Legal Definitions - Regulation FD

Regulation FD, which stands for Regulation Fair Disclosure, is a rule established by the U.S. Securities and Exchange Commission (SEC). Its primary purpose is to prevent public companies from selectively disclosing important, nonpublic information to certain individuals or groups (such as securities analysts or large institutional investors) before making that information available to the general public.

In essence, Regulation FD aims to ensure that all investors have equal access to material company information at the same time. "Material nonpublic information" refers to any information that has not been widely disseminated and that a reasonable investor would consider important when making a decision to buy, sell, or hold a company's securities.

If a public company or someone acting on its behalf *intentionally* discloses material nonpublic information to a select group, it must simultaneously disclose that same information to the public. If the selective disclosure is *unintentional*, the company must make a prompt public disclosure of the information.

Here are a few examples to illustrate how Regulation FD works:

• Example 1: Private Earnings Forecast

  Imagine a technology company's Chief Financial Officer (CFO) has a private phone call with a favored hedge fund manager. During the call, the CFO mentions that the company's upcoming quarterly earnings will be significantly lower than market expectations, several days before the official public announcement. This information about lower-than-expected earnings is "material nonpublic information" because it would likely cause investors to sell their stock, impacting the share price. By sharing this exclusively with one hedge fund manager, the company would be violating Regulation FD. To comply, the company would need to have publicly released this information at the same time it was shared with the hedge fund manager.

• Example 2: Exclusive Product Delay Disclosure

  Consider a pharmaceutical company whose CEO is having a private lunch with a major institutional investor. During their conversation, the CEO reveals that the highly anticipated launch of a new drug will be delayed by six months due to unexpected manufacturing issues, a fact not yet known to the public. This delay is "material nonpublic information" because it could significantly impact the company's future revenue and stock valuation. Disclosing this information privately to one investor gives them an unfair advantage over other investors who are still operating under the assumption of a timely launch. Regulation FD would require the company to publicly announce this delay to all investors simultaneously with, or promptly after, its disclosure to the institutional investor.

• Example 3: Selective Supply Chain Update

  A large manufacturing company's Head of Investor Relations holds a series of one-on-one meetings with a few top-tier investment analysts. In these private meetings, the Head of Investor Relations subtly hints that a critical component supplier is facing severe production issues, which will likely lead to a significant slowdown in the company's own output and a potential hit to profits in the next quarter. This information about an impending supply chain disruption and its financial impact is "material nonpublic information." By selectively sharing this insight with only a handful of analysts, the company would be in violation of Regulation FD. The rule mandates that such crucial information, once shared with a select few, must also be immediately or simultaneously disclosed to the broader investing public.