Governing the Corporate Insiders: Improving Regulation Fair Disclosure With More Robust Guidance and Stronger Penalties for Individual Executives

The Journal of Business, Entrepreneurship & the Law, May 2015

This article discusses the history of Regulation Fair Disclosure (Regulation FD), the problems it was intended to remedy, the scope of the regulation, and acceptable methods of disclosing material information in compliance with the rule. Part III examines specific further guidance and two investigative reports issued by the United States Securities and Exchange Commission (SEC) impacting Regulation FD disclosures. In Part IV, this article sets forth a comprehensive analysis of all the specific enforcement actions pursued by the SEC and the penalties assessed against publicly traded companies and individuals for Regulation FD violations. Part V evaluates the effectiveness of the rule and discusses whether any modifications may be warranted to clarify the disclosure requirements and enforce the rule to afford more protection to investors.

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Governing the Corporate Insiders: Improving Regulation Fair Disclosure With More Robust Guidance and Stronger Penalties for Individual Executives

e Journal of Business Executives Christopher Ippoliti 0 0 Christopher Ippoliti, Governing the Corporate Insiders: Improving Regulation Fair Disclosure With More Robust Guidance and Stronger Penalties for Individual Executives , 8 J. Bus. Entrepreneurship & L. 13 (2015) Available at: Part of the Corporation and Enterprise Law Commons; and the Securities Law Commons CHRISTOPHER IPPOLITI* ____________________________________ * L.L.M. Candidate in Business and Finance Law at The George Washington University Law School. The Author wishes to thank Theresa A. Gabaldon, Professor of Law, The George Washington University Law School, for her encouragement, support, editing, and helpful insights. Any errors or omissions are the Author’s own. INTRODUCTION This article will first discuss the history of Regulation Fair Disclosure (Regulation FD), the problems it was intended to remedy, the scope of the regulation, and acceptable methods of disclosing material information in compliance with the rule.1 Part III will then examine specific further guidance and two investigative reports issued by the United States Securities and Exchange Commission (SEC) impacting Regulation FD disclosures.2 In Part IV, this article sets forth a comprehensive analysis of all the specific enforcement actions pursued by the SEC and the penalties assessed against publicly traded companies and individuals for Regulation FD violations.3 Part V will evaluate the effectiveness of the rule and discuss whether any modifications may be warranted to clarify the disclosure requirements and enforce the rule to afford more protection to investors.4 II. THE HISTORY OF REGULATION FAIR DISCLOSURE AND ACCEPTABLE METHODS FOR COMPLIANCE WITH THE SAME The Securities Exchange Act operates to prevent pools and manipulations in the securities of your companies. It sets up standards for providing certain minimum information in the solicitation of proxies. Equally important, it recognizes that officers, directors[,] and dominant stockholders are fiduciaries and should not trade on inside information; and accordingly it penalizes certain purchases and sales.5 Thereafter, the Securities and Exchange Commission was cre ated in 1934 with the following express purposes to: (1) protect investors; (2) maintain fair, orderly, and efficient markets; and (3) facilitate capital formation.6 As part of the SEC’s mission to protect investors, and to combat insider trading, “[o]n August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by publicly traded companies and other issuers.”7 However, discriminatory disclosure of forecast data by corporate management was previously acknowledged many decades earlier, as follows: At the same time as many companies announced their projections publicly, a number of others communicated their expectations to a select few: Favored analysts might be advised of current budget data either directly or by letting them know that their estimates were “in the ball park.” Through a variety of such devices, many corporations sought to be sure that “market” estimates of their earnings were not far off the mark while still not taking any public position on the projected results. While the overwhelming majority of such efforts were done in good faith, the end result was lack of knowledge as to what forecasts were those of management as opposed to those of analysts working independently. In a few cases there was evidence of selective disclosure to institutional investors interested in the stock and unfair use of such insider information.8 To address this problem, Regulation FD “provides that when an issuer, or person acting on its behalf, discloses material[,] nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may trade on the basis of the information), it must make public disclosure of that information.”9 Additionally, Regulation FD, like insider trading regulations, is a matter of corporate governance, because it affects the relationship between corporate directors and officers, among other insiders, and the corporation’s shareholders, on the other.10 Moreover, Regulation FD is justified because disclosures of material information uphold the SEC’s mission in two ways—by protecting investors and maintaining fair markets. The first major aspect Regulation FD intended to address was the fact issuers were disclosing important, nonpublic information, such as advance warnings of earnings results, to securities analysts or selected institutional investors, or both, before making full disclosure of the same information to the general public.11 This type of selective disclosure has been characterized as an “unerodable[,] informational advantage.”12 Although it is important to label this appropriately as a wrongful advantage, it is consistent with earlier forms of abuse in the trading markets: [T]he “Pecora Hearings”[] uncovered (...truncated)


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Christopher Ippoliti. Governing the Corporate Insiders: Improving Regulation Fair Disclosure With More Robust Guidance and Stronger Penalties for Individual Executives, The Journal of Business, Entrepreneurship & the Law, 2015, pp. 13, Volume 8, Issue 1,