Regulation FD: Selective Disclosure by Issuers

Material nonpublic information shows up in two separate regimes on this exam. The general antifraud rule against trading on material nonpublic information is a different topic covered elsewhere in this course. Regulation FD is narrower: it is a disclosure duty that falls on the issuer, not on the person who trades.

Who Must Comply With Regulation FD?

• Regulation FD (Regulation Fair Disclosure) regulates the issuer, not the broker-dealer. An issuer is a company with a class of securities registered under the Securities Exchange Act, or one required to file periodic reports under that act. Closed-end investment companies are included. Any other investment company, any foreign government, and any foreign private issuer are excluded.
• The disclosure duty is triggered by the issuer itself, or by a person acting on behalf of the issuer:
  • A senior official: a director, executive officer, investor-relations or public-relations officer, or another person with similar functions.
  • Another officer, employee, or agent who regularly communicates with broker-dealers, investment advisers and institutional investment managers, investment companies, or holders of the issuer's securities.
• For a closed-end investment company, the senior official may instead be a senior official of the issuer's investment adviser.
• An officer, director, employee, or agent who discloses the information in breach of a duty of trust or confidence to the issuer is not acting on the issuer's behalf, so the issuer's duty is not triggered.

Exam Tip: Gotchas

• Regulation FD binds the issuer's disclosure conduct, not the broker-dealer's. A private-placement representative sits on the receiving end, as an enumerated recipient category, not as the regulated party.

Who Triggers the Disclosure Duty When They Receive Information?

Regulation FD applies when the issuer, or a person acting on its behalf, discloses material nonpublic information (MNPI) about the issuer or its securities to any of the following four recipient categories:

• A broker-dealer, or a person associated with a broker-dealer.
• An investment adviser, an institutional investment manager that filed a Form 13F for the most recent quarter that ended before the disclosure, or a person associated with either.
• An investment company (or an entity that would be one but for a specific Investment Company Act exclusion), or specified affiliated persons of one.
• A holder of the issuer's securities, where it is reasonably foreseeable that the holder will trade on the information.

When Must the Issuer Make Information Public?

• Public disclosure is made by furnishing or filing a Form 8-K, or by using another method (or combination of methods) reasonably designed to achieve broad, non-exclusionary distribution of the information to the public.

Exam Tip: Gotchas

• The prompt clock does not start the moment a senior official hears that some disclosure happened. It starts when that official knows, or is reckless in not knowing, that the information was both material and nonpublic.
• Intentional disclosure requires simultaneous public disclosure; non-intentional disclosure only requires prompt public disclosure, capped at the later of 24 hours or the next trading day's open. Swapping the two timing standards is a common distractor.

What Does a Regulation FD Failure Not Do?

• Missing the public disclosure that Regulation FD alone requires is not by itself a violation of the general antifraud rule against manipulative and deceptive devices. Regulation FD says so in its own text.
• Treat them as two separate exposures. A student who assumes every Regulation FD miss is also fraud will mark a correct answer wrong.

Which Disclosures Are Excluded From Regulation FD?

Regulation FD's public-disclosure duty does not apply to a disclosure made to:

• A person who owes the issuer a duty of trust or confidence (for example, an attorney, investment banker, or accountant).
• A person who expressly agrees to keep the disclosed information confidential.
• A disclosure made in connection with a registered securities offering, though certain shelf offerings are carved back out, through any of six named means: the registration statement or a prospectus in it, a free writing prospectus, any other prospectus the Securities Act permits in place of the full one, a proposed-offering notice, a tombstone communication, or a related oral communication made after the registration statement is filed.
• The proposed-offering notice and the tombstone communication are the same two permitted communications taught in the offering communications and research safe harbors unit. Regulation FD reuses them, it does not create new ones.

Exam Tip: Gotchas

• The registered-offering exclusion almost never helps on this exam. A Regulation D issuer is not registering anything, so it cannot use this exclusion.
• The confidentiality-agreement exclusion is exactly why private-placement work routinely opens with a nondisclosure agreement. When an issuer shares material nonpublic information with a placement representative under an express confidentiality agreement, the issuer has not triggered Regulation FD's public-disclosure duty, because the recipient accepted a duty to keep the information confidential instead of receiving it as an unrestricted selective disclosure.

What Should You Check on Exam Day?

• Confirm the fact pattern is testing the issuer's disclosure duty or a recipient category, not a broker-dealer's own obligation.
• Count all four recipient categories before scoring an answer that names fewer.
• Match intentional disclosure to simultaneous public disclosure, and non-intentional disclosure to the prompt, 24-hour-or-next-trading-day standard.
• Recognize a confidentiality agreement or a duty-of-trust relationship as a reason Regulation FD's duty never triggers in the first place.