Disclosure Of Material Information Research Articles

Regulation FD: A Review and Synthesis of the Academic Literature

SYNOPSIS: We summarize the empirical evidence regarding Regulation Fair Disclosure (FD) to gauge whether the regulation achieves its stated objectives and to provide insights and direction for future research. Overall, we find that FD's prohibition against the selective disclosure of material information eliminates the information advantage enjoyed by certain investors and analysts and thereby provides a more level playing field for all investors. In addition, a number of firms respond to FD by expanding public disclosures, and the information environment of the average firm does not appear to be adversely affected. However, we find that an unintended consequence of FD is a reduction in the total amount of information available in the market (i.e., a “chilling effect”) for small or high-technology firms. Finally, ongoing research suggests that private access to management continues to provide select analysts or investors with non-material information used to complete the “mosaic” of information.

Regulation FD: A Review and Synthesis of the Academic Literature

We summarize the empirical evidence regarding Regulation Fair Disclosure (FD) to gauge whether the regulation achieves its stated objectives and to provide insights and direction for future research. Overall, we find that FD’s prohibition against the selective disclosure of material information eliminates the information advantage enjoyed by certain investors and analysts and thereby provides a more level playing field for all investors. In addition, a number of firms respond to FD by expanding public disclosures and the information environment of the average firm does not appear to be adversely affected. However, we find that an unintended consequence of FD is a reduction in the total amount of information available in the market (i.e., a “chilling effect”) for small or high-technology firms. Finally, ongoing research suggests that private access to management continues to provide select analysts or investors with non-material information used to complete the “mosaic” of information.

Informed Consent and Fresh Egg Donation for Stem Cell Research

This article develops a model of informed consent for fresh oöcyte donation for stem cell research, during in vitro fertilisation (IVF), by building on the importance of patients' embodied experience. Informed consent typically focuses on the disclosure of material information. Yet this approach does not incorporate the embodied knowledge that patients acquire through lived experience. Drawing on interview data from 35 patients and health professionals in an IVF clinic in Australia, our study demonstrates the uncertainty of IVF treatment, and the tendency for patients to overestimate their chances of success prior to the experience of treatment. Once in active treatment, however, patients identify their oöcytes as both precious and precarious. We argue that it is necessary to formally include embodied experience as a source of knowledge in informed consent procedures, both for gratuitous donation and for egg-sharing regimes. We recommend that at least one full cycle of IVF be completed before approaching women to divert eggs away from their own fertility treatment.

‘ASIC’s Forward Agenda’ – The Australian Corporate Regulator’s Approach to Timely Disclosure by Listed Companies

The initial phrase of the title for this paper was borrowed from a speech delivered by Tony D’Aloisio, Chairman, Australian Securities and Investments Commission (ASIC), in September 2010. The Chairman stated The first point I will make about ASIC’s forward agenda for the next couple of years is that, for the most part, we will continue to do what we have been doing because it has been working well. ASIC is a regulatory oversight body and not a guarantor against risk and corporate failure. The regulator’s objective is to exercise its powers to improve the performance of the financial system and the entities within the system in the interests of commercial certainty and development of the economy. An important role is to efficiently process the information it receives under its powers and to promote informed participation by investors in the financial system. On 15 July 2011, Australia will mark the tenth anniversary of the Corporations Act 2001 (Cth) and the formation of ASIC under companion legislation. Reflecting the theme of the conference, this paper will review the regulator’s ‘past experience’ in enforcing timely (or continuous) corporate disclosure and, more particularly, the contribution of this experience to the regulator’s ‘forward agenda’? The Chairman acknowledges that ASIC has given ‘much thought to how the Australian market might evolve’. In the past year that evolution has witnessed the transfer of supervisory responsibilities for licensed equity and derivatives markets from the Australian Securities Exchange (ASX) to ASIC; the introduction of ‘market integrity’ rules directed at insider trading and market manipulation; potential Government support for competitive market trading of listed shares in Australia, and even the merger of ASX with another stock exchange. All of these issues can affect corporate disclosure. ASIC is also a party to continuous disclosure issues that are currently before the courts with the ongoing James Hardie and Fortescue cases. Consistent with the theme of the conference, the paper will endeavour to deduce the regulator’s present position on continuous disclosure and ASIC’s future agenda for enforcing the timely disclosure of material information by listed companies.

