Selective disclosure is the practice of disclosing nonpublic information about a company to a few select individuals such as securities market professionals and holders’ of issuer’s securities both of which may trade on this information. For example Company A. holds a conference meeting with a few select individuals (analysts, market professionals, etc) and reveals pertinent nonpublic information. These same select individuals act upon this information prior to the actual public announcement making this selective disclosure. As of October 23 2000 the Securities Exchange Commission enacted regulation FD (full disclosure) to prevent selective disclosure and its regards to insider trading. Regulation FD helps prevent selective disclosure and in turn insider trading by providing a fair playing field for all investors preventing loss of confidence in the markets.
Investors can not fully be shielded from bad events in regards to markets and companies, but what regulation FD does it ensures that all investors have equal access to information whether its good or bad. The SEC defines two types of selective disclosure that FD is to prevent and regulate. The first is intentional selective disclosure, such as the first example. The SEC has deemed that intentional disclosure must make disclosure simultaneously as the public disclosure. The second is unintentional selective disclosure where the company purpose of disclosure was not meant to be selective in nature. The company is required to make a public disclosure promptly after the discovery of the selective disclosure.
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Some analysts are worried that this regulation and how it defines selective disclosure will cause companies to stop the flow of information to investors. Their view is that companies release information to them and that they release the information to the public when public disclosures is announced. The reasoning behind this is that information hitting the markets from full disclosures in real time would make an already volatile market worse. Their purpose is to fully analyze the information for the public. Proponents of full disclosure disagree with this view in that companies were fully disclosing before the regulation was passed. Intel provides its expectations in its quarterly and annual reports after which Intel feels free to discuss how their business is doing whenever it chooses fully disclosing any changes it makes to its guidance that deviates from the original reports. So the process of full disclosure is feasible, companies must adapt its communication processes in order to comply and the idea of simply not communicating is not likely since these same companies desire investors to invest in their stocks, releasing no information is worse than fully disclosing all its communications.
The reason for full disclosure in the first place is to keep the playing field even between professional investors and analyst and the public investor. Without this even playing field you will simply have those few that are privileged to the information able to benefit from it while those without this privilege left behind to either A. take the fall for it or B. lose out on an opportunity. If the public believes that it is working at a disadvantage in the market what incentive do they have to invest in a game that the odds are already stacked against them. A situation like this leads to low consumer confidence in the market, something the SEC is trying to prevent.
Selective disclosure was not always a problem. Before certain technologies, analysts were not only the only ones that could receive corporate communications about these companies, but they were the only ones that could gain access to basic financial information about these companies. Information that we take for granted since it is accessible today through the Internet, email and other new advances in telecommunications. Since the information could only get to the public through these intermediaries (the analysts, professional investors) there were no problems with disclosure. Today most of the financial information companies releases in their periodic reports are available along with historical performances and basic analysis on reports. This with people more connected than ever through mobile and wireless communications enables the general public to monitor, examine and act upon information concerning their investments. All of this decreases the need for intermediaries for this information to pass through, making the few critical bits of information that is withheld unfair to the rest of the investors.
In today’s economy, unethical behaviors and illegal business practices have caused the financial markets to suffer. Confidence in these markets is what keeps them going, if you cannot have any faith that you will be treated fair and equitable in these markets then why invests at all. The SEC and its regulation of final disclosure helps bring confidence into the market, keeping the playing field level for all investors.
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