Paper Y'ample: Eradicating Selective Communication of Information

Published: 2022-12-27
Paper Y'ample: Eradicating Selective Communication of Information
Type of paper:  Report
Categories:  Business ethics Business law Marketing plan Business communication
Pages: 7
Wordcount: 1721 words
15 min read

Regulation Fair Disclosure formerly known as Regulation FD or Reg FD is a decree that was endorsed by the United States Securities and Exchange Commission in August 2000. The legislation was aimed at eradicating selective communication of information whereby some stakeholders usually large investors, obtained market information before the other shareholders and authorized to transact businesses with that knowledge. Under the directive, selective disclosure can be made provided that the organization acquires a secrecy understanding from the opposite number. The agreement does not have to incorporate a pledge not to take advantage of the information. The regulation's main aim was to clamp down on particular information used for insider trading since and come up with stringent measures and fines for any companies and individuals found guilty of circumventing the directives stated.

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According to (Armour et al. 185), the Regulation stated that the directive did not apply to disclosures of essential insights to people who were limited by their obligations of surety or confidence not to share any information for trading. Additionally, people such as investment bankers, attorneys, and accountants were categorically listed as individuals who might take advantage of the information they handle that would make them temporary insiders. On April 2013, the Securities Exchange ruled that firms can utilize social networks to distribute data if specific provisions are met. In regards to company web pages, stakeholders' access to the preferred social networking site should not be confined and they ought to be informed which social channel will be deployed to share the information.

Reg FD has divided opinion across the world. Its proponents have debated that the selective disclosure Reg FD proscribes has several adverse effects. First and foremost is that the disclosure gives the experts motivation to positively create partiality in their views to have control over the information. Selective disclosure also gives rise to the possibility for the professionals chosen clientele to benefit from trading profits at the cost of unknowing stakeholders which might be viewed as dishonest (Petacchi 138). Moreover, it has been identified that selective disclosure can cause a reduction in liquidity and enlarge the organizations' cost of capital when the disparity of information goes up.

Latter-day research has however delved into how working capital, shareholder value volatility and the authenticity of earnings prognosis have changed after Reg FD. These studies have concluded that Reg FD adverse effects have been blown out of proportion. Regulation FD has been very efficient in enhancing liquidity in the sense that narrower spreads and broader depths are witnessed. Regulations FD have also been vital in reducing the irregularity of information in the days leading up to the release of organizations' earnings and the days that follow after. Retail trading has also been on the rise in subsequent days after the publication of earnings information while institutional stakeholders trade substantially less in the course of the preannouncement duration post-FD (Petacchi 150). Besides, there has been a considerable drop in information inequality during the preannouncement interval which is firmly connected with lower institutional dealing. Increased involvement of retail investors following announcements in the post-FD eon has resulted in minimized information risk in the event period.

Recently, companies have been found guilty of flouting the directives issued in Regulation FD. The repercussions for contravening the rules indicated can be harsh. The Securities and Exchange Commission devised sanctions for those found guilty which generally constitute a financial penalty as well as a court order against prospective breaches. An example is whereby the Securities and Exchange Commission sued Presstek Inc. and its previous chief executive officer in a federal court. It was argued that the boss choosily disseminated information concerning Presstek's turnover of business to an associate director of a registered financial advisor. Upon obtaining the data, the associate opted to sell all his shares of Presstek stock controlled by the investment consultant. The Securities and Exchange Commission concluded that Presstek had breached a section of the exchange act by not informing the public of the decision undertaken. They were both found guilty of conspiracy and fined a total of $450,000 (Pershkow et al. 12).

In another case, the commission incriminated the past director of investor relations of First Solar Inc. with violation of the Exchange Act and Regulation FD. He admitted in telephone calls with a distinct group of evaluators and financiers that the firm was most probably not going to procure a long-expected loan commitment from the United States Department of Energy. First Solar's executive director had candidly conveyed confidence that the corporation would get loan guarantees amounting to $4.5 billion, but directors found out afterward that the corporation would not obtain at least one of the assurances. Legislators observed that the Regulation FD would limit the company from revealing that data to stakeholders and analysts before going public with it (Pershkow et al 13). Nevertheless, First Solar's chief of investor relations shared the information about failing to acquire a loan guarantee with investors. The resultant fine slapped on the company was $50,000 as a result of their cooperation during the investigation.

It is nevertheless commonplace for big institutional market players to search for details from issuers behind closed doors in an attempt to acquire an investing edge. For instance, Elon Musk the head of Tesla Motors Inc. candidly admitted to having a conversation with Tesla's largest investors about the consolidation of Tesla with SolarCity, a solar energy corporation, before going public with that information (Pershkow et al. 14).

