Securities Fraud: How the SEC Enforces the Fair Disclosure (FD) Rule

What is the Fair Disclosure Rule?

The Fair Disclosure Rule was adopted by the SEC in 2000 to prohibit selective disclosure by publicly traded companies of material nonpublic information to certain individuals or entities such as analysts, institutional investors or other market professionals before disclosing it to the general public.

Prior to Reg FD, companies could selectively disclose important information to favored analysts or investors before making it public. This allowed certain parties to make trading decisions based on the nonpublic information, while the general investing public was still in the dark, putting them at an unfair disadvantage.

Reg FD mandates that when a publicly traded company (or a person acting on its behalf) intentionally discloses material nonpublic information to securities market professionals, shareholders, or holders of the company’s securities who may trade on the basis of the information, the company must also make public disclosure of that same information. This levels the playing field and helps protect the integrity of the market.

What is Considered Material Nonpublic Information Under Reg FD?

Information is considered material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision or if it would significantly alter the total mix of information available. Examples could include:

• Earnings results
• Mergers, acquisitions, joint ventures or changes in assets
• New products, discoveries or developments regarding customers or suppliers
• Changes in control or management
• Change in auditors or auditor notification of inability to rely on financials
• Events regarding the company’s securities

To be nonpublic, the information must not have been previously disseminated in a manner that makes it available to investors generally. The SEC has provided guidance that information is considered public only once it has been disclosed via the company’s website, press releases, webcasts, conference calls or SEC filings.

Defenses and Challenges Against Reg FD Violations

Companies and individuals accused of Reg FD violations may raise certain defenses such as:

• The information selectively disclosed was not actually material.
• The disclosure was unintentional and accidental.
• Proper public disclosure was made within 24 hours (or promptly for unintentional disclosures).
• The communication fell under the “ordinary course of business” exception.

However, the SEC usually conducts thorough investigations and it can be difficult to successfully make these claims once charges have been brought. Settlements to avoid litigation expenses and negative publicity are common.

The biggest challenge to Reg FD came in 2020 when the SEC amended it to expressly deny private rights of action. This means only the SEC can bring enforcement actions under Reg FD, private investors and shareholders cannot sue for alleged violations. This addressed concerns over frivolous lawsuits and companies disclosing less information out of litigation fears.