Insider trading and disclosure: requirements for disclosure

In My Humble Opinion
1

At least in the US, the thing with Insider Trading is generally that if you have “Insider Information” on certain stocks, then you are legally required to refrain from trading those stocks or else disclose the information. How hard do you have to try in terms of the disclosure?

(hypothetical)

“I have insider information on IBM indicating that it’s stock is likely to go way up next week after the announcement of the merger. I want to trade now, but would need to disclose it. I think I will write out the information in Egyptian Hieroglyphics and post it on a community bulletin board in Pennsylvania Amish Country, wait 5 minutes, then call my broker. It’ll probably be a few hours before someone realizes the significance of the document - most people will think it was posted by drunk college students or something. Or, perhaps I should compose my disclosure in English, but mess up the spelling and grammar so that it is readable, but sounds like that Time Cube guy and then make the disclosure during a battle in World of Warcraft, hoping people will think that my message is unreliable because I am insane. Or, maybe inscribe it on a brick in Babylonian Cuneiform and throw it by the side of a rural road in Montana. That’s public property - how can that not constitute disclosure? If investors are so smug that they decide not to scour rural roads for stock info, why is that my fault?”

Are there actual rules that define how you must make the disclosure (e.g. a subjective ‘reasonableness’ test that depends on the judge or jury you get, perhaps you have to publish in a general circulation periodical (e.g. the New York Times or Newsweek, not the East Lake High School Monthly Faculty Bulletin, Go Sharks!, etc.). Are you required to wait a certain amount of time after ‘disclosing’, and if so, is it based on a test of reasonableness, or is there a hard and fast time (e.g. 1 hour, 2 hours, 72 hours, etc.)

2

Half educated guess:
I’m pretty sure posting it on 4chan /s/ won’t do.

When you’re an insider, there’s a form you have to fill out when trading the financial instruments to which you’re an insider. Perhaps it’s in that form or one which accompanies it that you’re supposed to disclose the information which leads you to trade.

You might ask, what if you’re a non obvious insider* and you trade base on the information? It’s likely that you then have to fill out the form anyway. How risky is it to trade based on the information without disclosing it when you’re a non obvious insider? Not very, it seems.

  • By which I mean someone who is not part of the corporation but got a hold of the insider information anyway, like a consultant, lawyer or friend of an executive.
3

http://www.sec.gov/rules/final/33-7881.htm
Surely this misses some important points on disclosure regulations but if you want a detailed analysis, IAAL and I charge 180$ an hour : )
a. Form 8-K Disclosure

Commenters generally opposed the proposed new Item 10 of Form 8-K based, in large part, on a concern that people would construe a separate Item 10 filing as an admission that the disclosed information is material.65 In light of the timing requirements for making materiality judgments under Regulation FD, commenters wanted to be able to err on the side of filing information that may or may not be material, without precluding a later conclusion that the information was not material. Commenters recommended amending Item 5 of Form 8-K to include required Regulation FD disclosures.66 Some commenters also suggested that Regulation FD submissions on Form 8-K should not be treated as “filed” for purposes of the Exchange Act.

In light of these comments, we provide that either filing or furnishing information on Form 8-K solely to satisfy Regulation FD will not, by itself, be deemed an admission as to the materiality of the information. In addition, while we retain a separate Item, we also are modifying Item 5 of Form 8-K to address commenters’ concerns. As revised, issuers may choose either to “file” a report under Item 5 of Form 8-K or to “furnish” a report under Item 9 of Form 8-K that will not be deemed “filed.” If an issuer chooses to file the information on Form 8-K,67 the information will be subject to liability under Section 18 of the Exchange Act. The information also will be subject to automatic incorporation by reference into the issuer’s Securities Act registration statements, which are subject to liability under Sections 11 and 12(a)(2) of the Securities Act. If an issuer chooses instead to furnish the information,68 it will not be subject to liability under Section 11 of the Securities Act or Section 18 of the Exchange Act for the disclosure, unless it takes steps to include that disclosure in a filed report, proxy statement, or registration statement. All disclosures on Form 8-K, whether filed or furnished, will remain subject to the antifraud provisions of the federal securities laws.

b. Alternative Methods of Public Disclosure

We are recognizing alternative methods of public disclosure to give issuers the flexibility to choose another method (or a combination of methods) of disclosure that will achieve the goal of effecting broad, non-exclusionary distribution of information to the public.69

As a general matter, acceptable methods of public disclosure for purposes of Regulation FD will include press releases distributed through a widely circulated news or wire service, or announcements made through press conferences or conference calls that interested members of the public may attend or listen to either in person, by telephonic transmission, or by other electronic transmission (including use of the Internet). The public must be given adequate notice of the conference or call and the means for accessing it. The regulation does not require use of a particular method, or establish a “one size fits all” standard for disclosure; rather, it leaves the decision to the issuer to choose methods that are reasonably calculated to make effective, broad, and non-exclusionary public disclosure, given the particular circumstances of that issuer. Indeed, we have modified the language of the regulation to note that the issuer may use a method “or combination of methods” of disclosure, in recognition of the fact that it may not always be possible or desirable for an issuer to rely on a single method of disclosure as reasonably designed to effect broad public disclosure.

We believe that issuers could use the following model, which employs a combination of methods of disclosure, for making a planned disclosure of material information, such as a scheduled earnings release:
First, issue a press release, distributed through regular channels, containing the information;70

Second, provide adequate notice, by a press release and/or website posting, of a scheduled conference call to discuss the announced results, giving investors both the time and date of the conference call, and instructions on how to access the call; and

Third, hold the conference call in an open manner, permitting investors to listen in either by telephonic means or through Internet webcasting.71