Definitively, Regulation Fair Disclosure has had a positive impact on limiting the distortion of information and managing investors' trading practices. It has offered stakeholders increased access to information that has a direct effect on the market while at the same time providing equal terms for retail investors. Also, liquidity has improved significantly.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 also referred to as the Public Company Accounting Reform and Investor Protection Act of 2002 is a United States rule of parliament legislated in July 2002. It brought about sweeping fluctuations to the control of financial practice and business administration. The law improved standards for all United States state enterprises, supervision, and public accounting organizations. The act comprises 11 sections starting from corporate obligations to penalties liable resulting from a breach of the rules. The law was put in place on the back of numerous financial scandals that had occurred like the Enron scandal which willingly perpetrated organized fraud by doctoring their financial records, and specific provisions were outlined.

A range of sophisticated factors created conducive breeding grounds whereby high-profile corporate scams took place between 2000 and 2002 involving firms such as Enron, WorldCom, and Tyco. The accounting fraud that happened uncovered significant issues ranging from opposing interests to compensation practices which led to a rigorous process to sanitize corporate rules and regulations. The Senate Banking Committee initiated several listening's regarding challenges experienced in the market that resulted in losses in the billions and even trillions of dollars in market value. The consultations generated a momentous agreement about the matters that needed to be resolved (Sheu 160). Among the issues raised was inadequate supervision by accountants, stifling of auditor's autonomy, ineffectual corporate governance approaches, and insufficient financial backing of the Securities and Exchange Commission.

In the years preceding the enactment of the Sarbanes-Oxley Act, auditing firms were self-regulated. They also offered non-audit and consultation services for the organizations they audited. A majority of the consultancy work paid more compared to auditing which in itself was a conflict of interest. For instance, calling into question a firm's accounting procedures might harm a customer's relationship, potentially affecting the consulting arrangement and ruining the auditing firm's final closing balance sheet. Additionally, boardroom shortcomings were evident where the executives tasked with representing investors during financial reporting were not qualified to handle the mandate and complexity of the business. The banking practices before the establishment of the act exhibited risky lending procedures such is the case where Enron received massive loans from banks without understanding the essential cautionary steps to be taken. That resulted in bad loans and hefty sums in terms of settlement payments to be paid by the bank which in turn hurt the investors (Kecskes 34).

The Sarbanes-Oxley directive is obligatory and all public entities ought to conform to the rules and regulations. The law was passed in 2002 and presented vital reforms to the policy of financial preparation and corporate governance. The chief proponents of the act were Senator Paul Sarbanes and Representative Michael Oxley. It is encompassed of numerous fragments although sections 302, 401, 404,409,802, and 906 are the most imperative in regards to conformity and internal checks. The categories are grouped into eleven sections which are Public Company Accounting Oversight Board, Auditor liberty, Corporate Accountability, Improved Financial Disclosures, Review of Conflicts of Interest, and Commission Resources and Authority. The other sections are Studies and Reports, Corporate and Criminal Fraud Accountability, White Collar Crime Penalties, Corporate Tax Returns, and Corporate Fraud Responsibility (Kecskes 38).

The main provisions of this regulation sought to validate the financial statements that were presented as real, create and sustain disclosure controls and practices, and to communicate truthfully to the Audit Committee where discrepancies and weak controls exist. Besides, the financial statements issued were supposed to be precise and submitted in a way that excludes inaccurate statements. The financial statements were also required to include all off-sheet liabilities and transactions to facilitate transparent reporting. Chief Executives Officers and Chief Financial Officers of companies were required to issue internal control statements when publishing the company's yearly report and to certify every four months the efficiency of internal controls over financial reporting ( Chang et al. 130). The management was further tasked with assessing the processes instilled and their effectiveness and giving their judgment.

Also, issuers needed to inform the public about any changes in their financial situation. The disclosures were to be submitted in a manner that is easily understandable and aided by graphical data. Organizations that do not adhere to the stipulated code of conduct were liable to penalties of fines and up to 20 years behind bars for doctoring, vandalizing, hiding, or giving incorrect records or an attempt to tamper with an investigation. Accountants were also liable to fines and imprisonment of up to 10 years if found guilty of deliberately contravening the requisites of maintenance. Fraudulent reporting attracts up to $5 Million in fines and jail terms of up to 20 years. There was also a section that discussed the penal sanctions for revenge against whistleblowers (Chang et al. 135).

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