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Cardozo Law Review

Abstract

In a significant departure from the disclosure regime created by the insider trading rules of the Securities and Exchange Act of 1934 (Exchange Act), Regulation Fair Disclosure (Reg FD) forces publicly traded companies to make simultaneous public disclosure of any information they make available to analysts or institutional investors. The rule gives issuers a choice: make public disclosure or don't disclose to anyone. Reg FD targets the transmission of information, rather than any actual trading based on that information. Unlike the insider trading rules, Reg FD is not an anti-fraud provision and the government can assert a claim without establishing any deceptive conduct or breach of any fiduciary duty.

The Securities and Exchange Commission (SEC) adopted Reg FD to compensate for the perceived ineffectiveness of insider trading laws. Case law that has developed since the adoption of Reg FD establishes that the perception was unfounded. Reg FD no longer serves an important function in light of the current judiciary's expansive view of insider trading restrictions, the government's success in prosecuting expert network firms, and the government's ability to use novel investigatory techniques.

Moreover, because it restricts the transmission of truthful information, Reg FD is also problematic from a First Amendment perspective. The Court has recently held that speech restrictions cannot be justified simply because they apply to a heavily regulated area, such as securities laws. If challenged under the commercial speech doctrine, the broad prophylactic restrictions on an issuer's ability to disclose information to analysts or institutional investors would unlikely withstand First Amendment scrutiny. Further, if measured against the robust articulation of corporate political speech rights in Citizens United v. FEC, Reg FD fails miserably.

Rather than focusing on the selective disclosure by issuers and providing equal access to all investors, the SEC should refocus on the real problem of trading. Vigorous enforcement of Section 10(b) and Rule 10b-5 should provide adequate protection to investors, and should do so without restricting private speech or compelling public speech.

Disciplines

First Amendment | Law | Securities Law

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