Social Media and the Securities Laws: Best Practices · PDF fileSocial Media and the...

Social Media and the Securities Laws: Best Practices Checklist

A Checklist of best practices for public companies and their counsel to consider when the company and its employees are active in social media. This Checklist offers suggestions in dealing with the limitations and challenges that federal securities laws place on the use of social media and avoiding violations of the securities laws. This Checklist also covers social media use during sensitive disclosure periods, such as during securities offerings and proxy solicitations.

Practical Law Corporate & Securities

For an in-depth discussion of the interaction between social media and securities and disclosure laws, see Practice Note, Social Media Compliance with Securities and Disclosure Laws.

Adopt Social Media Guidelines or Revise Existing Policies

• A written policy or set of guidelines should be adopted that addresses the use of social media from a securities law perspective.

• Clearly and comprehensively outline the ways in which employees are authorized (and not permitted) to use social media including standard policies and procedures.

• Guidelines should be reviewed regularly and updated to reflect rapid changes in the use of social media, including new forms of social media.

• The guidelines should work together with codes of ethics, and other communications, insider trading and Regulation FD policies already in place.

• The guidelines can stand alone or be incorporated into these other policies.

• Check to ensure Regulation FD, communications and insider trading policies contemplate social media disclosures. In many cases these policies were drafted before social media's widespread use and may need to be amended to contemplate the use of social media.

• If the company is part of a highly regulated industry, for example pharmaceuticals or investment advisers, consider specific subjects or types of content that should be prohibited from discussion due to regulatory concerns.

For sample social media guidelines, see Standard Documents, Social Media Guidelines (Public Company Short Form) and Social Media Guidelines (Public Company Long Form).

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Implement Social Media Education and Training

• Address the company's philosophy on using social media and what goals the company hopes to accomplish through social media.

• Tailor training for specific titles or business divisions based on the level of sensitive information that may be available to each group.

• Make training programs mandatory for all employees using social media.

• Address the risks, complications and limitations imposed by securities and disclosure laws, which may be unique to specific forms of social media, for example, including forward-looking statements legends with Twitter's 140 character limit.

• Emphasize that once information is posted, it is difficult if not impossible to remove it from the public domain.

• Because social media is advancing rapidly, regularly review and update employee training programs that should be held on an ongoing basis.

• Set up a chain of point people that clearly indicates which employees are authorized to speak on which topics and which employees can and should update company websites and social media channels.

• Clearly indicate how employees should bring issues to the attention of those in charge of the company's social media and to those in the compliance function.

Closely Monitor Company Social Media Channels

• Regularly review authorized company channels to ensure that information is accurate, not misleading and does not include information not authorized to be disclosed.

• Review unauthorized channels for misinformation.

• Companies with disclosure committees can update the responsibilities to include oversight of determining the materiality of information and disclosure obligations on a timely basis for company-sponsored social media communications.

• Ensure corporate public statements issued over social media channels are subject to the same review and approval processes as other corporate public statements.

• Employees charged with monitoring the social media channels, such as senior investor relations or legal staff, should have knowledge of securities and disclosure laws and the company's material nonpublic information to be able to determine when certain topics should not be discussed.

• Consider aggregating company and employee social media postings on one or several official company web pages to set a standard for authorized disclosures and to ease the monitoring process.

• Consider keeping a record of social media disclosures.

Be Sure Investor Relations, the Compliance Function and Legal are Coordinated



• Despite the perceived informality of social media, these disclosures should be considered the same as any written corporate communication, subject to the same securities laws.

• Social media disclosures should be considered with all of the following rules and regulations in mind:

• Regulation FD;

• Rule 10b-5;

• Regulation G;

• the rules for communications and offers of securities for emerging growth companies and non-emerging growth companies (see Practice Note, Publicity, Communications and Offers and JOBS Act: On-ramp to the Capital Markets for Emerging Growth Companies Summary);

• the prohibition on general solicitation for certain unregistered offerings (see Practice Note, Section 4(a)(2) and Regulation D Private Placements: No General Solicitation or Advertising of the Offering under Rule 504, Rule 505 and Rule 506(b)); and

• proxy solicitation rules.

Limit the Number of Individuals Authorized to Speak on Behalf of the Company

• The starting point can be those authorized under the Regulation FD policy.

• Those authorized should:

• have knowledge of securities laws and be aware of the company's material nonpublic information and guidelines for disclosures and procedures of this nature; and

• be aware of nonpublic future plans and the agreed on timing for when that information can be shared with the public and how.

Leading with Social Media

• Unless the company is completely comfortable that it complies with SEC guidance on using social media channels to disclose material information (see Practice Note, Social Media Compliance with Securities and Disclosure Laws: SEC Website Guidance), consider first disseminating material information using traditional disclosure channels such as press releases and Forms 8-K.

• If there is any doubt as to materiality, disseminate through the traditional channels first.

• However, consider planning ahead and disseminating material information through social media quickly after its release using traditional channels to condition the market to use the company's social media as a reliable source of information (see Consider the Process of Establishing a Recognized Channel of Distribution).

Employ Full Context and Balance



• While it may be tempting to post only the positive developments, social media disclosures must be balanced and tell the full story.

• Due to the difficulties in providing full context with social media's space limitations and practicalities, always consider leaving the substance out and using the social media channel to link to the full context on the corporate website.

Be Wary of Unintentional Attribution When Linking, "Liking" and "Retweeting"

• To avoid securities liability for third-party content that the company links to, explicitly state that the content is not the company's and the company in no way explicitly or implicitly endorses or approves it.

• Because the disclaimer may not be sufficient to shield the company from liability for false or misleading third-party content, all hyperlinks and the materials they link to should be carefully reviewed.

• Consider including language explaining why the company is providing the link.

• Consider implementing pop-up or exit pages (an intermediary page between the company's post and the third-party content) to add disclaimers, explanatory language and to make it clear that users are leaving the company's social media area or website.

• If there is a large amount of negative information circulating, avoid being misleading by linking only to positive content.

• Be especially careful with "liking" postings or comments on Facebook. The one-click, informal nature of likings can lead to forgetting the dangers of implicit adoption.

• The same dangers exist for "retweeting" on Twitter. Although quite common, a retweet can be viewed as an endorsement of everything in the original tweet, perhaps even the hyperlinks contained in that original tweet.

Draw a Line Between Individual and Professional Capacities

• When not speaking on behalf of the company, executives, officers and employees should include language that makes clear the statements are their own and are not authorized or approved by the company.

• Assume that senior officer and director statements will be viewed as coming officially from the company regardless of disclaimers to the contrary. Educate, monitor and plan accordingly.

• However, keep in mind that individuals acting as company representatives cannot avoid responsibility for material misstatements or omissions by purporting to speak in their individual capacities.

Use Disclaimers and Forward-looking Statements Legends

• In addition to disclaimers for statements made in individual capacities, social media should include any disclaimers that the disclosures would include if made through traditional channels.

• Include disclaimers when linking to third-party content (see Be Wary of Unintentional Attribution When Linking, Liking and Retweeting).



• Always consider including the company's forward-looking statements legend and a cross-reference to risk factors if the content is even remotely forward-looking (see Practice Note, Forward-looking Statements: Securing the Safe Harbor).

• Only include hyperlinks to required statements and legends in place of the full versions in social media posts where expressly permitted by the SEC staff, for example, in Rules 134 and 433 communications through character limited media (see Practice Note, Social Media Compliance with Securities and Disclosure Laws: Social Media and Securities Offerings).

Keep Your Securities Exchange in Mind

• Both the NYSE and NASDAQ have policies that require prompt release of material information to the public using Regulation FD-compliant methods and require notification to the exchanges.

• Put processes and procedures in place to comply with the applicable exchange's rules in a timely manner to avoid rule violations or timing delays in posting information.

Don't Forget Regulation G for Non-GAAP Financial Measures

• Regulation G requires issuers disclosing non-GAAP financial measures to include a comparable GAAP financial measure and a reconciliation of the two.

• If the company discloses non-GAAP financial information through social media (for example, during earnings call live tweets), provide the reconciliation on the company website and clearly disclose its location and availability at the beginning of the presentation and before posting the non-GAAP measures.

Date and Archive Aggregated Documents and Posts

• If the company includes or aggregates social media posts on a website, ensure all posts and documents are dated and archived when older.

• Create a coherent and clear system for archived material and highlighting new postings.

• Prominently disclaim any duty to update older posts and information.

What to Do When Information is Mistakenly Released

• In general, stick to a "no comment" policy when questioned about rumors.

• If material nonpublic information is unintentionally disclosed, cure the Regulation FD violation by filing a Form 8-K with that information promptly, but at least within 24 hours.

• If material nonpublic information is intentionally disclosed, cure the Regulation FD violation by filing a Form 8-K immediately.

• In either case, consider promptly self-reporting the violation to the SEC.



Be Extra Careful and Extra Quiet Before and During Securities Offerings

• Social media postings are written communications just like any other and can cause gun jumping, general solicitation and Securities Act Section 5 issues.

• Communications when a company is contemplating or conducting a securities offering should be reviewed very carefully to avoid social media communications being deemed as conditioning the market or as offers of securities without delivery of a prospectus.

• Be mindful of communications rules during the pre-filing, waiting and post-effective periods of SEC registrations (see Practice Note, Registration Process: Publicity).

• If a company is conducting an offering using general solicitation under Rules 506(c) or 144A, be sure the social media policy or guidelines are being followed and only authorized persons are disseminating an approved, consistent message.

Avoid Social Media for Most Proxy Solicitations

• After a company files a proxy statement, the rules of what constitutes a proxy solicitation are broad.

• Avoid social media communications being deemed proxy solicitations by ensuring they do not:

• encourage stockholders to vote a certain way; or

• present facts or points of view that seem to be arguing for or against pending ballot items.

• Consider avoiding social media to comment on most proxy issues.

Consider the Process of Establishing a Recognized Channel of Distribution

• Take systematic and significant steps to encourage the market to use the company's website and social media as a source of information.

• For information posted online only, establish clear waiting periods before this information can be discussed in social media to allow time for market absorption.

• In press releases and periodic reports filed with the SEC, include a statement that the company routinely posts important information on its website or other social media channels and a link to that section of the site and channels.

• Regularly post on the company website, as well as any other social media channels, corporate news, disclosures and other communications and all press releases.

• Post advance notice of important postings, such as the date and time of a live earnings tweet.

• Use push technology.

• Monitor the extent to which information reaches intended audiences and the degree to which investors access social media channels for information about the company.



• Have investor relations-specific pages and social media feeds that are easily accessible by the public to create the expected place for this information without extraneous non-investor related information intertwined.

Related content

TopicsCorporate Governance and Continuous Disclosure

Non-US Issuers

Registered Offerings

Unregistered Offerings

Practice NotesComplying with Regulation FD (Fair Disclosure)

Disclosing Nonpublic Information

Duty to Update Previously Disclosed Information

Forward-looking Statements: Securing the Safe Harbor

Registration Process: Publicity

Social Media Compliance with Securities and Disclosure Laws

Using Non-GAAP Financial Information

Standard DocumentsSocial Media Guidelines (Public Company Long Form)

Social Media Guidelines (Public Company Short Form)

ChecklistSummary of SEC Communication Rules for Public Companies: Chart

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81 Sec. 27ASECURITIES ACT OF 1933

the party in whose favor sanctions are to be imposed; or

(ii) the violation of Rule 11(b) of the Federal Rules of Civil Procedure was de minimis. (C) SANCTIONS.—If the party or attorney against

whom sanctions are to be imposed meets its burden under subparagraph (B), the court shall award the sanctions that the court deems appropriate pursuant to Rule 11 of the Federal Rules of Civil Procedure.

(d) DEFENDANT’S RIGHT TO WRITTEN INTERROGATORIES.—In any private action arising under this title in which the plaintiff may recover money damages only on proof that a defendant acted with a particular state of mind, the court shall, when requested by a defendant, submit to the jury a written interrogatory on the issue of each such defendant’s state of mind at the time the alleged viola-tion occurred.

(May 27, 1933, ch. 38, title I, Sec. 27, as added Pub. L. 104-67, title I, Sec. 101(a), Dec. 22, 1995, 109 Stat. 737; amended Pub. L. 105-353, title I, Sec. 101(a)(2), title III, Sec. 301(a)(5), Nov. 3, 1998, 112 Stat. 3230, 3235.)

AMENDMENTS

1998 — Pub. L. 105-353, Sec. 301(a)(5), made technical correction relating to placement of section.

Subsec. (b)(4). Pub. L. 105-353, Sec. 101(a)(2), added par. (4).

EFFECTIVE DATE OF 1998 AMENDMENT

Amendment by section 101(a)(2) of Pub. L. 105-353 not to affect or apply to any action commenced before and pending on Nov. 3, 1998, see section 101(c) of Pub. L. 105-353.

EFFECTIVE DATE

Section not to affect or apply to any private action arising under this title or title I of the Securities Exchange Act of 1934, commenced before and pending on Dec. 22, 1995, see sec-tion 108 of Pub. L. 104-67.

CONSTRUCTION

Nothing in section to be deemed to create or ratify any im-plied right of action, or to prevent Commission, by rule or regu-lation, from restricting or otherwise regulating private actions under Securities Exchange Act of 1934, see section 203 of Pub. L. 104-67.

SEC. 27A. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.

(a) APPLICABILITY.—This section shall apply only to a forward- looking statement made by—

(1) an issuer that, at the time that the statement is made, is subject to the reporting requirements of section 13(a) or sec-tion 15(d) of the Securities Exchange Act of 1934;

82Sec. 27A SECURITIES ACT OF 1933

(2) a person acting on behalf of such issuer; (3) an outside reviewer retained by such issuer making a

statement on behalf of such issuer; or (4) an underwriter, with respect to information provided by

such issuer or information derived from information provided by the issuer. (b) EXCLUSIONS.—Except to the extent otherwise specifically

provided by rule, regulation, or order of the Commission, this sec-tion shall not apply to a forward-looking statement—

(1) that is made with respect to the business or operations of the issuer, if the issuer—

(A) during the 3-year period preceding the date on which the statement was first made—

(i) was convicted of any felony or misdemeanor de-scribed in clauses (i) through (iv) of section 15(b)(4)(B) of the Securities Exchange Act of 1934; or

(ii) has been made the subject of a judicial or ad-ministrative decree or order arising out of a govern-mental action that—

(I) prohibits future violations of the antifraud provisions of the securities laws;

(II) requires that the issuer cease and desist from violating the antifraud provisions of the se-curities laws; or

(III) determines that the issuer violated the antifraud provisions of the securities laws;

(B) makes the forward-looking statement in connection with an offering of securities by a blank check company;

(C) issues penny stock; (D) makes the forward-looking statement in connection

with a rollup transaction; or (E) makes the forward-looking statement in connection

with a going private transaction; or (2) that is—

(A) included in a financial statement prepared in ac-cordance with generally accepted accounting principles;

(B) contained in a registration statement of, or other-wise issued by, an investment company;

(C) made in connection with a tender offer; (D) made in connection with an initial public offering; (E) made in connection with an offering by, or relating

to the operations of, a partnership, limited liability com-pany, or a direct participation investment program; or

(F) made in a disclosure of beneficial ownership in a report required to be filed with the Commission pursuant to section 13(d) of the Securities Exchange Act of 1934.

(c) SAFE HARBOR.—(1) IN GENERAL.—Except as provided in subsection (b), in any

private action arising under this title that is based on an untrue statement of a material fact or omission of a material fact nec-essary to make the statement not misleading, a person referred to in subsection (a) shall not be liable with respect to any forward- looking statement, whether written or oral, if and to the extent that—


(A) the forward-looking statement is—(i) identified as a forward-looking statement, and is ac-

companied by meaningful cautionary statements identi-fying important factors that could cause actual results to differ materially from those in the forward-looking state-ment; or

(ii) immaterial; or (B) the plaintiff fails to prove that the forward-looking

statement—(i) if made by a natural person, was made with actual

knowledge by that person that the statement was false or misleading; or

(ii) if made by a business entity, was—(I) made by or with the approval of an executive

officer of that entity, and (II) made or approved by such officer with actual

knowledge by that officer that the statement was false or misleading.

