SEC Bans Selective Disclosure

SAN FRANCISCO (08/10/2000) - The U.S. Securities and Exchange Commission took another step Thursday toward ending the monopoly that large institutional investors have enjoyed on market-moving information.

In a 3-1 vote taken at a public hearing, the SEC decided to prohibit companies from selectively disclosing information to analysts, saying that all "material" information should go out to the public at the same time that it's released to analysts. Laura Unger was the only commissioner to oppose the measure.

The move could lead to increased use of the Internet as a medium for disseminating relevant information to the public.

Industry professionals have spoken out against the rule. Many have predicted that it will only increase the amount of "backdoor" communication that goes on between companies and analysts.

"The very purpose of the rule is to get at the underground communications," said David Becker, general counsel of the SEC, at a press briefing in Washington. He said that assuming that people who communicate covertly do not make their comments public, "this might cause our enforcement division to get at these abuses." He added that the SEC would vigorously enforce the rule and would crack down on repeat offenders. "There is only so much homework that can be eaten by the dog," he said.

Many private investors have supported the decision, which has received more than 6,000 comments since it was put out for discussion in December. But large institutions said the rule could curtail the flow of information. They predicted that some companies would avoid speaking openly out of fear that they would be punished for releasing information that could be deemed "material."

Some said the ruling could contribute to market volatility, because retail investors may not know how to interpret complicated financial information released by listed firms.

"The proposed rules would be beneficial to the extent that they put the individual investors on the same footing with institutional investors and analysts," said Daniel Kramer, a partner in the litigation department of Schulte Roth & Zabel. "The fear is that companies will disclose less information and less timely information, and that if you take out the analysts as the filter between the company and investing public, there is a greater potential for information to be misunderstood - which could lead to more volatility in stock trading."

The decision does not allow private lawsuits, but government enforcement actions could end up in court. If they do, penalties could be in the tens of thousands of dollars, if not higher, SEC officials said.

Before voting, the SEC lightened the proposed rules in some areas after receiving complaints from Wall Street and the media.

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