosure of material, nonpublic information is discovered by a senior official after the close of trading on a Friday, the issuer must make public disclosure prior to the commencement of trading on the New York Stock Exchange on the following Monday. PUBLIC DISCLOSURE NECESSARY TO SATISFY REGULATIONFD Issuers have considerable flexibility in determining how to make required public disclosure under the regulation. Issuers can make public disclosure by filing or furnishing information on a Form 8-K, or by disseminating information through any other method of disclosure that is reasonably designed to provide broad, nonexclusionary distribution of the information to the public. The SEC assured issuers that either filing or furnishing information on Form 8-K solely to satisfy Regulation FD will not, by itself, be deemed an admission as to the materiality of the information. Moreover, the SEC has revised Item 5 of Form 8-K to address these concerns. Issuers may now choose to “file” a report under Item 5 of Form 8-K or, in the alternative, to “furnish” a report under Item 9 of Form 8-K that will not be deemed to be “filed.” If the issuer files Form 8-K in compliance with Regulation FD, the information may be subject to liability under � 18 of the Exchange Act. Further, the information will be subject to automatic incorporation by reference into the issuer’s Securities Act registration statements and prospectuses, which are respectively subject to liability under �� 11 and 12(a)(2) of the Securities Act. If an issuer chooses instead to “furnish” the information on Form 8-K, the information will not be subject to liability under � 11 of the Securities Act or � 18 of Exchange Act, unless it takes steps to include that disclosure in a filed report, proxy statement or registration statement. All disclosures, however, whether filed or furnished, are subject to Rule 10b-5 and to the other antifraud provisions of the federal securities laws. ALTERNATIVE METHODS OF PUBLIC DISCLOSURE Regulation FD also permits alternative methods of public disclosure that issuers may use to achieve the goal of effecting broad, nonexclusionary distribution of information to the public. Acceptable methods of public disclosure for purposes of the regulation include one or more of the following: (1) press releases distributed through a widely circulated news or wire service; (2) announcements made through press conferences or conference calls that interested members of the public may attend or listen to either in person, by telephonic transmission or by other electronic transmission (including the Internet), as long as the issuer gives the public appropriate notice of the conference or call and the means for accessing it; and (3) in certain situations, where issuers have web sites that are widely followed by the investment community, by posting the information on their web sites. It is not clear, at this time, whether an issuer will be fully protected if the issuer relies solely on posting the information on its web site. The SEC has indicated a willingness to consider this approach as technology evolves and as more investors have access to, and use of, the Internet. Regulation FD does not require the use of one particular method for issuers to make the required public disclosure. Rather, it leaves the decision to the issuer to choose methods that are reasonably calculated to make effective, broad and nonexclusionary public disclosure, given the particular circumstances of the issuer and the information. The SEC pointed out that, in determining whether an issuer’s method of making a particular disclosure is reasonable, the SEC will consider all the relevant facts and circumstances, recognizing that some methods of disclosure that may be effective for some issuers may not be effective for others. If, for example, an issuer knows that its press releases are not routinely carried by major business wire services, it may not be sufficient for that issuer to make public disclosure solely by submitting its press release to one of these wire services. In these circumstances, the issuer should use other or additional methods of dissemination, such as distribution of the information to the local media, furnishing or filing a Form 8-K, posting the information on its web site or using a service that distributes the press release to a variety of media outlets and/or retains the press release. The SEC noted that an issuer’s method of making the required disclosure will be judged to see if it was “reasonably designed” to effect broad, nonexclusionary distribution in light of all the relevant facts and circumstances. LIABILITY If issuers fail to comply with Regulation FD, they could be subject to an SEC enforcement action for alleged violations of the reporting requirements of the Exchange Act or, in the case of a closed-end investment company, the Investment Company Act of 1940, as well as Regulation FD. The SEC observed that it could bring an administrative action seeking a cease-and-desist order or a civil action seeking an injunction and/or civil money penalties. In appropriate cases, the SEC could initiate an enforcement action against an individual officer of the issuer whom the SEC determines is responsible for the violation. In the Adopting Release, the SEC clarified that Regulation FD is not an antifraud rule and that it is not designed to create new duties under the antifraud provisions of the federal securities laws or in private rights of action. On the other hand, the SEC pointed out that an issuer’s failure to make a public disclosure may still give rise to liability in certain circumstances under a “duty to correct” [FOOTNOTE 2]or “duty to update” [FOOTNOTE 3]theory. Further, an issuer’s contacts with analysts may lead to liability under the “entanglement” [FOOTNOTE 4]or “adoption” [FOOTNOTE 5]theories. Moreover, Regulation FD would not provide protection from Rule 10b-5 liability for false or misleading reports made pursuant to the regulation. Finally, Rule 103 of Regulation FD expressly states that an issuer’s failure to comply with Regulation FD will not affect whether the issuer is considered current or timely in its Exchange Act reports. This is especially important for purposes of an issuer’s continuing eligibility to use short-form registration statements (Forms S-2, S-3 and S-8) and the continuing availability of Rule 144 (relating to resales of restricted and control securities). Regulation FD is another in the rather long line of policies that the SEC has pursued during Chairman Arthur Levitt’s tenure to level the informational advantage previously enjoyed exclusively by institutions and other professional “insiders.” The volume of the opposition expressed generally by the securities industry to Regulation FD appears only to have stiffened Chairman Levitt’s resolve to continue on this course. It remains to be seen how effectively Regulation FD will be enforced and what “real” changes it will ultimately have on issuer communications. Richard Y. Roberts and Dennis C. Bertron are attorneys with Thelen, Reid & Priest LLP. Richard Roberts is located in Washington, D.C., and served as a commissioner of the SEC in 1990-1995. Dennis Bertron is located in New York, and served as a staff attorney in the SEC’s Division of Corporation Finance in 1997-1999. The views expressed herein are the personal views of the authors and do not necessarily represent the views of Thelen Reid & Priest LLP or the firm’s clients. ::::FOOTNOTES:::: FN1In the case of a closed-end investment company, Rule 101(c) applies to any senior official of the issuer’s investment adviser. FN2Under the “duty to correct” theory, an issuer must correct prior misleading disclosures to investors once it has knowledge of the disclosure’s misleading nature. FN3Under the “duty to update” theory, an issuer might be required to update prior statements that were true when made, but that are not currently accurate. FN4Under the “entanglement” theory, an issuer may be liable for inaccuracies in a research report published by a third party if it “sufficiently entangled itself” with such information to render the information attributable to the issuer. FN5Under the “adoption” theory, an issuer may be liable for false statements contained in a third-party report if it adopts, expressly or implicitly, these statements after they are published, even if management had no role in preparing the report.

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