(2) ORAL FORWARD-LOOKING STATEMENTS.—In the case of an oral forward-looking statement made by an issuer that is subject to the reporting requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, or by a person acting on behalf of such issuer, the requirement set forth in paragraph (1)(A) shall be deemed to be satisfied—

(A) if the oral forward-looking statement is accompanied by a cautionary statement—

(i) that the particular oral statement is a forward-look-ing statement; and

(ii) that the actual results could differ materially from those projected in the forward- looking statement; and (B) if—

(i) the oral forward-looking statement is accompanied by an oral statement that additional information con-cerning factors that could cause actual results to differ ma-terially from those in the forward-looking statement is con-tained in a readily available written document, or portion thereof;

(ii) the accompanying oral statement referred to in clause (i) identifies the document, or portion thereof, that contains the additional information about those factors re-lating to the forward-looking statement; and

(iii) the information contained in that written docu-ment is a cautionary statement that satisfies the standard established in paragraph (1)(A).

(3) AVAILABILITY.—Any document filed with the Commission or generally disseminated shall be deemed to be readily available for purposes of paragraph (2).

(4) EFFECT ON OTHER SAFE HARBORS.—The exemption pro-vided for in paragraph (1) shall be in addition to any exemption that the Commission may establish by rule or regulation under subsection (g).

(d) DUTY TO UPDATE.—Nothing in this section shall impose upon any person a duty to update a forward-looking statement.

84Sec. 27A SECURITIES ACT OF 1933

(e) DISPOSITIVE MOTION.—On any motion to dismiss based upon subsection (c)(1), the court shall consider any statement cited in the complaint and cautionary statement accompanying the forward- looking statement, which are not subject to material dis-pute, cited by the defendant.

(f) STAY PENDING DECISION ON MOTION.—In any private action arising under this title, the court shall stay discovery (other than discovery that is specifically directed to the applicability of the ex-emption provided for in this section) during the pendency of any motion by a defendant for summary judgment that is based on the grounds that—

(1) the statement or omission upon which the complaint is based is a forward-looking statement within the meaning of this section; and

(2) the exemption provided for in this section precludes a claim for relief. (g) EXEMPTION AUTHORITY.—In addition to the exemptions pro-

vided for in this section, the Commission may, by rule or regula-tion, provide exemptions from or under any provision of this title, including with respect to liability that is based on a statement or that is based on projections or other forward-looking information, if and to the extent that any such exemption is consistent with the public interest and the protection of investors, as determined by the Commission.

(h) EFFECT ON OTHER AUTHORITY OF COMMISSION.—Nothing in this section limits, either expressly or by implication, the authority of the Commission to exercise similar authority or to adopt similar rules and regulations with respect to forward-looking statements under any other statute under which the Commission exercises rulemaking authority.

(i) DEFINITIONS.—For purposes of this section, the following definitions shall apply:

(1) FORWARD-LOOKING STATEMENT.—The term ‘‘forward-looking statement’’ means—

(A) a statement containing a projection of revenues, income (including income loss), earnings (including earn-ings loss) per share, capital expenditures, dividends, cap-ital structure, or other financial items;

(B) a statement of the plans and objectives of manage-ment for future operations, including plans or objectives relating to the products or services of the issuer;

(C) a statement of future economic performance, in-cluding any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission;

(D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C);

(E) any report issued by an outside reviewer retained by an issuer, to the extent that the report assesses a for-ward-looking statement made by the issuer; or


(F) a statement containing a projection or estimate of such other items as may be specified by rule or regulation of the Commission. (2) INVESTMENT COMPANY.—The term ‘‘investment com-

pany’’ has the same meaning as in section 3(a) of the Invest-ment Company Act of 1940.

(3) PENNY STOCK.—The term ‘‘penny stock’’ has the same meaning as in section 3(a)(51) of the Securities Exchange Act of 1934, and the rules and regulations, or orders issued pursu-ant to that section.

(4) GOING PRIVATE TRANSACTION.—The term ‘‘going private transaction’’ has the meaning given that term under the rules or regulations of the Commission issued pursuant to section 13(e) of the Securities Exchange Act of 1934.

(5) SECURITIES LAWS.—The term ‘‘securities laws’’ has the same meaning as in section 3 of the Securities Exchange Act of 1934.

(6) PERSON ACTING ON BEHALF OF AN ISSUER.—The term ‘‘person acting on behalf of an issuer’’ means an officer, direc-tor, or employee of the issuer.

(7) OTHER TERMS.—The terms ‘‘blank check company’’, ‘‘rollup transaction’’, ‘‘partnership’’, ‘‘limited liability company’’, ‘‘executive officer of an entity’’ and ‘‘direct participation invest-ment program’’, have the meanings given those terms by rule or regulation of the Commission.

(May 27, 1933, ch. 38, title I, Sec. 27A, as added Pub. L. 104-67, title I, Sec. 102(a), Dec. 22, 1995, 109 Stat. 749; amended Pub. L. 105-353, title III, Sec. 301(a)(5), Nov. 3, 1998, 112 Stat. 3235; Pub. L. 111-203, title IX, Sec. 985(a)(4), July 21, 2010, 124 Stat. 1933.)

REFERENCES IN TEXT

The Securities Exchange Act of 1934, referred to in text, is act June 6, 1934, ch. 404, 48 Stat. 881, as amended, which is classified generally to this chapter (Sec. 78a et seq.).

The Investment Company Act of 1940, referred to in text, is title I of act Aug. 20, 1940, ch. 686, 54 Stat. 789, as amend-ed, which is classified generally to subchapter I (Sec. 80a-1 et seq.) of chapter 2D of U.S. Code Title 15, Commerce and Trade.

AMENDMENTS

2010 — Subsec. (c)(1)(B)(ii). Pub. L. 111-203, Sec. 985(a)(4), substituted ‘‘business entity,’’ for ‘‘business entity;’’.

1998 — Pub. L. 105-353 made technical correction relating to placement of section.

EFFECTIVE DATE OF 2010 AMENDMENT

Amendment by Pub. L. 111-203 effective 1 day after July 21, 2010, see section 4 of Pub. L. 111-203.

EFFECTIVE DATE

Section not to affect or apply to any private action arising under this title or title I of the Securities Exchange Act of

86Sec. 27B SECURITIES ACT OF 1933

19So in original. Probably should be ‘‘section’’.

1934, commenced before and pending on Dec. 22, 1995, see sec-tion 108 of Pub. L. 104-67.

CONSTRUCTION

Nothing in section deemed to create or ratify any implied right of action, or to prevent Commission, by rule or regula-tion, from restricting or otherwise regulating private actions under Securities Exchange Act of 1934, see section 203 of Pub. L. 104-67.

SEC. 27B. CONFLICTS OF INTEREST RELATING TO CERTAIN SECURITIZATIONS.

(a) IN GENERAL.—An underwriter, placement agent, initial pur-chaser, or sponsor, or any affiliate or subsidiary of any such entity, of an asset-backed security (as such term is defined in section 3 of the Securities and Exchange Act of 1934 (15 U.S.C. 78c), which for the purposes of this section shall include a synthetic asset-backed security), shall not, at any time for a period ending on the date that is one year after the date of the first closing of the sale of the asset-backed security, engage in any transaction that would involve or result in any material conflict of interest with respect to any in-vestor in a transaction arising out of such activity.

(b) RULEMAKING.—Not later than 270 days after the date of en-actment of this section, the Commission shall issue rules for the purpose of implementing subsection (a).

(c) EXCEPTION.—The prohibitions of subsection (a) shall not apply to—

(1) risk-mitigating hedging activities in connection with po-sitions or holdings arising out of the underwriting, placement, initial purchase, or sponsorship of an asset-backed security, provided that such activities are designed to reduce the specific risks to the underwriter, placement agent, initial purchaser, or sponsor associated with positions or holdings arising out of such underwriting, placement, initial purchase, or sponsorship; or

(2) purchases or sales of asset-backed securities made pur-suant to and consistent with—

(A) commitments of the underwriter, placement agent, initial purchaser, or sponsor, or any affiliate or subsidiary of any such entity, to provide liquidity for the asset-backed security, or

(B) bona fide market-making in the asset backed secu-rity.

(d) RULE OF CONSTRUCTION.—This subsection [19] shall not oth-erwise limit the application of section 15G of the Securities Ex-change Act of 1934.

(May 27, 1933, ch. 38, title I, Sec. 27B, as added Pub. L. 111-203, title VI, Sec. 621(a), July 21, 2010, 124 Stat. 1631.)

330Sec. 21E SECURITIES EXCHANGE ACT OF 1934

(i) a defendant in any private action arising under this title; or

(ii) a defendant in any private action arising under section 11 of the Securities Act of 1933, who is an outside director of the issuer of the securities that are the subject of the action; and (D) the term ‘‘outside director’’ shall have the meaning

given such term by rule or regulation of the Commission.

(June 6, 1934, ch. 404, title I, Sec. 21D, as added and amended Pub. L. 104-67, title I, Sec. 101(b), title II, Sec. 201(a), Dec. 22, 1995, 109 Stat. 743, 758; Pub. L. 105-353, title I, Sec. 101(b)(2), title III, Sec. 301(b)(13), Nov. 3, 1998, 112 Stat. 3233, 3236; Pub. L. 111-203, title IX, Sec. 933(b), July 21, 2010, 124 Stat. 1883.)

SEC. 21E. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS.

(a) APPLICABILITY.—This section shall apply only to a forward- looking statement made by—

(1) an issuer that, at the time that the statement is made, is subject to the reporting requirements of section 13(a) or sec-tion 15(d);

(2) a person acting on behalf of such issuer; (3) an outside reviewer retained by such issuer making a

statement on behalf of such issuer; or (4) an underwriter, with respect to information provided by

such issuer or information derived from information provided by such issuer. (b) EXCLUSIONS.—Except to the extent otherwise specifically

provided by rule, regulation, or order of the Commission, this sec-tion shall not apply to a forward-looking statement—

(1) that is made with respect to the business or operations of the issuer, if the issuer—

(A) during the 3-year period preceding the date on which the statement was first made—

(i) was convicted of any felony or misdemeanor de-scribed in clauses (i) through (iv) of section 15(b)(4)(B); or

(ii) has been made the subject of a judicial or ad-ministrative decree or order arising out of a governmental action that—

(I) prohibits future violations of the antifraud provisions of the securities laws;

(II) requires that the issuer cease and desist from violating the antifraud provisions of the se-curities laws; or

(III) determines that the issuer violated the antifraud provisions of the securities laws;

(B) makes the forward-looking statement in connection with an offering of securities by a blank check company;

(C) issues penny stock; (D) makes the forward-looking statement in connection

with a rollup transaction; or

331 Sec. 21ESECURITIES EXCHANGE ACT OF 1934

129So in law. The semicolon probably should be a comma.

(E) makes the forward-looking statement in connection with a going private transaction; or (2) that is—

(A) included in a financial statement prepared in ac-cordance with generally accepted accounting principles;

(B) contained in a registration statement of, or other-wise issued by, an investment company;

(C) made in connection with a tender offer; (D) made in connection with an initial public offering; (E) made in connection with an offering by, or relating

to the operations of, a partnership, limited liability com-pany, or a direct participation investment program; or

(F) made in a disclosure of beneficial ownership in a report required to be filed with the Commission pursuant to section 13(d).

(c) SAFE HARBOR.—(1) IN GENERAL.—Except as provided in subsection (b), in

any private action arising under this title that is based on an untrue statement of a material fact or omission of a material fact necessary to make the statement not misleading, a person referred to in subsection (a) shall not be liable with respect to any forward-looking statement, whether written or oral, if and to the extent that—

(A) the forward-looking statement is—(i) identified as a forward-looking statement, and

is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or

(ii) immaterial; or (B) the plaintiff fails to prove that the forward-looking

statement—(i) if made by a natural person, was made with ac-

tual knowledge by that person that the statement was false or misleading; or

(ii) if made by a business entity; [129]was—(I) made by or with the approval of an execu-

tive officer of that entity; and (II) made or approved by such officer with ac-

tual knowledge by that officer that the statement was false or misleading.

(2) ORAL FORWARD-LOOKING STATEMENTS.—In the case of an oral forward-looking statement made by an issuer that is subject to the reporting requirements of section 13(a) or section 15(d), or by a person acting on behalf of such issuer, the re-quirement set forth in paragraph (1)(A) shall be deemed to be satisfied—

(A) if the oral forward-looking statement is accom-panied by a cautionary statement—

(i) that the particular oral statement is a forward- looking statement; and

332Sec. 21E SECURITIES EXCHANGE ACT OF 1934

(ii) that the actual results might differ materially from those projected in the forward-looking statement; and (B) if—

(i) the oral forward-looking statement is accom-panied by an oral statement that additional informa-tion concerning factors that could cause actual results to materially differ from those in the forward-looking statement is contained in a readily available written document, or portion thereof;

(ii) the accompanying oral statement referred to in clause (i) identifies the document, or portion thereof, that contains the additional information about those factors relating to the forward-looking statement; and

(iii) the information contained in that written doc-ument is a cautionary statement that satisfies the standard established in paragraph (1)(A).

(3) AVAILABILITY.—Any document filed with the Commis-sion or generally disseminated shall be deemed to be readily available for purposes of paragraph (2).

(4) EFFECT ON OTHER SAFE HARBORS.—The exemption pro-vided for in paragraph (1) shall be in addition to any exemp-tion that the Commission may establish by rule or regulation under subsection (g). (d) DUTY TO UPDATE.—Nothing in this section shall impose

upon any person a duty to update a forward-looking statement. (e) DISPOSITIVE MOTION.—On any motion to dismiss based

upon subsection (c)(1), the court shall consider any statement cited in the complaint and any cautionary statement accompanying the forward-looking statement, which are not subject to material dis-pute, cited by the defendant.

(f) STAY PENDING DECISION ON MOTION.—In any private action arising under this title, the court shall stay discovery (other than discovery that is specifically directed to the applicability of the ex-emption provided for in this section) during the pendency of any motion by a defendant for summary judgment that is based on the grounds that—

(1) the statement or omission upon which the complaint is based is a forward-looking statement within the meaning of this section; and

(2) the exemption provided for in this section precludes a claim for relief. (g) EXEMPTION AUTHORITY.—In addition to the exemptions pro-

vided for in this section, the Commission may, by rule or regula-tion, provide exemptions from or under any provision of this title, including with respect to liability that is based on a statement or that is based on projections or other forward-looking information, if and to the extent that any such exemption is consistent with the public interest and the protection of investors, as determined by the Commission.

(h) EFFECT ON OTHER AUTHORITY OF COMMISSION.—Nothing in this section limits, either expressly or by implication, the authority of the Commission to exercise similar authority or to adopt similar rules and regulations with respect to forward-looking statements

333 Sec. 21FSECURITIES EXCHANGE ACT OF 1934

under any other statute under which the Commission exercises rulemaking authority.

(i) DEFINITIONS.—For purposes of this section, the following definitions shall apply:

(1) FORWARD-LOOKING STATEMENT.—The term ‘‘forward-looking statement’’ means—

(A) a statement containing a projection of revenues, income (including income loss), earnings (including earn-ings loss) per share, capital expenditures, dividends, cap-ital structure, or other financial items;

(B) a statement of the plans and objectives of manage-ment for future operations, including plans or objectives relating to the products or services of the issuer;

(C) a statement of future economic performance, in-cluding any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission;

(D) any statement of the assumptions underlying or relating to any statement described in subparagraph (A), (B), or (C);

(E) any report issued by an outside reviewer retained by an issuer, to the extent that the report assesses a forward- looking statement made by the issuer; or

(F) a statement containing a projection or estimate of such other items as may be specified by rule or regulation of the Commission. (2) INVESTMENT COMPANY.—The term ‘‘investment com-

pany’’ has the same meaning as in section 3(a) of the Invest-ment Company Act of 1940.

