Issuer selective disclosure

THIS is the fourth supplement to the Division of Corporation Finance's telephone interpretation manual.

We believe the practice of selective disclosure leads to a loss of investor confidence in the integrity of the capital market. Investors who see a security's price change dramatically and only later are given access to the information responsible for that move, rightly question whether they are on a level playing field with market insiders.

Issuer selective disclosure bears a close resemblance in this regard to ordinary ``tipping'' and insider trading. In both cases, a privileged few gain an informational edge _ and the ability to use that edge to profit _ from their superior access to corporate insiders, rather than from skill, acumen, or diligence.

Likewise, selective disclosure has an adverse impact on market integrity that is similar to the adverse impact from illegal insider trading: Investors lose confidence in the fairness of the markets when they know that other participants may exploit ``unerodable informational advantages'' derived not from hard work or insights, but from their access to corporate insiders.

The economic effects of the two practices are essentially the same. Yet, as a result of judicial interpretations, tipping and insider trading can be severely punished under the antifraud provisions of the federal securities laws, whereas the status of issuer selective disclosure has been considerably less clear.

Regulation FD is also designed to address another threat to the integrity of our markets: The potential for corporate management to treat material information as a commodity to be used to gain or maintain favour with particular analysts or investors. Technological developments have made it much easier for issuers to disseminate information broadly. Issuers once may have had to rely on analysts to serve as information intermediaries, but can now use a variety of methods to communicate directly with the market. In addition to press releases, these methods include Internet webcasting and teleconferencing. Accordingly, technological limitations no longer provide an excuse for abiding the threats to market integrity that selective disclosure represents.

(Source: Securities and Exchange Commission, US.)