Since the Allen Committee's 1997 report, the prevalence of selective disclosure — sharing specific information with certain market participants — has been of increasing concern to the securities regulatory authorities in Canada and the US. Public companies engage in selective disclosure when discussing corporate affairs during closed conference calls with analysts or by providing material to large investors which is not released publicly. Aside from unfairness in the marketplace, this practice can also violate public company disclosure requirements and insider trading prohibitions through tipping.
SEC Chairman Arthur Levitt has described selective disclosure as a "stain" on Wall Street's integrity — the SEC recently proposed rules to ban selective disclosure (Regulation FD) and tighten definitions of insider trading. The Ontario Securities Commission (OSC) has also weighed in by suggesting that sometimes the relationship between public companies and analysts and large investors "becomes too friendly.
The Continuous Disclosure Team of the Corporate Finance Branch of the OSC recently reported the results of a disclosure survey to 400 public companies to gather information on the corporate disclosure policies and practices of Canadian companies. Remarkably, 81% of the respondents continue to have one-on-one meetings with analysts and 27% of respondents do not have have a black-out period prior to scheduled earnings releases. Only 19% of the respondents broadcast their quarterly conference calls by the internet or other means. Totally open conference calls which allow participants to listen in, coupled with continuous playback and internet broadcasts, ensure that prohibited selective disclosure does not occur.
While the OSC is in the process of analysing the survey results and determining what follow-up action is necessary, public companies would be well advised to file news releases when appropriate and to follow best practices to avoid inadvertently violating the Securities Act by selectively disclosing material changes and material facts. Nicholas Dietrich
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