Examining Timely Disclosure of Material Information and the Privacy Concerns of Executive Officers

On January 20, 1993, Michael Walsh, the former Chairman and CEO of Tenneco revealed to the public that he had brain cancer. This type of disclosure of health issues are arguably serious enough to affect Wall Street. Other company officials have previously made similar disclosures such as Hugh Martin, CEO of Pacific Biosciences, who in October 2010 disclosed to his employees that he had cancer of the Blood (multiple myeloma), and Harry J. Pearce, the Vice President of General Motors, who disclosed in 2001 that he had leukemia. The above public disclosures are however more the exceptions than the rule. When a CEO becomes ill, most public companies usually respond by keeping the full details of the illness a secret without violation of Securities Laws. The concern of these companies is that investors would abandon ship and that stock prices would decline if this information gets to the market. Classic examples are Apple Inc., and Sara Lee. The Securities and Exchange Commission (SEC) rules seem to be silent on such situations. The Securities Act of 1933 and the Securities and Exchange Commission Act of 1934 require companies with publicly traded securities to make fair, timely disclosures of material information to the investing public.The question therefore remains whether the health situation of an executive officer of a company is material information within the contemplation of the SEC rules that must be disclosed. If answered in the affirmative, then to what extent do executive officers have a right to privacy? If this information is not material information that is subject to disclosure, should the company in the absence of specific SEC rules, disclose facts about the illness of executives as a matter of good corporate governance. This paper will look at the position of the securities laws with regard to the duty to disclose and some of the arguments in support of material disclosure of the health of executive officers. This paper will also examine some of the opposing arguments and criticism about additional disclosures, which are mostly based on privacy-related statutes, absence of specific SEC rules for such situations, and the burden that such a requirement might place on companies. The paper will also attempt to strike a balance between the need to provide material information that may influence the investment decision of shareholders, and the need for the protection of the right to privacy of executive officers of a company.

The spillover effect of disclosure rules and materiality thresholds: Evidence from profit warnings issued in Hong Kong market

Dual-listed firms simultaneously follow the relevant rules in their home country and in their cross-listed country. In contrast, other firms only listed in the cross-listed country are only subject to the local regulations. Previous literature has found evidence that cross-listing can improve firms’ information transparency because of more stringent listing rules in the cross-listed country. The existing research, however, has not paid enough attention to the potential influence of dual-listed firms and their home country institutional factors (e.g. unique disclosure policies) on other firms only listed in the cross-listed country (i.e. spillover effect). In the Hong Kong market, Chinese dual-listed firms are under the mandatory profit warning regulation of mainland China, but other firms listed only in Hong Kong only need to follow the voluntary disclosure rule of the Hong Kong Stock Exchange. Such a setting provides us with the opportunity to investigate a spillover effect, i.e. whether these Chinese dual-listed firms influence their peers only listed in Hong Kong to release profit warnings. We find that firms only listed in Hong Kong are more likely to issue profit warnings if their Chinese dual-listed peers have also issued warnings. We further find that this spillover effect increases with the market capitalization of Chinese dual-listed firms and increases with the market share of these firms before they dominate the industry. Lastly, due to an underlying duty to disclose material information in Hong Kong, the spillover effect is weaker for firms with large earnings surprises.

Second Circuit rules securities fraud claim of mutual fund shareholders relating to affiliated transfer agent arrangements may proceed, but upholds dismissal of breach of fiduciary duty claim

PurposeThe purpose of this paper is to explain a February 2010 US Second Circuit Court decision in Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Management LLC that supported fund investor plaintiffs who alleged that fund advisors accepted undisclosed compensation from a transfer agent to the funds, but affirmed a district court dismissal of a shareholder claim alleging breach of fiduciary duty under Section 36(b) of the Investment Company Act of 1940.Design/methodology/approachThe paper explains the background to the Second Circuit Court decision, including the advisors' hiring of a transfer agent, the advisors' creation of their own shareholder affiliate, the advisors' alleged concealing from shareholders of critical aspects of the new transfer agent affiliate's subcontracting arrangements with original transfer agent, and the earlier District Court decision.FindingsThe Court's opinion emphasized the fiduciary duty and disclosure obligations of investment advisers to mutual funds, noting that CAM, acting through SBFM, owed a “duty of ‘uncompromising fidelity’ and ‘undivided loyalty’ to Funds' shareholders.” The Court agreed with the district court that Section 36(b) does not permit the plaintiffs to seek damages that “inure to their own benefit and not to the Funds'”. As a result, the Court affirmed the District Court's holding that the Section 36(b) claim must be brought derivatively.Practical implicationsThis case is a reminder that when proposing to provide a service “in‐house” a fund adviser should have a solid business rationale for doing so and should engage in a full dialogue with the fund's board regarding the proposal. Failure to disclose material information regarding such an arrangement could be significant in the context of a Section 36(b) claim, as well as a claim under the Securities Act of 1933 or the Securities Exchange Act of 1934.Originality/valueThe paper provides practical guidance from experienced financial services lawyers.

