US clampdown on information leaks

The Securities and Exchange Commission (SEC) has agreed a clampdown on US companies leaking market-sensitive information to analysts and brokers before the public.

The SEC yesterday approved a fair disclosure rule requiring companies to release "material" information to the public at the same time as issuing it to Wall Street professionals.

The move follows a long campaign by private investors, backed by Mr Arthur Levitt, the SEC chairman, who has called the culture of leaks between companies and Wall Street analysts a "stain on our markets".

The SEC said companies must give information to the public by issuing a press release and filing it with the SEC in addition to any Internet announcement.

"If investors see a stock's price change dramatically but are given access to critical market-moving information only much later, we risk nothing less than the public's faith and confidence in America's capital markets," Mr Levitt said yesterday.

"To all of America's investors, it's well past time to say `welcome to the neighbourhood'."

The rule, known as Regulation Fair Disclosure (Reg FD), was approved 3-to-1 by the SEC's commissioners. It is expected to take effect in the next few months and will apply to a range of information.

It will include company earnings, warnings, tender offers, changes in management, developments with suppliers, and stock splits and changes in dividend policies. The rule does not apply to foreign companies also listed in the US.

"A web site disclosure by an issuer won't be an adequate means of distributing information," said Mr Steve Cutler, director of enforcement at the SEC. He added that web announcements should be used in combination with more standard disclosure methods such as press releases.

However, there are exceptions to the new regulation, including narrowing its scope to exclude "ordinary-course business communications with customers and suppliers". In addition, it does not apply to company conversations with the press and ratings agencies. It does not give private parties such as shareholders a right to sue a company.

The SEC will be the only body able to act against violations of the rules. Companies breaching the regulation actions face a range of monetary penalties of up to $5,000 or "many multiples of that" depending on the number of violations.

The rule is opposed by the Securities Industry Association (SIA), the leading trade group, which called it "unacceptable". It has argued that controlling selective discussions with analysts will lead to less information in the hands of the public rather than more.

"Although we appreciate the SEC's recent efforts to address some of the industry's concerns by modifying sections of the regulation and allowing for exemptions, we still find Reg FD to be unacceptable," said Mr Stuart Kaswell, SIA senior vice-president and general counsel.

"The changes do not address our fundamental concern, that analysts should be allowed to ferret out information on behalf of investors."

An original draft of the rule was widely criticised as being too broadly defined.