The SEC’s Quest for Informational Symmetry

Should large institutional investors be allowed to have better access to information than small individual investors? This vexing but longstanding policy question has re-emerged in the wake of news that certain large investors received advance warnings about Facebook’s dimming prospects ahead of the company’s initial public offering. As a matter of formal law, the answer is “no;” companies are not allowed to provide institutional investors with better access to information. Under its Regulation Fair Disclosure (Regulation FD), the Securities and Exchange Commission (SEC) requires public disclosure of all material information. It further requires that the disclosure of material information to any one party be simultaneously or promptly followed by public disclosure. In a recent paper, University of Pennsylvania Law School Professor Jill Fisch argues that Regulation FD “should be understood as successful” in curbing selective disclosure. She concludes that Regulation FD has reduced information asymmetry in the market without resulting in meaningfully less disclosure, as many had feared. She attributes the regulation’s impact to the SEC’s careful approach to enforcement, an approach that appears “designed less to punish wrongdoers than to announce generally applicable standards of conduct and to expose areas of ongoing regulatory concern.” Fisch argues that this approach has encouraged companies to develop meaningful compliance and education programs. After extensively reviewing the history of the rule and the empirical research on its impact over the last decade, Fisch notes that “[t]he mixed results of [the] research makes it difficult . . . to draw definitive conclusions about the effects of the regulation.” Although initial reactions were “highly critical,” with companies voicing concerns that the rule would chill disclosure and increase compliance costs, one empirical study has found “no evidence that Regulation FD impaired the quality and quantity of investors’ information.” Another study suggests that Regulation FD has benefited the market by reducing information asymmetry. Fisch observes that other studies seem to show reduced level of overall disclosure by public companies and a pattern of some persistent information asymmetries. Those studies conclude that Regulation FD has led to reduced level of accuracy in analyst forecasts due to less informal information being available to market analysts. In all, Fisch lauds the SEC for encouraging public companies to take their equal disclosure mandate seriously and to put in structural fixes for compliance. Further, she writes that the SEC has produced effective guidance for law-abiding companies through its enforcement decisions. Going forward, she suggests that the SEC should continue to refine its approach to Regulation FD to respond to issues of unequal disclosure arising from private meetings and new technological developments. Fisch’s paper will be published as chapter in a forthcoming book, Insider Trading Research Handbook