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The globalization of the market for securities has a persistent way of straining the traditional rationales for securities regulation. At the same time, the choices it forces upon us create the opportunity to better test empirically the desirability of the regulations being imposed. Regulation FD, which stands for "fair disclosure," is the most recent example where these twin effects of globalization arise. Regulation FD is arguably the most important change to the U.S. disclosure regime since the adoption of integrated disclosure almost two decades ago. Regulation FD is intended to stop the practice of "selective disclosure," whereby an issuer withholds material information from the general public but furnishes it selectively to certain outsiders such as analysts, institutional investors or shareholders likely to trade on the information. Regulation FD provides that where the disclosure of material information to such outsiders is intentional, the issuer must simultaneously make the information available to the general public, and where it is unintentional, the issuer must make the information publicly available promptly thereafter.

The Securities and Exchange Commission (SEC) initially proposed to have Regulation FD cover all Securities Exchange Act of 1934 ( the "Exchange Act") reporting issuers, foreign as well as domestic, thus including essentially all of the approximately 850 foreign issuers now listed on a U.S. exchange or NASDAQ. In its release adopting the final version of the regulation, however, the SEC stated that it had determined to exempt foreign issuers "at this time" from Regulation FD. Globalization creates strains because the SEC cannot properly answer this question of whether to exempt foreign issuers without being forced to choose between security regulation's two traditional rationales: investor protection and economic efficiency.8 In the purely domestic context, these rationales have coexisted relatively compatibly and have been used jointly to justify much of securities regulation. They have opposite implications, however, as to whether Regulation FD's ban on selective disclosure should apply to foreign issuers listed in the United States.

The fact that many foreign issuers are now listed in the United States also creates opportunities, however. The imposition of a new disclosure-oriented regulation on U.S., but not foreign, issuers creates the basis for a natural experiment, involving the comparison of two large sets of issuers continuing to trade in the same market, to test whether the reform in fact enhances the amount of meaningful information disclosed by the set of issuers to which it has been applied.


Law | Securities Law