(3) GOING PRIVATE TRANSACTION.—The term ‘‘going private transaction’’ has the meaning given that term under the rules or regulations of the Commission issued pursuant to section 13(e).

(4) PERSON ACTING ON BEHALF OF AN ISSUER.—The term ‘‘person acting on behalf of an issuer’’ means any officer, direc-tor, or employee of such issuer.

(5) OTHER TERMS.—The terms ‘‘blank check company’’, ‘‘rollup transaction’’, ‘‘partnership’’, ‘‘limited liability company’’, ‘‘executive officer of an entity’’ and ‘‘direct participation invest-ment program’’, have the meanings given those terms by rule or regulation of the Commission.

(June 6, 1934, ch. 404, title I, Sec. 21E, as added Pub. L. 104-67, title I, Sec. 102(b), Dec. 22, 1995, 109 Stat. 753.)

SEC. 21F. SECURITIES WHISTLEBLOWER INCENTIVES AND PROTEC-TION.

(a) DEFINITIONS.—In this section the following definitions shall apply:

(1) COVERED JUDICIAL OR ADMINISTRATIVE ACTION.—The term ‘‘covered judicial or administrative action’’ means any ju-dicial or administrative action brought by the Commission

SEC Rule 134

§230.134 Communications not deemed a prospectus.

Except as provided in paragraphs (e) and (g) of this section, the terms “prospectus” as defined in section 2(a)(10) of the Act or “free writing prospectus” as defined in Rule 405 (§230.405) shall not include a communication limited to the statements required or permitted by this section, provided that the communication is published or transmitted to any person only after a registration statement relating to the offering that includes a prospectus satisfying the requirements of section 10 of the Act (except as otherwise permitted in paragraph (a) of this section) has been filed.

(a) Such communication may include any one or more of the following items of information, which need not follow the numerical sequence of this paragraph, provided that, except as to paragraphs (a)(4) through (6) of this section, the prospectus included in the filed registration statement does not have to include a price range otherwise required by rule:

(1) Factual information about the legal identity and business location of the issuer limited to the following: the name of the issuer of the security, the address, phone number, and e-mail address of the issuer's principal offices and contact for investors, the issuer's country of organization, and the geographic areas in which it conducts business;

(2) The title of the security or securities and the amount or amounts being offered, which title may include a designation as to whether the securities are convertible, exercisable, or exchangeable, and as to the ranking of the securities;

(3) A brief indication of the general type of business of the issuer, limited to the following:

(i) In the case of a manufacturing company, the general type of manufacturing, the principal products or classes of products manufactured, and the segments in which the company conducts business;

(ii) In the case of a public utility company, the general type of services rendered, a brief indication of the area served, and the segments in which the company conducts business;

(iii) In the case of an asset-backed issuer, the identity of key parties, such as sponsor, depositor, issuing entity, servicer or servicers, and trustee, the asset class of the transaction, and the identity of any credit enhancement or other support; and

(iv) In the case of any other type of company, a corresponding statement;

(4) The price of the security, or if the price is not known, the method of its determination or the bona fide estimate of the price range as specified by the issuer or the managing underwriter or underwriters;

(5) In the case of a fixed income security, the final maturity and interest rate provisions or, if the final maturity or interest rate provisions are not known, the probable final maturity or interest rate provisions, as specified by the issuer or the managing underwriter or underwriters;

(6) In the case of a fixed income security with a fixed (non-contingent) interest rate provision, the yield or, if the yield is not known, the probable yield range, as specified by the issuer or the managing underwriter or underwriters and the yield of fixed income securities with comparable maturity and security rating;

(7) A brief description of the intended use of proceeds of the offering, if then disclosed in the prospectus that is part of the filed registration statement;

(8) The name, address, phone number, and e-mail address of the sender of the communication and the fact that it is participating, or expects to participate, in the distribution of the security;

(9) The type of underwriting, if then included in the disclosure in the prospectus that is part of the filed registration statement;

(10) The names of underwriters participating in the offering of the securities, and their additional roles, if any, within the underwriting syndicate;

(11) The anticipated schedule for the offering (including the approximate date upon which the proposed sale to the public will begin) and a description of marketing events (including the dates, times, locations, and procedures for attending or otherwise accessing them);

(12) A description of the procedures by which the underwriters will conduct the offering and the procedures for transactions in connection with the offering with the issuer or an underwriter or participating dealer (including procedures regarding account-opening and submitting indications of interest and conditional offers to buy), and procedures regarding directed share plans and other participation in offerings by officers, directors, and employees of the issuer;

(13) Whether, in the opinion of counsel, the security is a legal investment for savings banks, fiduciaries, insurance companies, or similar investors under the laws of any State or Territory or the District of Columbia, and the permissibility or status of the investment under the Employee Retirement Income Security Act of 1974 [29 U.S.C. 1001 et seq.];

(14) Whether, in the opinion of counsel, the security is exempt from specified taxes, or the extent to which the issuer has agreed to pay any tax with respect to the security or measured by the income therefrom;

(15) Whether the security is being offered through rights issued to security holders, and, if so, the class of securities the holders of which will be entitled to subscribe, the subscription ratio, the actual or proposed record date, the date upon which the rights were issued or are expected to be issued, the actual or anticipated date upon which they will expire, and the approximate subscription price, or any of the foregoing;

(16) Any statement or legend required by any state law or administrative authority;

(17) [Reserved]

(18) The names of selling security holders, if then disclosed in the prospectus that is part of the filed registration statement;

(19) The names of securities exchanges or other securities markets where any class of the issuer's securities are, or will be, listed;

(20) The ticker symbols, or proposed ticker symbols, of the issuer's securities;

(21) The CUSIP number as defined in Rule 17Ad-19(a)(5) of the Securities Exchange Act of 1934 (§240.17Ad-19(a)(5) of this chapter) assigned to the securities being offered; and

(22) Information disclosed in order to correct inaccuracies previously contained in a communication permissibly made pursuant to this section.

(b) Except as provided in paragraph (c) of this section, every communication used pursuant to this section shall contain the following:

(1) If the registration statement has not yet become effective, the following statement:

A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective; and

(2) The name and address of a person or persons from whom a written prospectus for the offering meeting the requirements of section 10 of the Act (other than a free writing prospectus as defined in Rule 405) including as to the identified paragraphs above a price range where required by rule, may be obtained.

(c) Any of the statements or information specified in paragraph (b) of this section may, but need not, be contained in a communication which:

(1) Does no more than state from whom and include the uniform resource locator (URL) where a written prospectus meeting the requirements of section 10 of the Act (other than a free writing prospectus as defined in Rule 405) may be obtained, identify the security, state the price thereof and state by whom orders will be executed; or

(2) Is accompanied or preceded by a prospectus or a summary prospectus, other than a free writing prospectus as defined in Rule 405, which meets the requirements of section 10 of the Act, including a price range where required by rule, at the date of such preliminary communication.

(d) A communication sent or delivered to any person pursuant to this section which is accompanied or preceded by a prospectus which meets the requirements of section 10 of the Act (other than a free writing prospectus as defined in Rule 405), including a price range where required by rule, at the date of such communication, may solicit from the recipient of the communication an offer to buy the security or request the recipient to indicate whether he or she might be interested in the security, if the communication contains substantially the following statement:

No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date.

Provided, that such statement need not be included in such a communication to a dealer.

(e) A section 10 prospectus included in any communication pursuant to this section shall remain a prospectus for all purposes under the Act.

(f) The provision in paragraphs (c)(2) and (d) of this section that a prospectus that meets the requirements of section 10 of the Act precede or accompany a communication will be satisfied if such communication is an electronic communication containing an active hyperlink to such prospectus.

(g) This section does not apply to a communication relating to an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48))

[70 FR 44800, Aug. 3, 2005, as amended at 76 FR 46617, Aug. 3, 2011]

SEC Rule 433

§230.433 Conditions to permissible post-filing free writing prospectuses.

(a) Scope of section. This section applies to any free writing prospectus with respect to securities of any issuer (except as set forth in Rule 164 (§230.164)) that are the subject of a registration statement that has been filed under the Act. Such a free writing prospectus that satisfies the conditions of this section may include information the substance of which is not included in the registration statement. Such a free writing prospectus that satisfies the conditions of this section will be a prospectus permitted under section 10(b) of the Act for purposes of sections 2(a)(10), 5(b)(1), and 5(b)(2) of the Act and will, for purposes of considering it a prospectus, be deemed to be public, without regard to its method of use or distribution, because it is related to the public offering of securities that are the subject of a filed registration statement.

(b) Permitted use of free writing prospectus. Subject to the conditions of this paragraph (b) and satisfaction of the conditions set forth in paragraphs (c) through (g) of this section, a free writing prospectus may be used under this section and Rule 164 in connection with a registered offering of securities:

(1) Eligibility and prospectus conditions for seasoned issuers and well-known seasoned issuers. Subject to the provisions of Rule 164(e), (f), and (g), the issuer or any other offering participant may use a free writing prospectus in the following offerings after a registration statement relating to the offering has been filed that includes a prospectus that, other than by reason of this section or Rule 431, satisfies the requirements of section 10 of the Act:

(i) Offerings of securities registered on Form S-3 (§239.33 of this chapter) pursuant to General Instruction I.B.1, I.B.2, I.B.5, I.C., or I.D. thereof;

(ii) Offerings of securities registered on Form F-3 (§239.13 of this chapter) pursuant to General Instruction I.A.5, I.B.1, I.B.2, or I.C. thereof;

(iii) Any other offering not excluded from reliance on this section and Rule 164 of securities of a well-known seasoned issuer; and

(iv) Any other offering not excluded from reliance on this section and Rule 164 of securities of an issuer eligible to use Form S-3 or Form F-3 for primary offerings pursuant to General Instruction I.B.1 of such Forms.

(2) Eligibility and prospectus conditions for non-reporting and unseasoned issuers. If the issuer does not fall within the provisions of paragraph (b)(1) of this section, then, subject to the provisions of Rule 164(e), (f), and (g), any person participating in the offer or sale of the securities may use a free writing prospectus as follows:

(i) If the free writing prospectus is or was prepared by or on behalf of or used or referred to by an issuer or any other offering participant, if consideration has been or will be given by the issuer or other

offering participant for the dissemination (in any format) of any free writing prospectus (including any published article, publication, or advertisement), or if section 17(b) of the Act requires disclosure that consideration has been or will be given by the issuer or other offering participant for any activity described therein in connection with the free writing prospectus, then a registration statement relating to the offering must have been filed that includes a prospectus that, other than by reason of this section or Rule 431, satisfies the requirements of section 10 of the Act, including a price range where required by rule, and the free writing prospectus shall be accompanied or preceded by the most recent such prospectus; provided, however, that use of the free writing prospectus is not conditioned on providing the most recent such prospectus if a prior such prospectus has been provided and there is no material change from the prior prospectus reflected in the most recent prospectus; provided further, that after effectiveness and availability of a final prospectus meeting the requirements of section 10(a) of the Act, no such earlier prospectus may be provided in satisfaction of this condition, and such final prospectus must precede or accompany any free writing prospectus provided after such availability, whether or not an earlier prospectus had been previously provided.

Notes to paragraph (b)(2)(i) of Rule 433. 1. The condition that a free writing prospectus shall be accompanied or preceded by the most recent prospectus satisfying the requirements of section 10 of the Act would be satisfied if a free writing prospectus that is an electronic communication contained an active hyperlink to such most recent prospectus; and

2. A communication for which disclosure would be required under section 17(b) of the Act as a result of consideration given or to be given, directly or indirectly, by or on behalf of an issuer or other offering participant is an offer by the issuer or such other offering participant as the case may be and is, if written, a free writing prospectus of the issuer or other offering participant.

(ii) Where paragraph (b)(2)(i) of this section does not apply, a registration statement relating to the offering has been filed that includes a prospectus that, other than by reason of this section or Rule 431 satisfies the requirements of section 10 of the Act, including a price range where required by rule. For purposes of paragraph (f) of this section, the prospectus included in the registration statement relating to the offering that has been filed does not have to include a price range otherwise required by rule.

(3) Successors. A successor issuer will be considered to satisfy the applicable provisions of this paragraph (b) if:

(i) Its predecessor and it, taken together, satisfy the conditions, provided that the succession was primarily for the purpose of changing the state or other jurisdiction of incorporation of the predecessor or forming a holding company and the assets and liabilities of the successor at the time of succession were substantially the same as those of the predecessor; or

(ii) All predecessors met the conditions at the time of succession and the issuer has continued to do so since the succession.

(c) Information in a free writing prospectus. (1) A free writing prospectus used in reliance on this section may include information the substance of which is not included in the registration statement but such information shall not conflict with:

(i) Information contained in the filed registration statement, including any prospectus or prospectus supplement that is part of the registration statement (including pursuant to Rule 430B or Rule 430C) (§230.430B or §230.430C) and not superseded or modified; or

(ii) Information contained in the issuer's periodic and current reports filed or furnished to the Commission pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) that are incorporated by reference into the registration statement and not superseded or modified.

(2)(i) A free writing prospectus used in reliance on this section shall contain substantially the following legend:

The issuer has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, the issuer, any underwriter or any dealer participating in the offering will arrange to send you the prospectus if you request it by calling toll-free 1-8[xx-xxx-xxxx].

(ii) The legend also may provide an e-mail address at which the documents can be requested and may indicate that the documents also are available by accessing the issuer's Web site and provide the Internet address and the particular location of the documents on the Web site.

(d) Filing conditions. (1) Except as provided in paragraphs (d)(3), (d)(4), (d)(5), (d)(6), (d)(7), (d)(8), and (f) of this section, the following shall be filed with the Commission under this section by a means reasonably calculated to result in filing no later than the date of first use. The free writing prospectus filed for purposes of this section will not be filed as part of the registration statement:

(i) The issuer shall file:

(A) Any issuer free writing prospectus, as defined in paragraph (h) of this section;

(B) Any issuer information that is contained in a free writing prospectus prepared by or on behalf of or used by any other offering participant (but not information prepared by or on behalf of a person other than the issuer on the basis of or derived from that issuer information); and

(C) A description of the final terms of the issuer's securities in the offering or of the offering contained in a free writing prospectus or portion thereof prepared by or on behalf of the issuer or any offering participant, after such terms have been established for all classes in the offering; and

(ii) Any offering participant, other than the issuer, shall file any free writing prospectus that is used or referred to by such offering participant and distributed by or on behalf of such person in a manner reasonably designed to lead to its broad unrestricted dissemination.

(2) Each free writing prospectus or issuer information contained in a free writing prospectus filed under this section shall identify in the filing the Commission file number for the related registration statement or, if that file number is unknown, a description sufficient to identify the related registration statement.

(3) The condition to file a free writing prospectus under paragraph (d)(1) of this section shall not apply if the free writing prospectus does not contain substantive changes from or additions to a free writing prospectus previously filed with the Commission.

(4) The condition to file issuer information contained in a free writing prospectus of an offering participant other than the issuer shall not apply if such information is included (including through incorporation by reference) in a prospectus or free writing prospectus previously filed that relates to the offering.

(5) Notwithstanding the provisions of paragraph (d)(1) of this section:

(i) To the extent a free writing prospectus or portion thereof otherwise required to be filed contains a description of terms of the issuer's securities in the offering or of the offering that does not reflect the final terms, such free writing prospectus or portion thereof is not required to be filed; and

(ii) A free writing prospectus or portion thereof that contains only a description of the final terms of the issuer's securities in the offering or of the offerings shall be filed by the issuer within two days of the later of the date such final terms have been established for all classes of the offering and the date of first use.

(6)(i) Notwithstanding the provisions of paragraph (d) of this section, in an offering of asset-backed securities, a free writing prospectus or portion thereof required to be filed that contains only ABS informational and computational materials as defined in Item 1101(a) of Regulation AB (§229.1101 of this chapter), may be filed under this section within the timeframe permitted by Rule 426(b) (§230.426(b)) and such filing will satisfy the filing conditions under this section.

