Securities Fraud: How the SEC Enforces the Fair Disclosure (FD) Rule
The SEC, or Securities and Exchange Commission, is the federal agency responsible for enforcing securities laws in the United States. One of the key rules they enforce is Regulation Fair Disclosure, also known as Reg FD or the FD rule. This rule prohibits companies from selectively disclosing important nonpublic information to analysts, institutional investors or other market professionals without also disclosing that information to the general public.
What is the Fair Disclosure Rule?
The Fair Disclosure rule was adopted by the SEC in 2000 to promote full and fair disclosure of information by public companies. It requires that when a public company discloses material, nonpublic information to market professionals like analysts or institutional investors, they must also make that information public. This prevents companies from sharing important information with a select group that may trade on that info before the general investing public has access to it.
Some examples of material nonpublic information that would be subject to Reg FD could include:
- Quarterly or annual earnings figures before broad public release
- A pending merger, acquisition or divestiture
- Major new products or business relationships
- Changes in executive leadership or board members
Reg FD puts everyone on a level playing field with equal access to significant company information that could impact investment decisions.
How the SEC Enforces Violations of the Fair Disclosure Rule
When companies are suspected of violating Regulation FD, the SEC can launch investigations and bring enforcement actions if violations are found. The consequences for Reg FD violations can be severe, with charges brought against both companies and individuals.
Recent cases include a $6.25 million penalty against a large telecommunications company in late 2022. Three of the company’s investor relations executives were also charged and fined $25,000 each for their role in selectively disclosing material nonpublic info to analysts back in 2016.The SEC has a few ways of detecting potential Fair Disclosure violations:
- Reviewing Trading Data: The SEC closely monitors trading activity around key company events and announcements. Unusual trading volume or price movements before news is announced can trigger investigations into potential selective disclosures.
- Tips from Investors: The SEC relies on tips from investors and other market participants who may become aware of potential improper disclosures.
- Compliance Programs: Some enforcement actions originate from company self-reporting of FD violations that are detected through their own compliance monitoring programs.
Once an investigation is opened, the SEC has broad authority to subpoena communications and phone records, take testimony, and require companies to turn over relevant documentation. They look for evidence that material nonpublic information was shared with select individuals, and that those individuals then traded on that exclusive info.
Penalties and Fines for Breaking Regulation FD
When Fair Disclosure violations are confirmed through SEC investigations, there are a few potential penalties:
- Civil Fines: The SEC can impose civil monetary penalties for Reg FD violations. Recent cases have seen fines ranging from several million dollars for large corporations to $25,000 for individual executives. Fines take into account factors like violation severity, company size, and level of cooperation with SEC.
- Disgorgement of Profits: The SEC also commonly requires that direct profits from illegal trading based on improperly disclosed info are paid back as disgorgement. This applies to both companies and individuals who financially benefitted.
- Injunctive Relief: Companies and persons responsible may be ordered by the courts to cease and desist violating practices related to selective disclosure of material nonpublic data.
- Individual Liability: Company executives and managers involved in prohibited selective sharing of market-moving information can face individual civil penalties from the SEC even if they didn’t trade themselves. Criminal charges are also possible.
In addition to direct punishments, disclosure violations often trigger shareholder lawsuits and seriously damage a company’s reputation.
How Companies Can Prevent FD Violations
The consequences of running afoul of Regulation Fair Disclosure can be significant, so companies take measures to avoid violations:
- FD Policies and Procedures: Well-documented Reg FD processes ensure compliance requirements are built into communications protocols and known by all employees.
- Limit Access to Material Nonpublic Information: Access to financials, plans, data or other market-moving info should be restricted only to those who absolutely need to know for business purposes.
- Use Precautions When Communicating Externally: Calls, meetings and contacts with analysts and institutional investors should be carefully monitored to avoid slip-ups. Reg FD training helps.
- Have a Response Plan: Protocols should be in place for rapidly disseminating market-moving disclosures publicly if accidental selective sharing occurs.
Staying on the right side of Regulation Fair Disclosure is crucial for public companies. By putting strong controls around information access and external communications, FD violations can be avoided. Careful compliance protects companies, executives and investors alike.
What Investors Should Do If They Suspect an FD Violation
For investors, becoming aware that material nonpublic data may have been selectively shared can be concerning. It puts investors at an information disadvantage.
If you suspect a public company has violated Regulation FD by improperly disclosing important information to selected parties, you can report it to the SEC.
Contact options include:
- Calling the SEC’s Office of Investor Education and Advocacy at 1-800-732-0330.
- Emailing a tip to the SEC at Help@SEC.gov.
- Filling out an online complaint form on the SEC website.
When submitting a tip, provide as much detail as possible on the suspected violation, like:
- The name of the company involved
- The nature of the potential undisclosed information
- When and with whom the info may have been shared
- Any unusual trading activity noticed around that time
The SEC takes all credible Regulation FD violation tips seriously. Your information could lead to an investigation and enforcement actions if circumstances warrant.
Reporting selective disclosure concerns helps the SEC in their mission to protect investors and ensure fair markets. If you believe you may have been disadvantaged by a company improperly sharing market-moving data, let the SEC know.