Comment Letter on Proposed Selective Disclosure and Insider Trading Rules
1875 I Street NW, Suite 600
Washington, DC 20006
May 2, 2000
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, NW
Washington, DC 20549-6009
Re: File No. S7-31-99; Selective Disclosure and Insider Trading, Release Nos. 33-7787, 34-42259, IC-24209
Dear Mr. Katz:
The National Association of Real Estate Investment Trusts®, (NAREIT®), welcomes this opportunity to respond to the request for comments from the Securities and Exchange Commission (the Commission) on various proposals contained in the Selective Disclosure and Insider Trading Release (the Release). NAREIT is the national trade association for real estate companies. Members are real estate investment trusts (REITs) and other businesses that own, operate, and finance income-producing real estate, as well as those firms and individuals who advise, study and service those businesses. NAREIT's Government Relations Committee is pleased to provide its comments.
Quite accurately, conversations between corporate officials and analysts have been described as a "fencing match conducted on a tightrope."1 Analysts perform a crucial role in analyzing corporate data for the marketplace; however, in providing information to analysts (and to the investor community in general), corporate officers must carefully negotiate the "high wire" and avoid making disclosures that could be deemed selective disclosures of material nonpublic information. Therefore, NAREIT members welcome the SEC's guidance in this area and commend the SEC for examining this issue. We have some comments, however, regarding several of the proposals in the Release.
Person Acting on Behalf of an Issuer.
The Release concerns disclosures by "an issuer or person acting on its behalf." As currently proposed, Rule 101(c) defines a person acting on behalf as "any officer, director, employee or agent of the issuer who discloses material nonpublic information while acting within the scope of his or her authority…." Although the Release states that the intent of the rule is to make the issuer responsible only for those who are "properly authorized or designated to speak to the media, the analyst community or and/or investors," we believe that that intent, although correct, is not clear from the specific language of the proposed Rule.
We believe that the Commission should consider two alternatives to the proposed Rule. In the first alternative, the Commission should change the language of proposed Rule 101(c) to state that a person acting on behalf of an issuer is " any officer, director, employee or agent of the issuer who discloses material nonpublic information while acting within the scope of his or her authority as the issuer's spokesperson…." We believe that this will clarify the Commission's intent in proposing the Rule.
In the second alternative, we suggest that the Commission define "a person acting on behalf of an issuer" the same as "senior official" in proposed Rule 101(d)(2); that is, to limit it to "any director, any executive officer, any investor relations or public relations officer, or any other person with similar functions."
Over the years, the concept of materiality has been proven difficult, both for issuers and the Commission. The Commission, to its credit, gives issuers some guidance as to "materiality" for the purposes of proposed Regulation FD: information is material "if there is a substantial likelihood that a reasonable shareholder would consider it important in making the investment decision," or if it would have "significantly altered the 'total mix' of information available." As the litigation surrounding the evolution of these standards shows, judgments regarding materiality are extremely difficult to make. Having to make these difficult judgments in the high-pressure, real-time environment of a telephone call will only add to the difficulty of the situation.
The Commission gives issuers some helpful guidance in the Release by suggesting practices to mitigate disclosure of material information. The Commission does not, however, provide further guidance on what is "material." We believe that further guidance will be necessary to better define the boundaries of "materiality." For example, the Commission could provide Interpretive Releases, before finalization of proposed Regulation FD and similar to the helpful Interpretive Releases regarding disclosure of Y2K issues, that resolve materiality issues in a question-and-answer or hypothetical format.
"Listen Only" Access.
We believe that conference calls to which members of the press or public have "listen only" access should fulfill the "simultaneous" and "public disclosure" requirements of Rule 101(e). Such a change would not harm the public, as the public would have access to the call through either direct participation, reporting in the press, or both, and would safeguard issuers from liability.
We believe that the posting of information on an issuer's website should be sufficient to effect "public disclosure." Many investors, especially retail investors, check company websites regularly for information. Company websites can be the most up-to-date source of information about a company. Indeed, investors can learn information more quickly from a company's website than from a daily or weekly newspaper or magazine that may (or may not) publish a company's press release.
Section 5(c) Exemption.