(ii) In the event that a free writing prospectus is used in reliance on this section and Rule 164 and the conditions of this section and Rule 164 (which may include the conditions of paragraph (d)(6)(i) of this section) are satisfied with respect thereto, then the use of that free writing prospectus shall not be conditioned on satisfaction of the provisions, including without limitation the filing conditions, of Rule 167 and Rule 426 (§§230.167 and 230.426). In the event that ABS informational and computational materials are used in reliance on Rule 167 and Rule 426 and the conditions of those rules are satisfied with respect thereto, then the use of those materials shall not be conditioned on the satisfaction of the conditions of Rule 164 and this section.

(iii) If a free writing prospectus used in an offering of asset-backed securities in reliance on this section and Rule 164 includes the specific address of or a hyperlink to an Internet Web site containing static

pool information and is filed in accordance with this paragraph (d), the static pool information relating to the asset-backed securities offering at that specific address is included in the free writing prospectus, and the filing including such address or hyperlink satisfies the filing conditions under this section.

(7) The condition to file a free writing prospectus or issuer information pursuant to this paragraph (d) for a free writing prospectus used at the same time as a communication in a business combination transaction subject to Rule 425 (§230.425) shall be satisfied if:

(i) The free writing prospectus or issuer information is filed in accordance with the provisions of Rule 425, including the filing timeframe of Rule 425;

(ii) The filed material pursuant to Rule 425 indicates on the cover page that it also is being filed pursuant to Rule 433; and

(iii) The filed material pursuant to Rule 425 contains the information specified in paragraph (c)(2) of this section.

(8) Notwithstanding any other provision of this paragraph (d):

(i) A road show for an offering that is a written communication is a free writing prospectus, provided that, except as provided in paragraph (d)(8)(ii) of this section, a written communication that is a road show shall not be required to be filed; and

(ii) In the case of a road show that is a written communication for an offering of common equity or convertible equity securities by an issuer that is, at the time of the filing of the registration statement for the offering, not required to file reports with the Commission pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934, such a road show is required to be filed pursuant to this section unless the issuer of the securities makes at least one version of a bona fide electronic road show available without restriction by means of graphic communication to any person, including any potential investor in the securities (and if there is more than one version of a road show for the offering that is a written communication, the version available without restriction is made available no later than the other versions).

Note to paragraph (d)(8): A communication that is provided or transmitted simultaneously with a road show and is provided or transmitted in a manner designed to make the communication available only as part of the road show and not separately is deemed to be part of the road show. Therefore, if the road show is not a written communication, such a simultaneous communication (even if it would otherwise be a graphic communication or other written communication) is also deemed not to be written. If the road show is written and not required to be filed, such a simultaneous communication is also not required to be filed. Otherwise, a written communication that is an offer contained in a separate file from a road show, whether or not the road show is a written communication, or otherwise transmitted separately from a road show, will be a free writing prospectus subject to any applicable filing conditions of paragraph (d) of this section.

(e) Treatment of information on, or hyperlinked from, an issuer's Web site. (1) An offer of an issuer's securities that is contained on an issuer's Web site or hyperlinked by the issuer from the issuer's Web site to a third party's Web site is a written offer of such securities by the issuer and, unless otherwise exempt or excluded from the requirements of section 5(b)(1) of the Act, the filing conditions of paragraph (d) of this section apply to such offer.

(2) Notwithstanding paragraph (e)(1) of this section, historical issuer information that is identified as such and located in a separate section of the issuer's Web site containing historical issuer information, that has not been incorporated by reference into or otherwise included in a prospectus of the issuer for the offering and that has not otherwise been used or referred to in connection with the offering, will not be considered a current offer of the issuer's securities and therefore will not be a free writing prospectus.

(f) Free writing prospectuses published or distributed by media. Any written offer for which an issuer or any other offering participant or any person acting on its behalf provided, authorized, or approved information that is prepared and published or disseminated by a person unaffiliated with the issuer or any other offering participant that is in the business of publishing, radio or television broadcasting or otherwise disseminating written communications would be considered at the time of publication or dissemination to be a free writing prospectus prepared by or on behalf of the issuer or such other offering participant for purposes of this section subject to the following:

(1) The conditions of paragraph (b)(2)(i) of this section will not apply and the conditions of paragraphs (c)(2) and (d) of this section will be deemed to be satisfied if:

(i) No payment is made or consideration given by or on behalf of the issuer or other offering participant for the written communication or its dissemination; and

(ii) The issuer or other offering participant in question files the written communication with the Commission, and includes in the filing the legend required by paragraph (c)(2) of this section, within four business days after the issuer or other offering participant becomes aware of the publication, radio or television broadcast, or other dissemination of the written communication.

(2) The filing obligation under paragraph (f)(1)(ii) of this section shall be subject to the following:

(i) The issuer or other offering participant shall not be required to file a free writing prospectus if the substance of that free writing prospectus has previously been filed with the Commission;

(ii) Any filing made pursuant to paragraph (f)(1)(ii) of this section may include information that the issuer or offering participant in question reasonably believes is necessary or appropriate to correct information included in the communication; and

(iii) In lieu of filing the actual written communication as published or disseminated as required by paragraph (f)(1)(ii) of this section, the issuer or offering participant in question may file a copy of the materials provided to the media, including transcripts of interviews or similar materials, provided the copy or transcripts contain all the information provided to the media.

(3) For purposes of this paragraph (f) of this section, an issuer that is in the business of publishing or radio or television broadcasting may rely on this paragraph (f) as to any publication or radio or television broadcast that is a free writing prospectus in respect of an offering of securities of the issuer if the issuer or an affiliate:

(i) Is the publisher of a bona fide newspaper, magazine, or business or financial publication of general and regular circulation or bona fide broadcaster of news including business and financial news;

(ii) Has established policies and procedures for the independence of the content of the publications or broadcasts from the offering activities of the issuer; and

(iii) Publishes or broadcasts the communication in the ordinary course.

(g) Record retention. Issuers and offering participants shall retain all free writing prospectuses they have used, and that have not been filed pursuant to paragraph (d) or (f) of this section, for 3 years following the initial bona fide offering of the securities in question.

Note to paragraph (g) of §230.433. To the extent that the record retention requirements of Rule 17a-4 of the Securities Exchange Act of 1934 (§240.17a-4 of this chapter) apply to free writing prospectuses required to be retained by a broker-dealer under this section, such free writing prospectuses are required to be retained in accordance with such requirements.

(h) Definitions. For purposes of this section:

(1) An issuer free writing prospectus means a free writing prospectus prepared by or on behalf of the issuer or used or referred to by the issuer and, in the case of an asset-backed issuer, prepared by or on behalf of a depositor, sponsor, or servicer (as defined in Item 1101 of Regulation AB) or affiliated depositor or used or referred to by any such person.

(2) Issuer information means material information about the issuer or its securities that has been provided by or on behalf of the issuer.

(3) A written communication or information is prepared or provided by or on behalf of a person if the person or an agent or representative of the person authorizes the communication or information or approves the communication or information before it is used. An offering participant other than the issuer shall not be an agent or representative of the issuer solely by virtue of its acting as an offering participant.

(4) A road show means an offer (other than a statutory prospectus or a portion of a statutory prospectus filed as part of a registration statement) that contains a presentation regarding an offering by one or more members of the issuer's management (and in the case of an offering of asset-backed securities, management involved in the securitization or servicing function of one or more of the depositors, sponsors, or servicers (as such terms are defined in Item 1101 of Regulation AB) or an affiliated depositor) and includes discussion of one or more of the issuer, such management, and the securities being offered; and

(5) A bona fide electronic road show means a road show that is a written communication transmitted by graphic means that contains a presentation by one or more officers of an issuer or other persons in an issuer's management (and in the case of an offering of asset-backed securities, management involved in the securitization or servicing function of one or more of the depositors, sponsors, or servicers (as such terms are defined in Item 1101 of Regulation AB) or an affiliated depositor) and, if more than one road show that is a written communication is being used, includes discussion of the same general areas of information regarding the issuer, such management, and the securities being offered as such other issuer road show or shows for the same offering that are written communications.

Note to §230.433. This section does not affect the operation of the provisions of clause (a) of section 2(a)(10) of the Act providing an exception from the definition of “prospectus.”

[70 FR 44815, Aug. 3, 2005, as amended at 71 FR 7413, Feb. 13, 2006]

Regulation FD

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§243.100 General rule regarding selective disclosure.

(a) Whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to any person described in paragraph (b)(1) of this section, the issuer shall make public disclosure of that information as provided in §243.101(e):

(1) Simultaneously, in the case of an intentional disclosure; and

(2) Promptly, in the case of a non-intentional disclosure.

(b)(1) Except as provided in paragraph (b)(2) of this section, paragraph (a) of this section shall apply to a disclosure made to any person outside the issuer:

(i) Who is a broker or dealer, or a person associated with a broker or dealer, as those terms are defined in Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a));

(ii) Who is an investment adviser, as that term is defined in Section 202(a)(11) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)); an institutional investment manager, as that term is defined in Section 13(f)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(f)(6)), that filed a report on Form 13F (17 CFR 249.325) with the Commission for the most recent quarter ended prior to the date of the disclosure; or a person associated with either of the foregoing. For purposes of this paragraph, a “person associated with an investment adviser or institutional investment manager” has the meaning set forth in Section 202(a)(17) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(17)), assuming for these purposes that an institutional investment manager is an investment adviser;

(iii) Who is an investment company, as defined in Section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3), or who would be an investment company but for Section 3(c)(1) (15 U.S.C. 80a-3(c)(1)) or Section 3(c)(7) (15 U.S.C. 80a-3(c)(7)) thereof, or an affiliated person of either of the foregoing. For purposes of this paragraph, “affiliated person” means only those persons described in Section 2(a)(3)(C), (D), (E), and (F) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(3)(C), (D), (E), and (F)), assuming for these purposes that a person who would be an investment company but for Section 3(c)(1) (15 U.S.C. 80a-3(c)(1)) or Section 3(c)(7) (15 U.S.C. 80a-3(c)(7)) of the Investment Company Act of 1940 is an investment company; or

(iv) Who is a holder of the issuer's securities, under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer's securities on the basis of the information.

(2) Paragraph (a) of this section shall not apply to a disclosure made:

(i) To a person who owes a duty of trust or confidence to the issuer (such as an attorney, investment banker, or accountant);

(ii) To a person who expressly agrees to maintain the disclosed information in confidence;

(iii) In connection with a securities offering registered under the Securities Act, other than an offering of the type described in any of Rule 415(a)(1)(i) through (vi) under the Securities Act (§230.415(a)(1)(i)



through (vi) of this chapter) (except an offering of the type described in Rule 415(a)(1)(i) under the Securities Act (§230.415(a)(1)(i) of this chapter) also involving a registered offering, whether or not underwritten, for capital formation purposes for the account of the issuer (unless the issuer's offering is being registered for the purpose of evading the requirements of this section)), if the disclosure is by any of the following means:

(A) A registration statement filed under the Securities Act, including a prospectus contained therein;

(B) A free writing prospectus used after filing of the registration statement for the offering or a communication falling within the exception to the definition of prospectus contained in clause (a) of section 2(a)(10) of the Securities Act;

(C) Any other Section 10(b) prospectus;

(D) A notice permitted by Rule 135 under the Securities Act (§230.135 of this chapter);

(E) A communication permitted by Rule 134 under the Securities Act (§230.134 of this chapter); or

(F) An oral communication made in connection with the registered securities offering after filing of the registration statement for the offering under the Securities Act.

[65 FR 51738, Aug. 24, 2000, as amended at 70 FR 44829, Aug. 3, 2005; 74 FR 63865, Dec. 4, 2009; 75 FR 61051, Oct. 4, 2010; 76 FR 71877, Nov. 21, 2011]

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§243.101 Definitions.

This section defines certain terms as used in Regulation FD (§§243.100 -243.103).

(a) Intentional. A selective disclosure of material nonpublic information is “intentional” when the person making the disclosure either knows, or is reckless in not knowing, that the information he or she is communicating is both material and nonpublic.

(b) Issuer. An “issuer” subject to this regulation is one that has a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or is required to file reports under Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)), including any closed-end investment company (as defined in Section 5(a)(2) of the Investment Company Act of 1940) (15 U.S.C. 80a-5(a)(2)), but not including any other investment company or any foreign government or foreign private issuer, as those terms are defined in Rule 405 under the Securities Act (§230.405 of this chapter).

(c) Person acting on behalf of an issuer. “Person acting on behalf of an issuer” means any senior official of the issuer (or, in the case of a closed-end investment company, a senior official of the issuer's investment adviser), or any other officer, employee, or agent of an issuer who regularly communicates with any person described in §243.100(b)(1)(i), (ii), or (iii), or with holders of the issuer's securities. An officer, director, employee, or agent of an issuer who discloses material nonpublic information in breach of a duty of trust or confidence to the issuer shall not be considered to be acting on behalf of the issuer.

(d) Promptly. “Promptly” means as soon as reasonably practicable (but in no event after the later of 24 hours or the commencement of the next day's trading on the New York Stock Exchange) after a senior official of the issuer (or, in the case of a closed-end investment company, a senior official of the issuer's investment adviser) learns that there has been a non-intentional disclosure by the issuer or person acting

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on behalf of the issuer of information that the senior official knows, or is reckless in not knowing, is both material and nonpublic.

(e) Public disclosure. (1) Except as provided in paragraph (e)(2) of this section, an issuer shall make the “public disclosure” of information required by §243.100(a) by furnishing to or filing with the Commission a Form 8-K (17 CFR 249.308) disclosing that information.

(2) An issuer shall be exempt from the requirement to furnish or file a Form 8-K if it instead disseminates the information through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.

(f) Senior official. “Senior official” means any director, executive officer (as defined in §240.3b-7 of this chapter), investor relations or public relations officer, or other person with similar functions.

(g) Securities offering. For purposes of §243.100(b)(2)(iv):

(1) Underwritten offerings. A securities offering that is underwritten commences when the issuer reaches an understanding with the broker-dealer that is to act as managing underwriter and continues until the later of the end of the period during which a dealer must deliver a prospectus or the sale of the securities (unless the offering is sooner terminated);

(2) Non-underwritten offerings. A securities offering that is not underwritten:

(i) If covered by Rule 415(a)(1)(x) (§230.415(a)(1)(x) of this chapter), commences when the issuer makes its first bona fide offer in a takedown of securities and continues until the later of the end of the period during which each dealer must deliver a prospectus or the sale of the securities in that takedown (unless the takedown is sooner terminated);

(ii) If a business combination as defined in Rule 165(f)(1) (§230.165(f)(1) of this chapter), commences when the first public announcement of the transaction is made and continues until the completion of the vote or the expiration of the tender offer, as applicable (unless the transaction is sooner terminated);

(iii) If an offering other than those specified in paragraphs (a) and (b) of this section, commences when the issuer files a registration statement and continues until the later of the end of the period during which each dealer must deliver a prospectus or the sale of the securities (unless the offering is sooner terminated).

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§243.102 No effect on antifraud liability.

No failure to make a public disclosure required solely by §243.100 shall be deemed to be a violation of Rule 10b-5 (17 CFR 240.10b-5) under the Securities Exchange Act.

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§243.103 No effect on Exchange Act reporting status.

A failure to make a public disclosure required solely by §243.100 shall not affect whether:





(a) For purposes of Forms S-2 (17 CFR 239.12), S-3 (17 CFR 239.13) and S-8 (17 CFR 239.16b) under the Securities Act, an issuer is deemed to have filed all the material required to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) or, where applicable, has made those filings in a timely manner; or

(b) There is adequate current public information about the issuer for purposes of §230.144(c) of this chapter (Rule 144(c)).