The joint effects of materiality thresholds and voluntary disclosure incentives on firms’ disclosure decisions

Under GAAP, SEC and exchange listing rules, managers must disclose material information. We construct a disclosure specification incorporating managers’ obligation to disclose material information and voluntary disclosure incentives. We demonstrate that tests of the incentives to voluntarily disclose information must recognize such information is often disclosed because of an underlying duty to disclose. Our empirical tests isolating the impact of materiality on firms’ disclosures have greater explanatory power over empirical tests that do not. Voluntary disclosure incentives better explain disclosure when the information is less likely to be material. Tests of voluntary disclosure theories ignoring materiality likely lead to incorrect inferences.

Summary of selected FINRA Regulatory Notices, April‐June 2009

PurposeThe purpose of this summary is to provide excerpts of selected Financial Industry Regulatory Authority (FINRA) Regulatory Notices and Disciplinary Actions issued from April to June 2009 and a sample of disciplinary actions during that period.Design/methodology/approachThe paper provides excerpts from Regulatory Notice 09‐22, Personal Securities Transactions; 09‐25, Suitability and “Know Your Customer”; 09‐27, Member Public Offerings; 09‐30, Credit Default Swaps; 09‐34, Investment Company Securities; 09‐35, Municipal Securities.FindingsNotice 09‐22: Sound supervisory practices require that a member firm monitor personal securities transactions outside of the firm by or for its associated persons. Notice 09‐25: Suitability obligations and know‐your customer obligations are critical to protecting investors. Notice 09‐27: The offering of securities by a member firm or a control entity of the firm in a private placement raises conflicts of interest and has been an area of regulatory concern in recent years. Notice 09‐30: Regulatory authorities are adopting measures to address system risk arising from credit default swaps (CDS), including risks to the financial system arising from the lack of a central clearing counterparty to clear and settle CDS; the SEC has approved a rule establishing an interim pilot program on margin requirements for CDS transactions. Notice 09‐34: As part of the process to develop a new consolidated rulebook, FINRA is requesting comment on a proposed rule regarding the distribution and sale of investment company securities. Notice 09‐35: FINRA recommends that firms engaged in municipal securities business review and, if necessary, modify their policies and procedures in light of changes to the Municipal Securities Rulemaking Board's (MSRB) Electronic Municipal Market Access system (EMMA) that take effect July 1, 2009, and changes to MSRB rules that went into effect June 1, 2009. FINRA also encourages firms to review the overall adequacy and effectiveness of their current policies and procedures for municipal securities activities generally, particularly those relating to the disclosure of material information, the suitability of recommendations to retail customers, and the general supervision of their municipal securities activities.Originality/valueThese are direct excerpts designed to provide a useful digest for the reader and an indication of regulatory trends. The FINRA staff is aware of this summary but has neither reviewed nor edited it. For further detail as well as other useful information, the reader should visit www.finra.org

Should the Lawyer's Duty to Keep Confidences Override the Duty to Disclose Material Information to a Client?

The approach taken by New Zealand and England with regards to the duties of lawyers of confidentiality and disclosure is discussed. Professional rules should recognize a strong duty of disclosure that is not subordinate to the duty to preserve confidences.

