SEC Proposes Measure to End ‘Selective Disclosure’

The Securities and Exchange Commission on Wednesday proposed a rule to stop companies from disclosing market-moving information to securities analysts and large investors before they release it to the general public.

The measure would require a company to issue a press release or take other steps to inform the public at the same time it discusses with analysts or institutional investors any information that is likely to have an effect on its share price.

“The all-too-common practice of selectively disseminating material information is a disservice to investors and undermines the fundamental principle of fairness,” SEC Chairman Arthur Levitt said. “This practice leads to potential conflicts of interest for analysts and undermines investor confidence in our markets.”

The commission’s long-awaited proposal to rein in the practice known as selective disclosure will be put out for 90 days for the public to make comments before the SEC will consider whether to approve it.

The proposal raised immediate concern in the securities industry that the changes would have a chilling effect on companies’ ability to share information with analysts.

“We are concerned the proposal will end up restricting the flow of information rather than encouraging it, by imposing detailed rules on companies, investors and analysts,” said Stuart J. Kaswell, general counsel of the Securities Industry Assn. trade group.

“Companies and their lawyers may be much more cautious about having any one-on-one conversations with an analyst or even a member of the media,” said securities lawyer John Olson, a partner with the Gibson, Dunn & Crutcher firm.

If adopted, the rule could “cause a dumbing-down of the quality of the disclosure because companies may not be willing to give sophisticated details with all the public listening,” Olson said.

However, Brian Borders, president of the Assn. of Publicly Traded Companies, whose membership is composed of hundreds of small and mid-size companies, said that if the proposal is adopted, “it will give companies a means to tell analysts ‘no’ when they demand information that isn’t public.”

The proposal would not prohibit company officials’ meeting privately with brokerage analysts. Companies would not be required to publicly release information discussed in a closed-door session if the material would not be considered important to other investors. But if market-moving news is unexpectedly or inadvertently disclosed in a private discussion, the rule would require companies to provide the information to the public as soon as possible.

The proposal comes nearly two years after Levitt started campaigning against selective disclosure, something he once called a “stain upon our market.”

Under the SEC’s proposal, a company would be required to disclose important information to the public in one of three ways: By issuing a press release; by including it in a filing with the commission, which would be almost immediately available to the public through the SEC’s electronic filing disclosure system; or by providing public access to its conference call or meeting by telephone or through the Internet.

Levitt reiterated his preference that companies provide equal access to their meetings and conference calls. “I urge companies to open up their conference calls to all investors,” he said.

If a company unintentionally discloses market-moving information at a private conference or on a conference call that isn’t open to the public, it would face SEC enforcement scrutiny if it did not publicly announce that information as soon as possible, commission attorneys said.

The SEC expects to post the proposal in detail on its Web site (https://www.sec.gov) in a few days.