BASIC INC. v. LEVINSON, 485 U.S. 224 (1988)

485 U.S. 224

BASIC INC. ET AL. v. LEVINSON ET AL. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT No. 86-279. Argued November 2, 1987 Decided March 7, 1988

The Securities and Exchange Commission's Rule 10b-5, promulgated under 10(b) of the Securities Exchange Act of 1934 (Act), prohibits, in connection with the purchase or sale of any security, the making of any untrue statement of a material fact or the omission of a material fact that would render statements made not misleading. In December 1978, Combustion Engineering, Inc., and Basic Incorporated agreed to merge. During the preceding two years, representatives of the two companies had various meetings and conversations regarding the possibility of a merger; during that time Basic made three public statements denying that any merger negotiations were taking place or that it knew of any corporate developments that would account for heavy trading activity in its stock. Respondents, former Basic shareholders who sold their stock between Basic's first public denial of merger activity and the suspension of trading in Basic stock just prior to the merger announcement, filed a class action against Basic and some of its directors, alleging that Basic's statements had been false or misleading, in violation of 10(b) and Rule 10b-5, and that respondents were injured by selling their shares at prices artificially depressed by those statements. The District Court certified respondents' class, but granted summary judgment for petitioners on the merits. The Court of Appeals affirmed the class certification, agreeing that under a "fraud-on-the-market" theory, respondents' reliance on petitioners' misrepresentations could be presumed, and thus that common issues predominated over questions pertaining to individual plaintiffs. The Court of Appeals reversed the grant of summary judgment and remanded, rejecting the District Court's view that preliminary merger discussions are immaterial as a matter of law, and holding that even discussions that might not otherwise have been material, become so by virtue of a statement denying their existence.

Held:

1. The standard set forth in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 , whereby an omitted fact is material if there is a substantial likelihood that its disclosure would have been considered significant by a reasonable investor, is expressly adopted for the 10(b) and Rule 10b-5 context. Pp. 230-232. [485 U.S. 224, 225]

2. The "agreement-in-principle" test, under which preliminary merger discussions do not become material until the would-be merger partners have reached agreement as to the price and structure of

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the transaction, is rejected as a bright-line materiality test. Its policy-based rationales do not justify the exclusion of otherwise significant information from the definition of materiality. Pp. 232-236.

3. The Court of Appeals' view that information concerning otherwise insignificant developments becomes material solely because of an affirmative denial of their existence is also rejected: Rule 10b-5 requires that the statements be misleading as to a material fact. Pp. 237-238.

4. Materiality in the merger context depends on the probability that the transaction will be consummated, and its significance to the issuer of the securities. Thus, materiality depends on the facts and is to be determined on a case-by-case basis. Pp. 238-241.

5. The courts below properly applied a presumption of reliance, supported in part by the fraud-on-the-market theory, instead of requiring each plaintiff to show direct reliance on Basic's statements. Such a presumption relieves the Rule 10b-5 plaintiff of an unrealistic evidentiary burden, and is consistent with, and supportive of, the Act's policy of requiring full disclosure and fostering reliance on market integrity. The presumption is also supported by common sense and probability: an investor who trades stock at the price set by an impersonal market does so in reliance on the integrity of that price. Because most publicly available information is reflected in market price, an investor's reliance on any public material misrepresentations may be presumed for purposes of a Rule 10b-5 action. Pp. 241-247.

6. The presumption of reliance may be rebutted: Rule 10b-5 defendants may attempt to show that the price was not affected by their misrepresentation, or that the plaintiff did not trade in reliance on the integrity of the market price. Pp. 248-249.

786 F.2d 741, vacated and remanded.

BLACKMUN, J., delivered the opinion of the Court, in which BRENNAN, MARSHALL, and STEVENS, JJ., joined, and in Parts I, II, and III of which WHITE and O'CONNOR, JJ., joined. WHITE, J., filed an opinion concurring in part and dissenting in part, in which O'CONNOR, J., joined, post, p. 250. REHNQUIST, C. J., and SCALIA and KENNEDY, JJ., took no part in the consideration or decision of the case.

Joel W. Sternman argued the cause for petitioners. With him on the briefs were H. Stephen Madsen, Norman S. Jeavons, William W. Golub, Ambrose Doskow, Arnold I. Roth, and Katherine M. Blakeley. [485 U.S. 224, 226]

Wayne A. Cross argued the cause for respondents. With him on the brief were David S. Elkind and Lee A. Pickard. *

[ Footnote * ] Briefs of amici curiae urging reversal were filed for the American Corporate Counsel Association by Stephen M. Shapiro, Andrew L. Frey, Kenneth S. Geller, Daniel Harris, and Mark I. Levy; for Arthur Andersen & Co. et al. by Victor M. Earle III, Carl D. Liggio, Donald Dreyfus, Harris J. Amhowitz, Kenneth H. Lang, Richard H. Murray, Leonard P. Novello, and Eldon Olson; and for the American Institute of Certified Public Accountants by Louis A. Craco.

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Solicitor General Fried, Deputy Solicitor General Cohen, Jerrold J. Ganzfried, Daniel L. Goelzer, Paul Gonson, Jacob H. Stillman, Eric Summergrad, Katharine B. Gresham, and Max Berueffy filed a brief for the United States as amicus curiae.

JUSTICE BLACKMUN delivered the opinion of the Court.

This case requires us to apply the materiality requirement of 10(b) of the Securities Exchange Act of 1934 (1934 Act), 48 Stat. 881, as amended, 15 U.S.C. 78a et seq., and the Securities and Exchange Commission's Rule 10b-5, 17 CFR 240.10b-5 (1987), promulgated thereunder, in the context of preliminary corporate merger discussions. We must also determine whether a person who traded a corporation's shares on a securities exchange after the issuance of a materially misleading statement by the corporation may invoke a rebuttable presumption that, in trading, he relied on the integrity of the price set by the market.

I

Prior to December 20, 1978, Basic Incorporated was a publicly traded company primarily engaged in the business of manufacturing chemical refractories for the steel industry. As early as 1965 or 1966, Combustion Engineering, Inc., a company producing mostly alumina-based refractories, expressed some interest in acquiring Basic, but was deterred from pursuing this inclination seriously because of antitrust concerns it then entertained. See App. 81-83. In 1976, however, regulatory action opened the way to a renewal of [485 U.S. 224, 227] Combustion's interest. 1 The "Strategic Plan," dated October 25, 1976, for Combustion's Industrial Products Group included the objective: "Acquire Basic Inc. $30 million." App. 337.

Beginning in September 1976, Combustion representatives had meetings and telephone conversations with Basic officers and directors, including petitioners here, 2 concerning the possibility of a merger. 3 During 1977 and 1978, Basic made three public statements denying that it was engaged in merger negotiations. 4 On December 18, 1978, Basic asked [485 U.S. 224, 228] the New York Stock Exchange to suspend trading in its shares and issued a release stating that it had been "approached" by another company concerning a merger. Id., at 413. On December 19, Basic's board endorsed Combustion's offer of $46 per share for its common stock, id., at 335, 414-416, and on the following day publicly announced its approval of Combustion's tender offer for all outstanding shares.

Respondents are former Basic shareholders who sold their stock after Basic's first public statement of October 21, 1977, and before the suspension of trading in December 1978. Respondents brought a class action against Basic and its directors, asserting that the defendants issued three false or misleading public statements and thereby were in violation of 10(b) of the 1934 Act and of Rule 10b-5. Respondents alleged that they were injured by selling Basic shares at artificially depressed prices in a market affected by petitioners' misleading statements and in reliance thereon.

The District Court adopted a presumption of reliance by members of the plaintiff class upon petitioners' public statements that enabled the court to conclude that common questions of fact or law predominated over particular questions pertaining to individual plaintiffs. See Fed. Rule Civ. Proc.

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23(b)(3). The District Court therefore certified respondents' class. 5 On the merits, however, the District Court granted [485 U.S. 224, 229] summary judgment for the defendants. It held that, as a matter of law, any misstatements were immaterial: there were no negotiations ongoing at the time of the first statement, and although negotiations were taking place when the second and third statements were issued, those negotiations were not "destined, with reasonable certainty, to become a merger agreement in principle." App. to Pet. for Cert. 103a.

The United States Court of Appeals for the Sixth Circuit affirmed the class certification, but reversed the District Court's summary judgment, and remanded the case. 786 F.2d 741 (1986). The court reasoned that while petitioners were under no general duty to disclose their discussions with Combustion, any statement the company voluntarily released could not be "`so incomplete as to mislead.'" Id., at 746, quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (CA2 1968) (en banc), cert. denied sub nom. Coates v. SEC, 394 U.S. 976 (1969). In the Court of Appeals' view, Basic's statements that no negotiations were taking place, and that it knew of no corporate developments to account for the heavy trading activity, were misleading. With respect to materiality, the court rejected the argument that preliminary merger discussions are immaterial as a matter of law, and held that "once a statement is made denying the existence of any discussions, even discussions that might not have been material in absence of the denial are material because they make the statement made untrue." 786 F.2d, at 749.

The Court of Appeals joined a number of other Circuits in accepting the "fraud-on-the-market theory" to create a rebuttable presumption that respondents relied on petitioners' material [485 U.S. 224, 230] misrepresentations, noting that without the presumption it would be impractical to certify a class under Federal Rule of Civil Procedure 23(b)(3). See 786 F.2d, at 750-751.

We granted certiorari, 479 U.S. 1083 (1987), to resolve the split, see Part III, infra, among the Courts of Appeals as to the standard of materiality applicable to preliminary merger discussions, and to determine whether the courts below properly applied a presumption of reliance in certifying the class, rather than requiring each class member to show direct reliance on Basic's statements.

II

The 1934 Act was designed to protect investors against manipulation of stock prices. See S. Rep. No. 792, 73d Cong., 2d Sess., 1-5 (1934). Underlying the adoption of extensive disclosure requirements was a legislative philosophy: "There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy." H. R. Rep. No. 1383, 73d Cong., 2d Sess., 11 (1934). This Court "repeatedly has described the `fundamental purpose' of the Act as implementing a `philosophy of full disclosure.'" Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477 -478 (1977), quoting SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186 (1963).

Pursuant to its authority under 10(b) of the 1934 Act, 15 U.S.C. 78j, the Securities and Exchange Commission promulgated Rule 10b-5. 6 Judicial interpretation and application, [485 U.S. 224, 231] legislative acquiescence, and the passage of time have removed any doubt that a private cause of action exists for a violation of 10(b) and Rule 10b-5, and constitutes an essential tool for enforcement of




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the 1934 Act's requirements. See, e. g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 196 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975).

The Court previously has addressed various positive and common-law requirements for a violation of 10(b) or of Rule 10b-5. See, e. g., Santa Fe Industries, Inc. v. Green, supra ("manipulative or deceptive" requirement of the statute); Blue Chip Stamps v. Manor Drug Stores, supra ("in connection with the purchase or sale" requirement of the Rule); Dirks v. SEC, 463 U.S. 646 (1983) (duty to disclose); Chiarella v. United States, 445 U.S. 222 (1980) (same); Ernst & Ernst v. Hochfelder, supra (scienter). See also Carpenter v. United States, 484 U.S. 19 (1987) (confidentiality). The Court also explicitly has defined a standard of materiality under the securities laws, see TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), concluding in the proxy-solicitation context that "[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." Id., at 449. 7 Acknowledging that certain information concerning corporate developments could well be of "dubious significance," id., at 448, the Court was careful not to set too low a standard of materiality; it was concerned that a minimal standard might bring an overabundance of information within its reach, and lead management "simply to bury the shareholders in an avalanche of trivial information - a result that is hardly conducive to informed decisionmaking." Id., at 448-449. It further explained that to fulfill the materiality requirement "there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the [485 U.S. 224, 232] reasonable investor as having significantly altered the `total mix' of information made available." Id., at 449. We now expressly adopt the TSC Industries standard of materiality for the 10(b) and Rule 10b-5 context. 8

III

The application of this materiality standard to preliminary merger discussions is not self-evident. Where the impact of the corporate development on the target's fortune is certain and clear, the TSC Industries materiality definition admits straightforward application. Where, on the other hand, the event is contingent or speculative in nature, it is difficult to ascertain whether the "reasonable investor" would have considered the omitted information significant at the time. Merger negotiations, because of the ever-present possibility that the contemplated transaction will not be effectuated, fall into the latter category. 9

A

Petitioners urge upon us a Third Circuit test for resolving this difficulty. 10 See Brief for Petitioners 20-22. Under this [485 U.S. 224, 233] approach, preliminary merger discussions do not become material until "agreement-in-principle" as to the price and structure of the transaction has been reached between the would-be merger partners. See Greenfield v. Heublein, Inc., 742 F.2d 751, 757 (CA3 1984), cert. denied, 469 U.S. 1215 (1985). By definition, then, information concerning any negotiations not yet at the agreement-in-principle stage could be withheld or even misrepresented without a violation of Rule 10b-5.

Three rationales have been offered in support of the "agreement-in-principle" test. The first derives from the concern expressed in TSC Industries that an investor not be overwhelmed by excessively













detailed and trivial information, and focuses on the substantial risk that preliminary merger discussions may collapse: because such discussions are inherently tentative, disclosure of their existence itself could mislead investors and foster false optimism. See Greenfield v. Heublein, Inc., 742 F.2d, at 756; Reiss v. Pan American World Airways, Inc., 711 F.2d 11, 14 (CA2 1983). The other two justifications for the agreement-in-principle standard are based on management concerns: because the requirement of "agreement-in-principle" limits the scope of disclosure obligations, it helps preserve the confidentiality of merger discussions where earlier disclosure might prejudice the negotiations; and the test also provides a usable, bright-line rule for determining when disclosure must be made. See Greenfield v. Heublein, Inc., 742 F.2d, at 757; Flamm [485 U.S. 224, 234] v. Eberstadt, 814 F.2d 1169, 1176-1178 (CA7), cert. denied, 484 U.S. 853 (1987).

None of these policy-based rationales, however, purports to explain why drawing the line at agreement-in-principle reflects the significance of the information upon the investor's decision. The first rationale, and the only one connected to the concerns expressed in TSC Industries, stands soundly rejected, even by a Court of Appeals that otherwise has accepted the wisdom of the agreement-in-principle test. "It assumes that investors are nitwits, unable to appreciate - even when told - that mergers are risky propositions up until the closing." Flamm v. Eberstadt, 814 F.2d, at 1175. Disclosure, and not paternalistic withholding of accurate information, is the policy chosen and expressed by Congress. We have recognized time and again, a "fundamental purpose" of the various Securities Acts, "was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry." SEC v. Capital Gains Research Bureau, Inc., 375 U.S., at 186 . Accord, Affiliated Ute Citizens v. United States, 406 U.S. 128, 151 (1972); Santa Fe Industries, Inc. v. Green, 430 U.S., at 477 . The role of the materiality requirement is not to "attribute to investors a child-like simplicity, and inability to grasp the probabilistic significance of negotiations," Flamm v. Eberstadt, 814 F.2d, at 1175, but to filter out essentially useless information that a reasonable investor would not consider significant, even as part of a larger "mix" of factors to consider in making his investment decision. TSC Industries, Inc. v. Northway, Inc., 426 U.S., at 448 -449.

The second rationale, the importance of secrecy during the early stages of merger discussions, also seems irrelevant to an assessment whether their existence is significant to the trading decision of a reasonable investor. To avoid a "bidding war" over its target, an acquiring firm often will insist that negotiations remain confidential, see, e. g., In re Carnation [485 U.S. 224, 235] Co., Exchange Act Release No. 22214, 33 S. E. C. Docket 1025 (1985), and at least one Court of Appeals has stated that "silence pending settlement of the price and structure of a deal is beneficial to most investors, most of the time." Flamm v. Eberstadt, 814 F.2d, at 1177. 11

We need not ascertain, however, whether secrecy necessarily maximizes shareholder wealth - although we note that the proposition is at least disputed as a matter of theory and empirical research 12 - for this case does not concern the timing of a disclosure; it concerns only its accuracy and completeness. 13 We face here the narrow question whether information concerning the existence and status of preliminary merger discussions is significant to the reasonable investor's trading decision. Arguments based on the premise that some disclosure would be "premature" in a sense are more properly


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considered under the rubric of an issuer's duty to disclose. The "secrecy" rationale is simply inapposite to the definition of materiality. [485 U.S. 224, 236]

The final justification offered in support of the agreement-in-principle test seems to be directed solely at the comfort of corporate managers. A bright-line rule indeed is easier to follow than a standard that requires the exercise of judgment in the light of all the circumstances. But ease of application alone is not an excuse for ignoring the purposes of the Securities Acts and Congress' policy decisions. Any approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive. In TSC Industries this Court explained: "The determination [of materiality] requires delicate assessments of the inferences a `reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him . . . ." 426 U.S., at 450 . After much study, the Advisory Committee on Corporate Disclosure cautioned the SEC against administratively confining materiality to a rigid formula. 14 Courts also would do well to heed this advice.

