Regulation Fair Disclosure | China Accounting Blog | Paul Gillis

Regulation Fair Disclosure

One of the best rules that the SEC ever put in place was Regulation Fair Disclosure, or Reg FD, which was promulgated in 2000. Reg FD mandates that public companies must disclose material information to all investors at the same time. 

Prior to Reg FD, companies would often disclose market-moving information to certain investors before others, allowing them to profit by placing trades before the information became widely known.  

Unfortunately, Reg FD does not apply to foreign private issuers. Most US listed Chinese companies are classified as foreign private issuers. As foreign private issuers, the companies are also not required to file quarterly reports on Form 10Q nor get auditor review of the quarters. Most US listed Chinese companies do provide quarterly results anyway, although they usually do not include an auditor review report. For foreign private issuers, the annual report is filed on Form 20F instead of Form 10K, and is due a month later. 

I think the logic behind not applying Reg FD to foreign private issuers is based on an assumption that the companies are also listed on a foreign exchange, and the SEC is reluctant to add on additional requirements beyond what the regulators and exchanges in local markets require. That logic is invalid with respect to most U.S. listed Chinese companies, since they are not typically listed on any other stock exchange.  

I believe that some US listed Chinese companies abuse the Reg FD exception and selectively disclose information to favored analysts and investors ahead of the public. I am going to try to prove that by looking at price movements ahead of announcements. 

I call on the SEC to take another look at the foreign private issuer exception to Reg FD. While I can understand exempting companies that have a primary listing in another market, I believe that those companies listed only in the US should be treated the same as other US listed companies. 

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