Section 5(c) of the Securities Act seeks to avoid "gun-jumping," or conditioning of the markets for an offering by prohibiting offers for securities until a registration statement has been filed. Penalties for violating Section 5(c) are significant, in order to dissuade companies from "hyping" a prospective offering.
Even if companies take all precautions to avoid violating Section 5(c), however, compliance with proposed Regulation FD could cause REITs and other public companies to violate Section 5(c). This creates an unnecessary and overly harsh dilemma to public companies that are trying both to be responsive to investors and the analyst community and to comply with the securities laws. As the Commission notes in the Release, "A company may find itself in the position of being required by Regulation FD to disclose to the public information which could constitute an 'offer' of its securities prior to the filing of a registration statement, contrary to Section 5(c)." As the release notes, violation of Section 5(c) could "…subject [the company] to liability under Section 12(a)(1) if it proceeds with its offering. The public disclosure also could constitute a general solicitation and therefore preclude the company from undertaking a private exempt offering."
Forcing any company to comply with Regulation FD by disclosing information to the public which results in a violation of the securities laws is unjust, particularly when viewed as a remedy in the context of an unintentional disclosure. Forcing a REIT to make a public disclosure is particularly draconian when you consider the need that many REITs must be continuously engaged in the registration process due to the unique nature of their structure.
REITs using the Umbrella Partnership REIT (UPREIT) structure own interests in, and assets through, Operating Partnerships which issue Operating Partnership Units (OP Units). OP Units are issued in connection with preformation transactions in anticipation of REIT IPOs. In addition, REITs often acquire real estate by exchanging REIT shares or OP Units for the interests in the real estate. OP Units are generally exchangeable for REIT shares or cash after a specified "lockup" period. REITs generally register either the issuance of the REIT shares for the exchange of OP Units or the resale of the REIT shares following the exchange. Because these OP Units are given throughout the year, and therefore are exchangeable for REIT shares throughout the year, many REITs face registration (and potential gun-jumping issues) periodically throughout the year. Accordingly, REITs are obligated to register their OP Units or REIT shares periodically throughout the year and cannot determine to simply postpone these offerings so as to avoid Section 5(c) violations if they have been forced to make public disclosure of information because of requirements under Regulation FD.
New proposed Rule 181 would permit public disclosures to be made under proposed Regulation FD without violating Section 5(b)(1) of the Securities Act. We strongly believe that issuers making disclosures under Regulation FD also should be protected from violations of Section 5(c) of the Securities Act. The penalties for violating Section 5(c) are simply too harsh a price to pay for an inadvertent slip of the tongue or mistaken disclosure.
The Commission, rightly so, wants to avoid creating a loophole that would allow issuers to "hype" an offering before filing a registration statement. But not all disclosures made under Regulation FD will be made with the intent to "hype" a prospective offering. Companies should be protected unless they intend the disclosure to "hype" an offering. We believe that the Commission should craft a rule that is narrowly tailored to dissuade intentional "hyping" of an offering before filing of a registration statement. Nothing less than a narrowly tailored, stringent standard will protect innocent, well-meaning issuers from innocent mistakes or slips of the tongue.
Costs of Proposed Regulation FD.
We would like to note that some of the methods suggested by the Commission to effect public disclosure, such as simultaneous website broadcasts, are quite costly, especially for smaller issuers. In addition, implementation of Regulation FD may cause issuers to incur higher costs because issuers may have to add more personnel (namely, attorneys) to each conference call and invest in new technologies (for example recording equipment, transcription services, website upgrades) to comply with Regulation FD.
We share the Commission's goal of an open and transparent marketplace and commend the Commission for examining the problems behind selective disclosure. We believe, however, the proposals as contained in the Release could be modified to better meet the Commission and NAREIT's goals while protecting well-meaning, innocent issuers.
Please contact me or Anna Chason, NAREIT's Public Affairs Counsel, at (202) 739-9400 with any questions.
Tony M. Edwards
Senior Vice President and General Counsel
National Association of Real Estate Investment Trusts
1 SEC v. Bausch & Lomb, Inc. 565 F2d 8, 9 (2d Cir. 1977).