We therefore find no valid justification for artificially excluding from the definition of materiality information concerning merger discussions, which would otherwise be considered significant to the trading decision of a reasonable investor, merely because agreement-in-principle as to price and structure has not yet been reached by the parties or their representatives. [485 U.S. 224, 237]

B

The Sixth Circuit explicitly rejected the agreement-in-principle test, as we do today, but in its place adopted a rule that, if taken literally, would be equally insensitive, in our view, to the distinction between materiality and the other elements of an action under Rule 10b-5:

"When a company whose stock is publicly traded makes a statement, as Basic did, that `no negotiations' are underway, and that the corporation knows of `no reason for the stock's activity,' and that `management is unaware of any present or pending corporate development that would result in the abnormally heavy trading activity,' information concerning ongoing acquisition discussions becomes material by virtue of the statement denying their existence. . . .

. . . . .

". . . In analyzing whether information regarding merger discussions is material such that it must be affirmatively disclosed to avoid a violation of Rule 10b-5, the discussions and their progress are the primary considerations. However, once a statement is made denying the existence of any discussions, even discussions that might not have been material in absence of the denial are material because they make the statement made untrue." 786 F.2d, at 748-749 (emphasis in original). 15 [485 U.S. 224, 238]

This approach, however, fails to recognize that, in order to prevail on a Rule 10b-5 claim, a plaintiff must show that the statements were misleading as to a material fact. It is not enough that a statement is false or incomplete, if the misrepresented fact is otherwise insignificant.

C




Even before this Court's decision in TSC Industries, the Second Circuit had explained the role of the materiality requirement of Rule 10b-5, with respect to contingent or speculative information or events, in a manner that gave that term meaning that is independent of the other provisions of the Rule. Under such circumstances, materiality "will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity." SEC v. Texas Gulf Sulphur Co., 401 F.2d, at 849. Interestingly, neither the Third Circuit decision adopting the agreement-in-principle test nor petitioners here take issue with this general standard. Rather, they suggest that with respect to preliminary merger discussions, there are good reasons to draw a line at agreement on price and structure.

In a subsequent decision, the late Judge Friendly, writing for a Second Circuit panel, applied the Texas Gulf Sulphur probability/magnitude approach in the specific context of preliminary merger negotiations. After acknowledging that materiality is something to be determined on the basis of the particular facts of each case, he stated:

"Since a merger in which it is bought out is the most important event that can occur in a small corporation's life, to wit, its death, we think that inside information, as regards a merger of this sort, can become material at an earlier stage than would be the case as regards lesser transactions - and this even though the mortality rate of mergers in such formative stages is doubtless high." SEC v. Geon Industries, Inc., 531 F.2d 39, 47-48 (1976). [485 U.S. 224, 239]

We agree with that analysis. 16

Whether merger discussions in any particular case are material therefore depends on the facts. Generally, in order to assess the probability that the event will occur, a factfinder will need to look to indicia of interest in the transaction at the highest corporate levels. Without attempting to catalog all such possible factors, we note by way of example that board resolutions, instructions to investment bankers, and actual negotiations between principals or their intermediaries may serve as indicia of interest. To assess the magnitude of the transaction to the issuer of the securities allegedly manipulated, a factfinder will need to consider such facts as the size of the two corporate entities and of the potential premiums over market value. No particular event or factor short of closing the transaction need be either necessary or sufficient by itself to render merger discussions material. 17 [485 U.S. 224, 240]

As we clarify today, materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information. 18 The fact-specific inquiry we endorse here is consistent with the approach a number of courts have taken in assessing the materiality of merger negotiations. 19 Because the standard of materiality we have [485 U.S. 224, 241] adopted differs from that used by both courts below, we remand the case for reconsideration of the question whether a grant of summary judgment is appropriate on this record. 20

IV

A







We turn to the question of reliance and the fraud-on-the-market theory. Succinctly put:

"The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business. . . . Misleading statements will therefore [485 U.S. 224, 242] defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. . . . The causal connection between the defendants' fraud and the plaintiffs' purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations." Peil v. Speiser, 806 F.2d 1154, 1160-1161 (CA3 1986).

Our task, of course, is not to assess the general validity of the theory, but to consider whether it was proper for the courts below to apply a rebuttable presumption of reliance, supported in part by the fraud-on-the-market theory. Cf. the comments of the dissent, post, at 252-255.

This case required resolution of several common questions of law and fact concerning the falsity or misleading nature of the three public statements made by Basic, the presence or absence of scienter, and the materiality of the misrepresentations, if any. In their amended complaint, the named plaintiffs alleged that in reliance on Basic's statements they sold their shares of Basic stock in the depressed market created by petitioners. See Amended Complaint in No. C79-1220 (ND Ohio), �� 27, 29, 35, 40; see also id., � 33 (alleging effect on market price of Basic's statements). Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action, since individual issues then would have overwhelmed the common ones. The District Court found that the presumption of reliance created by the fraud-on-the-market theory provided "a practical resolution to the problem of balancing the substantive requirement of proof of reliance in securities cases against the procedural requisites of [Federal Rule of Civil Procedure] 23." The District Court thus concluded that with reference to each public statement and its impact upon the open market for Basic shares, common questions predominated over individual questions, as required by Federal Rules of Civil Procedure 23(a)(2) and (b)(3). [485 U.S. 224, 243]

Petitioners and their amici complain that the fraud-on-the-market theory effectively eliminates the requirement that a plaintiff asserting a claim under Rule 10b-5 prove reliance. They note that reliance is and long has been an element of common-law fraud, see, e. g., Restatement (Second) of Torts 525 (1977); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts 108 (5th ed. 1984), and argue that because the analogous express right of action includes a reliance requirement, see, e. g., 18(a) of the 1934 Act, as amended, 15 U.S.C. 78r(a), so too must an action implied under 10(b).

We agree that reliance is an element of a Rule 10b-5 cause of action. See Ernst & Ernst v. Hochfelder, 425 U.S., at 206 (quoting Senate Report). Reliance provides the requisite causal connection between a defendant's misrepresentation and a plaintiff's injury. See, e. g., Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 92 (CA2 1981); List v. Fashion Park, Inc., 340 F.2d 457, 462 (CA2), cert. denied sub nom. List v. Lerner, 382 U.S. 811 (1965). There is, however, more than one way to demonstrate the causal connection. Indeed, we previously have dispensed with a requirement of positive proof of



reliance, where a duty to disclose material information had been breached, concluding that the necessary nexus between the plaintiffs' injury and the defendant's wrongful conduct had been established. See Affiliated Ute Citizens v. United States, 406 U.S., at 153 -154. Similarly, we did not require proof that material omissions or misstatements in a proxy statement decisively affected voting, because the proxy solicitation itself, rather than the defect in the solicitation materials, served as an essential link in the transaction. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384 -385 (1970).

The modern securities markets, literally involving millions of shares changing hands daily, differ from the face-to-face [485 U.S. 224, 244] transactions contemplated by early fraud cases, 21 and our understanding of Rule 10b-5's reliance requirement must encompass these differences. 22

"In face-to-face transactions, the inquiry into an investor's reliance upon information is into the subjective pricing of that information by that investor. With the presence of a market, the market is interposed between seller and buyer and, ideally, transmits information to the investor in the processed form of a market price. Thus the market is performing a substantial part of the valuation process performed by the investor in a face-to-face transaction. The market is acting as the unpaid agent of the investor, informing him that given all the information available to it, the value of the stock is worth the market price." In re LTV Securities Litigation, 88 F. R. D. 134, 143 (ND Tex. 1980).

Accord, e. g., Peil v. Speiser, 806 F.2d, at 1161 ("In an open and developed market, the dissemination of material misrepresentations or withholding of material information typically affects the price of the stock, and purchasers generally rely on the price of the stock as a reflection of its value"); Blackie [485 U.S. 224, 245] v. Barrack, 524 F.2d 891, 908 (CA9 1975) ("[T]he same causal nexus can be adequately established indirectly, by proof of materiality coupled with the common sense that a stock purchaser does not ordinarily seek to purchase a loss in the form of artificially inflated stock"), cert. denied, 429 U.S. 816 (1976).

B

Presumptions typically serve to assist courts in managing circumstances in which direct proof, for one reason or another, is rendered difficult. See, e. g., 1 D. Louisell & C. Mueller, Federal Evidence 541-542 (1977). The courts below accepted a presumption, created by the fraud-on-the-market theory and subject to rebuttal by petitioners, that persons who had traded Basic shares had done so in reliance on the integrity of the price set by the market, but because of petitioners' material misrepresentations that price had been fraudulently depressed. Requiring a plaintiff to show a speculative state of facts, i. e., how he would have acted if omitted material information had been disclosed, see Affiliated Ute Citizens v. United States, 406 U.S., at 153 -154, or if the misrepresentation had not been made, see Sharp v. Coopers & Lybrand, 649 F.2d 175, 188 (CA3 1981), cert. denied, 455 U.S. 938 (1982), would place an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market. Cf. Mills v. Electric Auto-Lite Co., 396 U.S., at 385 .

Arising out of considerations of fairness, public policy, and probability, as well as judicial economy, presumptions are also useful devices for allocating the burdens of proof between parties. See E. Cleary, McCormick on Evidence 968-969 (3d ed. 1984); see also Fed. Rule Evid. 301 and Advisory Committee










Notes, 28 U.S.C. App., p. 685. The presumption of reliance employed in this case is consistent with, and, by facilitating Rule 10b-5 litigation, supports, the congressional policy embodied in the 1934 Act. In drafting that Act, [485 U.S. 224, 246] Congress expressly relied on the premise that securities markets are affected by information, and enacted legislation to facilitate an investor's reliance on the integrity of those markets:

"No investor, no speculator, can safely buy and sell securities upon the exchanges without having an intelligent basis for forming his judgment as to the value of the securities he buys or sells. The idea of a free and open public market is built upon the theory that competing judgments of buyers and sellers as to the fair price of a security brings [sic] about a situation where the market price reflects as nearly as possible a just price. Just as artificial manipulation tends to upset the true function of an open market, so the hiding and secreting of important information obstructs the operation of the markets as indices of real value." H. R. Rep. No. 1383, at 11.

See Lipton v. Documation, Inc., 734 F.2d 740, 748 (CA11 1984), cert. denied, 469 U.S. 1132 (1985). 23

The presumption is also supported by common sense and probability. Recent empirical studies have tended to confirm Congress' premise that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations. 24 It has been noted that "it is hard to imagine that [485 U.S. 224, 247] there ever is a buyer or seller who does not rely on market integrity. Who would knowingly roll the dice in a crooked crap game?" Schlanger v. Four-Phase Systems Inc., 555 F. Supp. 535, 538 (SDNY 1982). Indeed, nearly every court that has considered the proposition has concluded that where materially misleading statements have been disseminated into an impersonal, well-developed market for securities, the reliance of individual plaintiffs on the integrity of the market price may be presumed. 25 Commentators generally have applauded the adoption of one variation or another of the fraud-on-the-market theory. 26 An investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price. Because most publicly available information is reflected in market price, an investor's reliance on any public material misrepresentations, therefore, may be presumed for purposes of a Rule 10b-5 action. [485 U.S. 224, 248]

C

The Court of Appeals found that petitioners "made public, material misrepresentations and [respondents] sold Basic stock in an impersonal, efficient market. Thus the class, as defined by the district court, has established the threshold facts for proving their loss." 786 F.2d, at 751. 27 The court acknowledged that petitioners may rebut proof of the elements giving rise to the presumption, or show that the misrepresentation in fact did not lead to a distortion of price or that an individual plaintiff traded or would have traded despite his knowing the statement was false. Id., at 750, n. 6.

Any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance. For example, if petitioners could show that the "market makers" were privy to the truth about the merger discussions here with Combustion, and thus that the market price would not







have been affected by their misrepresentation, the causal connection could be broken: the basis for finding that the fraud had been transmitted through market price would be gone. 28 Similarly, if, despite petitioners' allegedly fraudulent attempt [485 U.S. 224, 249] to manipulate market price, news of the merger discussions credibly entered the market and dissipated the effects of the misstatements, those who traded Basic shares after the corrective statements would have no direct or indirect connection with the fraud. 29 Petitioners also could rebut the presumption of reliance as to plaintiffs who would have divested themselves of their Basic shares without relying on the integrity of the market. For example, a plaintiff who believed that Basic's statements were false and that Basic was indeed engaged in merger discussions, and who consequently believed that Basic stock was artificially underpriced, but sold his shares nevertheless because of other unrelated concerns, e. g., potential antitrust problems, or political pressures to divest from shares of certain businesses, could not be said to have relied on the integrity of a price he knew had been manipulated.

V

In summary:

1. We specifically adopt, for the 10(b) and Rule 10b-5 context, the standard of materiality set forth in TSC Industries, Inc. v. Northway, Inc., 426 U.S., at 449 .

2. We reject "agreement-in-principle as to price and structure" as the bright-line rule for materiality.

3. We also reject the proposition that "information becomes material by virtue of a public statement denying it." [485 U.S. 224, 250]

4. Materiality in the merger context depends on the probability that the transaction will be consummated, and its significance to the issuer of the securities. Materiality depends on the facts and thus is to be determined on a case-by-case basis.

5. It is not inappropriate to apply a presumption of reliance supported by the fraud-on-the-market theory.

6. That presumption, however, is rebuttable.

7. The District Court's certification of the class here was appropriate when made but is subject on remand to such adjustment, if any, as developing circumstances demand.

The judgment of the Court of Appeals is vacated, and the case is remanded to that court for further proceedings consistent with this opinion.

It is so ordered.

THE CHIEF JUSTICE, JUSTICE SCALIA, and JUSTICE KENNEDY took no part in the consideration or decision of this case.

Footnotes




[ Footnote 1 ] In what are known as the Kaiser-Lavino proceedings, the Federal Trade Commission took the position in 1976 that basic or chemical refractories were in a market separate from nonbasic or acidic or alumina refractories; this would remove the antitrust barrier to a merger between Basic and Combustion's refractories subsidiary. On October 12, 1978, the Initial Decision of the Administrative law Judge confirmed that position. See In re Kaiser Aluminum & Chemical Corp., 93 F. T. C. 764, 771, 809-810 (1979). See also the opinion of the Court of Appeals in this case, 786 F.2d 741, 745 (CA6 1986).

[ Footnote 2 ] In addition to Basic itself, petitioners are individuals who had been members of its board of directors prior to 1979: Anthony M. Caito, Samuel Eels, Jr., John A. Gelbach, Harley C. Lee, Max Muller, H. Chapman Rose, Edmund G. Sylvester, and John C. Wilson, Jr. Another former director, Mathew J. Ludwig, was a party to the proceedings below but died on July 17, 1986, and is not a petitioner here. See Brief for Petitioners ii.

[ Footnote 3 ] In light of our disposition of this case, any further characterization of these discussions must await application, on remand, of the materiality standard adopted today.

[ Footnote 4 ] On October 21, 1977, after heavy trading and a new high in Basic stock, the following news item appeared in the Cleveland Plain Dealer:

"[Basic] President Max Muller said the company knew no reason for the stock's activity and that no negotiations were under way with any company for a merger. He said Flintkote recently denied Wall Street rumors that it would make a tender offer of $25 a share for control of the Cleveland-based maker of refractories for the steel industry." App. 363.

