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)