Do Firms’ Nonfinancial Disclosures Enhance the Value of Analyst Services?*

Regulation FD recommends press releases as a primary avenue for timely disclosure of material information to market participants. Firms commonly issue product‐related and business expansion information through press releases, yet no study examines how analysts respond to these information events. We find that forecasting activity nearly doubles at the disclosure date, and that forecasts associated with these disclosures become more accurate and less dispersed across analysts. Finally, in short windows around the disclosure date, the market’s reaction is concentrated at the date of the subsequent forecast revision. Overall, our results suggest that nonfinancial disclosures improve the quality and quantity of information in capital markets and appear to enhance the value of analysts’ services, even though the information is made widely available to all market participants at the time the firm makes the disclosure. * We thank B. Ayers, L. Bamber, L. Brown, J. Hales, M. Venkatachalam and participants at the

The Joint Effects of Materiality Thresholds and Voluntary Disclosure Incentives on Firms' Disclosure Decisions

Under GAAP, SEC and exchange-listing rules, managers must disclose material information. We construct a disclosure specification incorporating managers’ obligation to disclose material information and voluntary disclosure incentives. We demonstrate that tests of the incentives to voluntarily disclose information must recognize such information is often disclosed because of an underlying duty to disclose. Our empirical tests isolating the impact of materiality on firms’ disclosures have greater explanatory power over empirical tests that do not. Voluntary disclosure incentives better explain disclosure when the information is less likely to be material. Tests of voluntary disclosure theories ignoring materiality likely lead to incorrect inferences.

An inconsistency in SEC disclosure requirements? The case of the “insignificant” private target

Although the SEC's main charge is to ensure the disclosure of material information, it has not always consistently defined materiality. We show that acquisitions of privately-held targets classified as “insignificant” by the SEC appreciably affect market prices, and therefore are material by the SEC's definition. We find significant returns in transactions with targets as small as 2% – compared with the SEC's disclosure threshold of 20% – of the acquirer. Further, an average of 19 undisclosed private acquisitions per year exceed the median IPO value in the same year for our sample period. However, because the SEC deems these transactions insignificant, information like target financial statements remains undisclosed to the market. Disclosure rules regarding target financial statements thus create a regulatory disconnect, in which information that is material is nevertheless deemed “insignificant” and therefore not disclosed.

Misleading Disclosure of Material Information: Negligence vs. Strict Standards of Liability

The article addresses the role of civil liability in the general system of disclosure to the stock market. Civil liability has an important role in fostering enforcement and avoid capturing of regulating agencies. However, the way civil liability is structured creates several distortions. The analysis made by the author leads him to conclude that there are several reasons to prefer a duty-based regime of liability in regulating the liability of issuers for disclosing misleading information. A duty-based regime encourages the introduction of efficient preventive measures at a firm-level, allows a quicker detection of misconduct and diminishes conflicts of interests between legal counsels and issuers. Moreover, it favors a longer commitment of investors to the firm.

The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry

AbstractIn October 2000, the Securities and Exchange Commission (SEC) passed Regulation Fair Disclosure (FD) in an effort to reduce selective disclosure of material information by firms to analysts and other investment professionals. We find that the information asymmetry reflected in trading costs at earnings announcements has declined after Regulation FD, with the decrease more pronounced for smaller and less liquid stocks. Return volatility around mandatory announcements is also lower but overall information flow is unchanged when mandatory and voluntary announcements are combined. Thus, the SEC appears to have diminished the advantage of informed investors, without increasing volatility.

Informed consent and surgeons' performance.

This paper argues that the provision of effective informed consent by surgical patients requires the disclosure of material information about the comparative clinical performance of available surgeons. We develop a new ethical argument for the conclusion that comparative information about surgeons' performance--surgeons' report cards--should be provided to patients, a conclusion that has already been supported by legal and economic arguments. We consider some recent institutional and legal developments in this area, and we respond to some common objections to the use of report cards on the clinical performance of surgeons.

Regulation Fair Disclosure, Analyst Following, and Analyst Forecast Dispersion

This paper presents preliminary evidence of the effect of Regulation Fair Disclosure (FD) on the quantity and quality of firm-specific information released to the market by comparing analyst forecast data from pre-FD to post-FD time periods. By prohibiting selective disclosure of material information to privileged individuals, the Securities and Exchange Commission intends to provide a level playing field to all investors. However, opponents argue that FD has a negative impact by decreasing the quantity and quality of publicly available information. Consistent with this argument, we document a decrease in analyst following and an increase in forecast dispersion following the passage of FD.

SEC Enforcement of the Rule 10b-5 Duty to Disclose Material Information: Remedies and the Texas Gulf Sulphur Case

SEC Enforcement of the Rule 10b-5 Duty to Disclose Material Information: Remedies and the Texas Gulf Sulphur Case