On September 25, 1978, in reply to an inquiry from the New York Stock Exchange, Basic issued a release concerning increased activity in its stock and stated that

"management is unaware of any present or pending company development that would result in the abnormally heavy trading activity and price fluctuation [485 U.S. 224, 228] in company shares that have been experienced in the past few days." Id., at 401.

On November 6, 1978, Basic issued to its shareholders a "Nine Months Report 1978." This Report stated:

"With regard to the stock market activity in the Company's shares we remain unaware of any present or pending developments which would account for the high volume of trading and price fluctuations in recent months." Id., at 403.

[ Footnote 5 ] Respondents initially sought to represent all those who sold Basic shares between October 1, 1976, and December 20, 1978. See Amended Complaint in No. C79-1220 (ND Ohio), � 5. The District Court, however, recognized a class period extending only from October 21, 1977, the date of the first public statement, rather than from the date negotiations allegedly [485 U.S. 224, 229] commenced. In its certification decision, as subsequently amended, the District Court also excluded from the class those who had purchased Basic shares after the October 1977 statement but sold them before the September 1978 statement, App. to Pet. for Cert. 123a-124a, and those who sold their shares after the close of the market on Friday, December 15, 1978. Id., at 137a.

http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=CASE&court=US&vol=485&page=224#t1





[ Footnote 6 ] In relevant part, Rule 10b-5 provides:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

. . . . .

"(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . .,

. . . . .

"in connection with the purchase or sale of any security."

[ Footnote 7 ] TSC Industries arose under 14(a), as amended, of the 1934 Act, 15 U.S.C. 78n(a), and Rule 14a-9, 17 CFR 240.14a-9 (1975).

[ Footnote 8 ] This application of the 14(a) definition of materiality to 10(b) and Rule 10b-5 is not disputed. See Brief for Petitioners 17, n. 12; Brief for Respondents 30, n. 10; Brief for SEC as Amicus Curiae 8, n. 4. See also McGrath v. Zenith Radio Corp., 651 F.2d 458, 466, n. 4 (CA7), cert. denied, 454 U.S. 835 (1981), and Goldberg v. Meridor, 567 F.2d 209, 218-219 (CA2 1977), cert. denied, 434 U.S. 1069 (1978).

[ Footnote 9 ] We do not address here any other kinds of contingent or speculative information, such as earnings forecasts or projections. See generally Hiler, The SEC and the Courts' Approach to Disclosure of Earnings Projections, Asset Appraisals, and Other Soft Information: Old Problems, Changing Views, 46 Md. L. Rev. 1114 (1987).

[ Footnote 10 ] See Staffin v. Greenberg, 672 F.2d 1196, 1207 (CA3 1982) (defining duty to disclose existence of ongoing merger negotiations as triggered when agreement-in-principle is reached); Greenfield v. Heublein, Inc., 742 F.2d 751 (CA3 1984) (applying agreement-in-principle test to materiality inquiry), cert. denied, 469 U.S. 1215 (1985). Citing Staffin, the United States Court of Appeals for the Second Circuit has rejected a claim that defendant was under an obligation to disclose various events related to merger negotiations. Reiss v. Pan American World Airways, Inc., [485 U.S. 224, 233] 711 F.2d 11, 13-14 (1983). The Seventh Circuit recently endorsed the agreement-in-principle test of materiality. See Flamm v. Eberstadt, 814 F.2d 1169, 1174-1179 (describing agreement-in-principle as an agreement on price and structure), cert. denied, 484 U.S. 853 (1987). In some of these cases it is unclear whether the court based its decision on a finding that no duty arose to reveal the existence of negotiations, or whether it concluded that the negotiations were immaterial under an interpretation of the opinion in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).

[ Footnote 11 ] Reasoning backwards from a goal of economic efficiency, that Court of Appeals stated: "Rule 10b-5 is about fraud, after all, and it is not fraudulent to conduct business in a way that makes investors better off . . . ." 814 F.2d, at 1177.














[ Footnote 12 ] See, e. g., Brown, Corporate Secrecy, the Federal Securities Laws, and the Disclosure of Ongoing Negotiations, 36 Cath. U. L. Rev. 93, 145-155 (1986); Bebchuk, The Case for Facilitating Competing Tender Offers, 95 Harv. L. Rev. 1028 (1982); Flamm v. Eberstadt, 814 F.2d, at 1177, n. 2 (citing scholarly debate). See also In re Carnation Co., Exchange Act Release No. 22214, 33 S. E. C. Docket 1025, 1030 (1985) ("The importance of accurate and complete issuer disclosure to the integrity of the securities markets cannot be overemphasized. To the extent that investors cannot rely upon the accuracy and completeness of issuer statements, they will be less likely to invest, thereby reducing the liquidity of the securities markets to the detriment of investors and issuers alike").

[ Footnote 13 ] See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (CA2 1968) (en banc) ("Rule 10b-5 is violated whenever assertions are made, as here, in a manner reasonably calculated to influence the investing public . . . if such assertions are false or misleading or are so incomplete as to mislead . . ."), cert. denied sub nom. Coates v. SEC, 394 U.S. 976 (1969).

[ Footnote 14 ] "Although the Committee believes that ideally it would be desirable to have absolute certainty in the application of the materiality concept, it is its view that such a goal is illusory and unrealistic. The materiality concept is judgmental in nature and it is not possible to translate this into a numerical formula. The Committee's advice to the [SEC] is to avoid this quest for certainty and to continue consideration of materiality on a case-by-case basis as disclosure problems are identified." House Committee on Interstate and Foreign Commerce, Report of the Advisory Committee on Corporate Disclosure to the Securities and Exchange Commission, 95th Cong., 1st Sess., 327 (Comm. Print 1977).

[ Footnote 15 ] Subsequently, the Sixth Circuit denied a petition for rehearing en banc in this case. App. to Pet. for Cert. 144a. Concurring separately, Judge Wellford, one of the original panel members, then explained that he did not read the panel's opinion to create a "conclusive presumption of materiality for any undisclosed information claimed to render inaccurate statements denying the existence of alleged preliminary merger discussions." Id., at 145a. In his view, the decision merely reversed the District Court's judgment, which had been based on the agreement-in-principle standard. Ibid.

[ Footnote 16 ] The SEC in the present case endorses the highly fact-dependent probability/magnitude balancing approach of Texas Gulf Sulphur. It explains: "The possibility of a merger may have an immediate importance to investors in the company's securities even if no merger ultimately takes place." Brief for SEC as Amicus Curiae 10. The SEC's insights are helpful, and we accord them due deference. See TSC Industries, Inc. v. Northway, Inc., 426 U.S., at 449 , n. 10.

[ Footnote 17 ] To be actionable, of course, a statement must also be misleading. Silence, absent a duty to disclose, is not misleading under Rule 10b-5. "No comment" statements are generally the functional equivalent of silence. See In re Carnation Co., Exchange Act Release No. 22214, 33 S. E. C. Docket 1025 (1985). See also New York Stock Exchange Listed Company Manual 202.01, reprinted in 3 CCH Fed. Sec. L. Rep. � 23,515 (1987) (premature public announcement may properly be delayed for valid business purpose and where adequate security can be maintained); American Stock Exchange Company Guide 401-405, reprinted in 3 CCH Fed. Sec. L. Rep. �� 23,124A-23, 124E (1985) (similar provisions).









It has been suggested that given current market practices, a "no comment" statement is tantamount to an admission that merger discussions are underway. See Flamm v. Eberstadt, 814 F.2d, at 1178. That may well hold true to the extent that issuers adopt a policy of truthfully denying merger rumors when no discussions are underway, and of issuing "no comment" statements when they are in the midst of negotiations. There [485 U.S. 224, 240] are, of course, other statement policies firms could adopt; we need not now advise issuers as to what kind of practice to follow, within the range permitted by law. Perhaps more importantly, we think that creating an exception to a regulatory scheme founded on a prodisclosure legislative philosophy, because complying with the regulation might be "bad for business," is a role for Congress, not this Court. See also id., at 1182 (opinion concurring in judgment and concurring in part).

[ Footnote 18 ] We find no authority in the statute, the legislative history, or our previous decisions for varying the standard of materiality depending on who brings the action or whether insiders are alleged to have profited. See, e. g., Pavlidis v. New England Patriots Football Club, Inc., 737 F.2d 1227, 1231 (CA1 1984) ("A fact does not become more material to the shareholder's decision because it is withheld by an insider, or because the insider might profit by withholding it"); cf. Aaron v. SEC, 446 U.S. 680, 691 (1980) ("[S]cienter is an element of a violation of 10(b) and Rule 10b-5, regardless of the identity of the plaintiff or the nature of the relief sought").

We recognize that trading (and profit making) by insiders can serve as an indication of materiality, see SEC v. Texas Gulf Sulphur Co., 401 F.2d, at 851; General Portland, Inc. v. LaFarge Coppee S. A., [1982-1983] CCH Fed. Sec. L. Rep. � 99,148, p. 95,544 (ND Tex. 1981). We are not prepared to agree, however, that "[i]n cases of the disclosure of inside information to a favored few, determination of materiality has a different aspect than when the issue is, for example, an inaccuracy in a publicly disseminated press release." SEC v. Geon Industries, Inc., 531 F.2d 39, 48 (CA2 1976). Devising two different standards of materiality, one for situations where insiders have traded in abrogation of their duty to disclose or abstain (or for that matter when any disclosure duty has been breached), and another covering affirmative misrepresentations by those under no duty to disclose (but under the ever-present duty not to mislead), would effectively collapse the materiality requirement into the analysis of defendant's disclosure duties.

[ Footnote 19 ] See, e. g., SEC v. Shapiro, 494 F.2d 1301, 1306-1307 (CA2 1974) (in light of projected very substantial increase in earnings per share, negotiations material, although merger still less than probable); Holmes v. Bateson, [485 U.S. 224, 241] 583 F.2d 542, 558 (CA1 1978) (merger negotiations material although they had not yet reached point of discussing terms); SEC v. Gaspar, [1984-1985] CCH Fed. Sec. L. Rep. � 92,004, pp. 90,977-90,978 (SDNY 1985) (merger negotiations material although they did not proceed to actual tender offer); Dungan v. Colt Industries, Inc., 532 F. Supp. 832, 837 (ND Ill. 1982) (fact that defendants were seriously exploring the sale of their company was material); American General Ins. Co. v. Equitable General Corp., 493 F. Supp. 721, 744-745 (ED Va. 1980) (merger negotiations material four months before agreement-in-principle reached). Cf. Susquehanna Corp. v. Pan American Sulphur Co., 423 F.2d 1075, 1084-1085 (CA5 1970) (holding immaterial "unilateral offer to negotiate" never acknowledged by target and repudiated two days later); Berman v. Gerber Products Co., 454 F. Supp. 1310, 1316, 1318 (WD Mich. 1978) (mere "overtures" immaterial).




[ Footnote 20 ] The Sixth Circuit rejected the District Court's narrow reading of Basic's "no developments" statement, see n. 4, supra, which focused on whether petitioners knew of any reason for the activity in Basic stock, that is, whether petitioners were aware of leaks concerning ongoing discussions. 786 F.2d, at 747. See also Comment, Disclosure of Preliminary Merger Negotiations Under Rule 10b-5, 62 Wash. L. Rev. 81, 82-84 (1987) (noting prevalence of leaks and studies demonstrating that substantial trading activity immediately preceding merger announcements is the "rule, not the exception"). We accept the Court of Appeals' reading of the statement as the more natural one, emphasizing management's knowledge of developments (as opposed to leaks) that would explain unusual trading activity. See id., at 92-93; see also SEC v. Texas Gulf Sulphur Co., 401 F.2d, at 862-863.

[ Footnote 21 ] W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts 726 (5th ed. 1984) ("The reasons for the separate development of [the tort action for misrepresentation and nondisclosure], and for its peculiar limitations, are in part historical, and in part connected with the fact that in the great majority of the cases which have come before the courts the misrepresentations have been made in the course of a bargaining transaction between the parties. Consequently the action has been colored to a considerable extent by the ethics of bargaining between distrustful adversaries") (footnote omitted).

[ Footnote 22 ] Actions under Rule 10b-5 are distinct from common-law deceit and misrepresentation claims, see Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 744 -745 (1975), and are in part designed to add to the protections provided investors by the common law, see Herman & MacLean v. Huddleston, 459 U.S. 375, 388 -389 (1983).

[ Footnote 23 ] Contrary to the dissent's suggestion, the incentive for investors to "pay attention" to issuers' disclosures comes from their motivation to make a profit, not their attempt to preserve a cause of action under Rule 10b-5. Facilitating an investor's reliance on the market, consistently with Congress' expectations, hardly calls for "dismantling the federal scheme which mandates disclosure." See post, at 259.

[ Footnote 24 ] See In re LTV Securities Litigation, 88 F. R. D. 134, 144 (ND Tex. 1980) (citing studies); Fischel, Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded Securities, 38 Bus. Law. 1, 4, n. 9 (1982) (citing literature on efficient-capital-market theory); Dennis, Materiality and the Efficient Capital Market Model: A Recipe for the Total Mix. 25 Wm. & Mary L. Rev. 373, 374-381, and n. 1 (1984). We need not determine by adjudication what economists and social scientists have debated [485 U.S. 224, 247] through the use of sophisticated statistical analysis and the application of economic theory. For purposes of accepting the presumption of reliance in this case, we need only believe that market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices.

[ Footnote 25 ] See, e. g., Peil v. Speiser, 806 F.2d 1154, 1161 (CA3 1986); Harris v. Union Electric Co., 787 F.2d 355, 367, and n. 9 (CA8), cert. denied, 479 U.S. 823 (1986); Lipton v. Documation, Inc., 734 F.2d 740 (CA11 1984), cert. denied, 469 U.S. 1132 (1985); T. J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel Authority, 717 F.2d 1330, 1332-1333 (CA10 1983), cert. denied sub nom. Linde, Thomson,











Fairchild, Langworthy, Kohn & Van Dyke v. T. J. Raney & Sons, Inc., 465 U.S. 1026 (1984); Panzirer v. Wolf, 663 F.2d 365, 367-368 (CA2 1981), vacated and remanded sub nom. Price Waterhouse v. Panzirer, 459 U.S. 1027 (1982); Ross v. A. H. Robins Co., 607 F.2d 545, 553 (CA2 1979), cert. denied, 446 U.S. 946 (1980); Blackie v. Barrack, 524 F.2d 891, 905-908 (CA9 1975), cert. denied, 429 U.S. 816 (1976).

[ Footnote 26 ] See, e. g., Black, Fraud on the Market: A Criticism of Dispensing with Reliance Requirements in Certain Open Market Transactions, 62 N.C. L. Rev. 435 (1984); Note, The Fraud-on-the-Market Theory, 95 Harv. L. Rev. 1143 (1982); Note, Fraud on the Market: An Emerging Theory of Recovery Under SEC Rule 10b-5, 50 Geo. Wash. L. Rev. 627 (1982).

[ Footnote 27 ] The Court of Appeals held that in order to invoke the presumption, a plaintiff must allege and prove: (1) that the defendant made public misrepresentations; (2) that the misrepresentations were material; (3) that the shares were traded on an efficient market; (4) that the misrepresentations would induce a reasonable, relying investor to misjudge the value of the shares; and (5) that the plaintiff traded the shares between the time the misrepresentations were made and the time the truth was revealed. See 786 F.2d, at 750.

Given today's decision regarding the definition of materiality as to preliminary merger discussions, elements (2) and (4) may collapse into one.

[ Footnote 28 ] By accepting this rebuttable presumption, we do not intend conclusively to adopt any particular theory of how quickly and completely publicly available information is reflected in market price. Furthermore, our decision today is not to be interpreted as addressing the proper measure of damages in litigation of this kind.

