SEC Votes to End Selective Disclosure

In a 3-1 vote, the SEC voted to pass Rule FD (Fair Disclosure), which will prevent companies from privately passing market-moving information to Wall Street analysts.

By Bill Barker (TMF Max)
August 10, 2000

In a move that should be celebrated by individual investors everywhere, the Securities and Exchange Commission (SEC) today voted to pass Rule FD (Fair Disclosure). The rule was significantly modified from the original proposal, but the version that passed maintained the essence of what should be important to individual investors.

The Fact Sheet distributed at this morning's SEC vote sets the issue up in these words:

"On December 20, 1999, the Commission proposed new Regulation FD -- for 'fair disclosure' -- to combat selective disclosure. Selective disclosure occurs when issuers release material nonpublic information about a company to selected persons, such as securities analysts or institutional investors, before disclosing the information to the general public. This practice undermines the integrity of the securities markets and reduces investor confidence in the fairness of those markets. Selective disclosure also may create conflicts of interest for securities analysts, who may have an incentive to avoid making negative statements about an issuer for fear of losing their access to selectively disclosed information.

"Regulation FD would require that when an issuer intentionally discloses material information, it do so publicly and not selectively. The company may make the required disclosure by filing the information with the Commission, or by another method intended to reach the public on a broad, nonexclusionary basis, such as a press release. When selective disclosure of material information is made unintentionally, the company must publicly disclose the information promptly thereafter."

The Fact Sheet then notes that the proposed rule prompted an "outpouring of public comment -- nearly 6,000 comment letters. The vast majority of the comments were from individual investors who urged -- almost uniformly -- that the Commission adopt Regulation FD. These investors expressed frustration with the practice of selective disclosure, believing that it places them at a severe disadvantage in the market."

The Fact Sheet also noted that the securities industry urged the SEC to continue allowing the practice of selective disclosure.

Democracy prevailed today, and the individual won out over Wall Street. We'll cover this important event with more details in the upcoming weeks, but in the meantime, let the celebrating begin.

More on Fool Audio
Fool associate general counsel Jay Perlman and Bill Barker discussed the implications of the SEC's decision earlier today. You can listen to their conversation here on Fool audio (requires Real Audio Player).

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