SEC Reg. FD’s Meaning Isn’t Transparent

Some m&a pros are scratching their heads as they try to read the tea leaves of SEC Commissioner Arthur Levitt’s most recent open-markets salvo. The ruling, known as Regulation FD (full disclosure), is Levitt’s latest effort in his crusade to ensure that small investors have access to the same information as Wall Street professionals. The commission passed Regulation FD by a 3-to-1 margin on August 10. It will take effect on October 23. “The adoption of this rule will mean that when companies disclose material, non-public information, they must disseminate this information broadly,” Levitt said in a statement. Reg. FD applies only to an issuer’s communications with market professionals and holders of the issuer’s securities under circumstances in which the holders may reasonably be expected to trade on the basis of the information. It does not apply to communications with the press, rating agencies, and customers and suppliers. But one criteria of Reg. FD – materiality – may be in the eye of the beholder. Todd David, a partner at Alston & Bird, an Atlanta law firm, says that one ambiguity that troubles him about Reg. FD is the definition of materiality. “If a CEO announces that he’s going to open 24 new stores and an analyst asks him if one of them is in Detroit, is the answer to that question material under Reg. FD?” David says that the answer isn’t clear. He did say he expects Reg. FD to reduce some jousting by analysts to get information. He also predicts that Reg. FD would reduce ad hoc communication by executives. The securities industry lobbied vigorously against the rule. One industry representative, the Securities Industry Association, warned that it would lead to less, not more, disclosure for all classes of investors. Another concern for dealmakers is how Reg. FD jibes with January’s Regulation MA (mergers and acquisitions). The January ruling eliminated the five-day waiting period in the wake of initial deal announcements. It also established a distinction between written communications, which must be filed with the SEC, and oral communications that carry no such burden. Some dealmakers and their advisers think that Reg. FD muddies these waters. “It’s surprising that eight months after the SEC issued Reg. MA we have another rule that seems to contradict some parts of MA,” says Richard Hall, a practitioner of securities law at Cravath, Swaine & Moore. Hall points to Reg. FD’s erasing of the distinction between written and oral communications that MA established as one question mark raised by Reg. FD. Another point of potential confusion, Hall says, is that because Reg. FD creates an exemption for communication in connection with a registered stock offer, it would appear that comments by a company issuing stock to finance a takeover would be exempt. This creates at least the appearance of treating a stock deal differently than a cash deal. While these concerns won’t affect most friendly deals, Hall says, they might affect hostile transactions because the burden of disclosure on the part of the target appears to be greater than that of the would-be acquirer. Although Hall says that these considerations are not likely to be deal-killers, the New York attorney says that his read of Reg. FD is that it erodes the benefits of Reg. MA in a way that wasn’t intended by SEC staffers. An SEC spokesman said that the key distinction that investors should keep in mind is that Reg. FD is concerned with selective disclosure in non-public forums so it concentrates on verbal communications, while Reg. MA applies to written public information.