Chamber of Commerce Supports Challenge to SEC 'Fair Disclosure' Rule

In the first contested action over the Securities and Exchange Commission's fair-disclosure rule, the U.S. Chamber of Commerce has submitted an amicus brief contending the agency did not have the authority to require the across-the-board release of information by public companies.

The nation's largest federation of businesses also says the SEC's enforcement action against Siebel Systems Inc. should be dismissed because Regulation FD is an infringement on First Amendment rights.

"At its essence, Regulation FD requires corporate executives either to share their material business information with no one, so as to avoid triggering the disclosure requirement, or to share it with everyone," the Chamber wrote. "In either case, Regulation FD impermissibly violates corporate executives' right to freedom of expression and association."

The SEC enacted Regulation FD in October 2000 to prevent corporations from disclosing market-moving information to analysts or fund managers prior to its dissemination to the investing public. The rule was designed to level the playing field between analysts and investors and reduce analyst influence on stock-market fluctuations.

The rule was also expected to help curb insider trading and was supported by investor advocates such as former SEC chairman Arthur Levitt. The regulation was opposed by broker-dealers and other business interests that said it would chill the flow of information in the marketplace.

The action in Manhattan federal court against Siebel, a business-software company, stemmed from remarks made by its CEO at an invitation-only dinner in April 2003 hosted by Morgan Stanley & Co. Also named in the suit are CFO Kenneth Goldman and Mark Hanson, former director of investor relations.

This is the second time Siebel allegedly violated Regulation FD. In November 2002 the SEC issued a cease-and-desist order and imposed a $250,000 civil penalty against the company for statements made at an invitation-only conference sponsored by Goldman Sachs.

In its motion to dismiss, Siebel says the SEC exceeded its authority in enacting the rule, which is overbroad and constitutionally suspect. Siebel and the SEC also dispute whether the statements made at the April 2003 meeting were material or whether the information had already been disclosed.

In response to the constitutional challenge, the SEC says Regulation FD does not violate the First Amendment as it "is not content-based and regulates only the manner in which speech is disseminated."

The rule was implemented under the financial reporting provisions of Section 13(a) of the Securities Exchange Act, and the agency contends the regulation fulfills its congressional mandate to protect investors and ensure fair dealing in publicly traded securities.

In its amicus brief, the Chamber of Commerce says Section 13(a) only addresses the SEC's ability to impose reporting requirements in annually and quarterly reports, or registration statements.

"That Section 13(a) is directed at information submitted to a government agency, while Regulation FD is aimed at disclosure to the public (whether or not the SEC is informed), underscores the vast difference between the statute and the regulation," the Chamber says.

As the regulation applies to any information deemed "material" by the agency, the Chamber says it "created enormous uncertainty in the business community and effectively vests the SEC with the power of selective enforcement."

"Such a wholesale alteration of the securities laws is a major policy decision properly made by Congress, not the SEC," the Chamber says.