[ Footnote 29 ] We note there may be a certain incongruity between the assumption that Basic shares are traded on a well-developed, efficient, and information-hungry market, and the allegation that such a market could remain misinformed, and its valuation of Basic shares depressed, for 14 months, on the basis of the three public statements. Proof of that sort is a matter for trial, throughout which the District Court retains the authority to amend the certification order as may be appropriate. See Fed. Rules Civ. Proc. 23(c)(1) and (c)(4). See 7B C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure 128-132 (1986). Thus, we see no need to engage in the kind of factual analysis the dissent suggests that manifests the "oddities" of applying a rebuttable presumption of reliance in this case. See post, at 259-263.

JUSTICE WHITE, with whom JUSTICE O'CONNOR joins, concurring in part and dissenting in part.

I join Parts I-III of the Court's opinion, as I agree that the standard of materiality we set forth in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), should be applied to actions under 10(b) and Rule 10b-5. But I dissent from the remainder of the Court's holding because I do not agree that the "fraud-on-the-market" theory should be applied in this case.

I











Even when compared to the relatively youthful private cause-of-action under 10(b), see Kardon v. National Gypsum Co., 69 F. Supp. 512 (ED Pa. 1946), the fraud-on-the-market theory is a mere babe. 1 Yet today, the Court embraces [485 U.S. 224, 251] this theory with the sweeping confidence usually reserved for more mature legal doctrines. In so doing, I fear that the Court's decision may have many adverse, unintended effects as it is applied and interpreted in the years to come.

A

At the outset, I note that there are portions of the Court's fraud-on-the-market holding with which I am in agreement. Most importantly, the Court rejects the version of that theory, heretofore adopted by some courts, 2 which equates "causation" with "reliance," and permits recovery by a plaintiff who claims merely to have been harmed by a material misrepresentation which altered a market price, notwithstanding proof that the plaintiff did not in any way rely on that price. Ante, at 248. I agree with the Court that if Rule 10b-5's reliance requirement is to be left with any content at all, the fraud-on-the-market presumption must be capable of being rebutted by a showing that a plaintiff did not "rely" on the market price. For example, a plaintiff who decides, months in advance of an alleged misrepresentation, to purchase a stock; one who buys or sells a stock for reasons unrelated to its price; one who actually sells a stock "short" days before the misrepresentation is made - surely none of these people can state a valid claim under Rule 10b-5. Yet, some federal courts have allowed such claims to stand under one variety or another of the fraud-on-the-market theory. 3 [485 U.S. 224, 252]

Happily, the majority puts to rest the prospect of recovery under such circumstances. A nonrebuttable presumption of reliance - or even worse, allowing recovery in the face of "affirmative evidence of nonreliance," Zweig v. Hearst Corp., 594 F.2d 1261, 1272 (CA9 1979) (Ely, J., dissenting) - would effectively convert Rule 10b-5 into "a scheme of investor's insurance." Shores v. Sklar, 647 F.2d 462, 469, n. 5 (CA5 1981) (en banc), cert. denied, 459 U.S. 1102 (1983). There is no support in the Securities Exchange Act, the Rule, or our cases for such a result.

B

But even as the Court attempts to limit the fraud-on-the-market theory it endorses today, the pitfalls in its approach are revealed by previous uses by the lower courts of the broader versions of the theory. Confusion and contradiction in court rulings are inevitable when traditional legal analysis is replaced with economic theorization by the federal courts. [485 U.S. 224, 253]

In general, the case law developed in this Court with respect to 10(b) and Rule 10b-5 has been based on doctrines with which we, as judges, are familiar: common-law doctrines of fraud and deceit. See, e. g., Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 471 -477 (1977). Even when we have extended civil liability under Rule 10b-5 to a broader reach than the common law had previously permitted, see ante, at 244, n. 22, we have retained familiar legal principles as our guideposts. See, e. g., Herman & MacLean v. Huddleston, 459 U.S. 375, 389 -390 (1983). The federal courts have proved adept at developing an evolving jurisprudence of Rule 10b-5 in such a manner. But with no staff economists, no experts schooled in the "efficient-capital-market hypothesis," no ability to test the validity of empirical market

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studies, we are not well equipped to embrace novel constructions of a statute based on contemporary microeconomic theory. 4

The "wrong turns" in those Court of Appeals and District Court fraud-on-the-market decisions which the Court implicitly rejects as going too far should be ample illustration of the dangers when economic theories replace legal rules as the basis for recovery. Yet the Court today ventures into this area beyond its expertise, beyond - by its own admission - the confines of our previous fraud cases. See ante, at 243-244. Even if I agreed with the Court that "modern securities [485 U.S. 224, 254] markets . . . involving millions of shares changing hands daily" require that the "understanding of Rule 10b-5's reliance requirement" be changed, ibid., I prefer that such changes come from Congress in amending 10(b). The Congress, with its superior resources and expertise, is far better equipped than the federal courts for the task of determining how modern economic theory and global financial markets require that established legal notions of fraud be modified. In choosing to make these decisions itself, the Court, I fear, embarks on a course that it does not genuinely understand, giving rise to consequences it cannot foresee. 5

For while the economists' theories which underpin the fraud-on-the-market presumption may have the appeal of mathematical exactitude and scientific certainty, they are - in the end - nothing more than theories which may or may not prove accurate upon further consideration. Even the most earnest advocates of economic analysis of the law recognize this. See, e. g., Easterbrook, Afterword: Knowledge and Answers, 85 Colum. L. Rev. 1117, 1118 (1985). Thus, while the majority states that, for purposes of reaching its result it need only make modest assumptions about the way in which "market professionals generally" do their jobs, and how the conduct of market professionals affects stock prices, ante, at 246, n. 23, I doubt that we are in much of a position [485 U.S. 224, 255] to assess which theories aptly describe the functioning of the securities industry.

Consequently, I cannot join the Court in its effort to reconfigure the securities laws, based on recent economic theories, to better fit what it perceives to be the new realities of financial markets. I would leave this task to others more equipped for the job than we.

C

At the bottom of the Court's conclusion that the fraud-on-the-market theory sustains a presumption of reliance is the assumption that individuals rely "on the integrity of the market price" when buying or selling stock in "impersonal, well-developed market[s] for securities." Ante, at 247. Even if I was prepared to accept (as a matter of common sense or general understanding) the assumption that most persons buying or selling stock do so in response to the market price, the fraud-on-the-market theory goes further. For in adopting a "presumption of reliance," the Court also assumes that buyers and sellers rely - not just on the market price - but on the "integrity" of that price. It is this aspect of the fraud-on-the-market hypothesis which most mystifies me.

To define the term "integrity of the market price," the majority quotes approvingly from cases which suggest that investors are entitled to "`rely on the price of a stock as a reflection of its value.'" Ante, at 244 (quoting Peil v. Speiser, 806 F.2d 1154, 1161 (CA3 1986)). But the meaning of this phrase eludes me, for it implicitly suggests that stocks have some "true value" that is measurable by a standard other than



their market price. While the scholastics of medieval times professed a means to make such a valuation of a commodity's "worth," 6 I doubt that the federal courts of our day are similarly equipped. [485 U.S. 224, 256]

Even if securities had some "value" - knowable and distinct from the market price of a stock - investors do not always share the Court's presumption that a stock's price is a "reflection of [this] value." Indeed, "many investors purchase or sell stock because they believe the price inaccurately reflects the corporation's worth." See Black, Fraud on the Market: A Criticism of Dispensing with Reliance Requirements in Certain Open Market Transactions, 62 N.C. L. Rev. 435, 455 (1984) (emphasis added). If investors really believed that stock prices reflected a stock's "value," many sellers would never sell, and many buyers never buy (given the time and cost associated with executing a stock transaction). As we recognized just a few years ago: "[I]nvestors act on inevitably incomplete or inaccurate information, [consequently] there are always winners and losers; but those who have `lost' have not necessarily been defrauded." Dirks v. SEC, 463 U.S. 646, 667 , n. 27 (1983). Yet today, the Court allows investors to recover who can show little more than that they sold stock at a lower price than what might have been. 7

I do not propose that the law retreat from the many protections that 10(b) and Rule 10b-5, as interpreted in our prior cases, provide to investors. But any extension of these laws, to approach something closer to an investor insurance [485 U.S. 224, 257] scheme, should come from Congress, and not from the courts.

II

Congress has not passed on the fraud-on-the-market theory the Court embraces today. That is reason enough for us to abstain from doing so. But it is even more troubling that, to the extent that any view of Congress on this question can be inferred indirectly, it is contrary to the result the majority reaches.

A

In the past, the scant legislative history of 10(b) has led us to look at Congress' intent in adopting other portions of the Securities Exchange Act when we endeavor to discern the limits of private causes of action under Rule 10b-5. See, e. g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 204 -206 (1976). A similar undertaking here reveals that Congress flatly rejected a proposition analogous to the fraud-on-the-market theory in adopting a civil liability provision of the 1934 Act.

Section 18 of the Act expressly provides for civil liability for certain misleading statements concerning securities. See 15 U.S.C. 78r(a). When the predecessor of this section was first being considered by Congress, the initial draft of the provision allowed recovery by any plaintiff "who shall have purchased or sold a security the price of which may have been affected by such [misleading] statement." See S. 2693, 73d Cong., 2d Sess., 17(a) (1934). Thus, as initially drafted, the precursor to the express civil liability provision of the 1934 Act would have permitted suits by plaintiffs based solely on the fact that the price of the securities they bought or sold was affected by a misrepresentation: a theory closely akin to the Court's holding today.





Yet this provision was roundly criticized in congressional hearings on the proposed Securities Exchange Act, because it failed to include a more substantial "reliance" requirement. 8 [485 U.S. 224, 258] Subsequent drafts modified the original proposal, and included an express reliance requirement in the final version of the Act. In congressional debates over the redrafted version of this bill, the then-Chairman of the House Committee, Representative Sam Rayburn, explained that the "bill as originally written was very much challenged on the ground that reliance should be required. This objection has been met." 78 Cong. Rec. 7701 (1934). Moreover, in a previous case concerning the scope of 10(b) and Rule 10b-5, we quoted approvingly from the legislative history of this revised provision, which emphasized the presence of a strict reliance requirement as a prerequisite for recovery. See Ernst & Ernst v. Hochfelder, supra, at 206 (citing S. Rep. No. 792, 73d Cong., 2d Sess., 12-13 (1934)).

Congress thus anticipated meaningful proof of "reliance" before civil recovery can be had under the Securities Exchange Act. The majority's adoption of the fraud-on-the-market theory effectively eviscerates the reliance rule in actions brought under Rule 10b-5, and negates congressional intent to the contrary expressed during adoption of the 1934 Act.

B

A second congressional policy that the majority's opinion ignores is the strong preference the securities laws display for widespread public disclosure and distribution to investors of material information concerning securities. This congressionally adopted policy is expressed in the numerous and varied disclosure requirements found in the federal securities [485 U.S. 224, 259] law scheme. See, e. g., 15 U.S.C. 78m, 78o(d) (1982 ed. and Supp. IV).

Yet observers in this field have acknowledged that the fraud-on-the-market theory is at odds with the federal policy favoring disclosure. See, e. g., Black, 62 N.C. L. Rev., at 457-459. The conflict between Congress' preference for disclosure and the fraud-on-the-market theory was well expressed by a jurist who rejected the latter in order to give force to the former:

"[D]isclosure . . . is crucial to the way in which the federal securities laws function. . . . [T]he federal securities laws are intended to put investors into a position from which they can help themselves by relying upon disclosures that others are obligated to make. This system is not furthered by allowing monetary recovery to those who refuse to look out for themselves. If we say that a plaintiff may recover in some circumstances even though he did not read and rely on the defendants' public disclosures, then no one need pay attention to those disclosures and the method employed by Congress to achieve the objective of the 1934 Act is defeated." Shores v. Sklar, 647 F.2d, at 483 (Randall, J., dissenting).

It is no surprise, then, that some of the same voices calling for acceptance of the fraud-on-the-market theory also favor dismantling the federal scheme which mandates disclosure. But to the extent that the federal courts must make a choice between preserving effective disclosure and trumpeting the new fraud-on-the-market hypothesis, I think Congress has spoken clearly - favoring the current prodisclosure policy. We should limit our role in interpreting 10(b) and Rule 10b-5 to one of giving effect to such policy decisions by Congress.


III

Finally, the particular facts of this case make it an exceedingly poor candidate for the Court's fraud-on-the-market theory, [485 U.S. 224, 260] and illustrate the illogic achieved by that theory's application in many cases.

Respondents here are a class of sellers who sold Basic stock between October 1977 and December 1978, a 14-month period. At the time the class period began, Basic's stock was trading at $20 a share (at the time, an all-time high); the last members of the class to sell their Basic stock got a price of just over $30 a share. App. 363, 423. It is indisputable that virtually every member of the class made money from his or her sale of Basic stock.

The oddities of applying the fraud-on-the-market theory in this case are manifest. First, there are the facts that the plaintiffs are sellers and the class period is so lengthy - both are virtually without precedent in prior fraud-on-the-market cases. 9 For reasons I discuss in the margin, I think these two facts render this case less apt to application of the fraud-on-the-market hypothesis.

Second, there is the fact that in this case, there is no evidence that petitioner Basic's officials made the troublesome misstatements for the purpose of manipulating stock prices, or with any intent to engage in underhanded trading of Basic stock. Indeed, during the class period, petitioners do not [485 U.S. 224, 261] appear to have purchased or sold any Basic stock whatsoever. App. to Pet. for Cert. 27a. I agree with amicus who argues that "[i]mposition of damages liability under Rule 10b-5 makes little sense . . . where a defendant is neither a purchaser nor a seller of securities." See Brief for American Corporate Counsel Association as Amicus Curiae 13. In fact, in previous cases, we had recognized that Rule 10b-5 is concerned primarily with cases where the fraud is committed by one trading the security at issue. See, e. g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 736 , n. 8 (1975). And it is difficult to square liability in this case with 10(b)'s express provision that it prohibits fraud "in connection with the purchase or sale of any security." See 15 U.S.C. 78j(b) (emphasis added).

Third, there are the peculiarities of what kinds of investors will be able to recover in this case. As I read the District Court's class certification order, App. to Pet. for Cert. 123a-126a; ante, at 228-229, n. 5, there are potentially many persons who did not purchase Basic stock until after the first false statement (October 1977), but who nonetheless will be able to recover under the Court's fraud-on-the-market theory. Thus, it is possible that a person who heard the first corporate misstatement and disbelieved it - i. e., someone who purchased Basic stock thinking that petitioners' statement was false - may still be included in the plaintiff-class on remand. How a person who undertook such a speculative stock-investing strategy - and made $10 a share doing so (if he bought on October 22, 1977, and sold on December 15, 1978) - can say that he was "defrauded" by virtue of his reliance on the "integrity" of the market price is beyond me. 10 [485 U.S. 224, 262] And such speculators may not be uncommon, at least in this case. See App. to Pet. for Cert. 125a.

Indeed, the facts of this case lead a casual observer to the almost inescapable conclusion that many of those who bought or sold Basic stock during the period in question flatly disbelieved the statements which are alleged to have been "materially misleading." Despite three statements denying that merger




negotiations were underway, Basic stock hit record-high after record-high during the 14-month class period. It seems quite possible that, like Casca's knowing disbelief of Caesar's "thrice refusal" of the Crown, 11 clever investors were skeptical of petitioners' three denials that merger talks were going on. Yet such investors, the saviest of the savvy, will be able to recover under the Court's opinion, as long as they now claim that they believed in the "integrity of the market price" when they sold their stock (between September and December 1978). 12 Thus, persons who bought after hearing and relying on the falsity of petitioners' statements may be able to prevail and recover money damages on remand.

And who will pay the judgments won in such actions? I suspect that all too often the majority's rule will "lead to large judgments, payable in the last analysis by innocent investors, for the benefit of speculators and their lawyers." Cf. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 867 (CA2 1968) (en banc) (Friendly, J., concurring), cert. denied, 394 U.S. 976 (1969). This Court and others have previously recognized that "inexorably broadening . . . the class of plaintiff[s] who may sue in this area of the law will ultimately result in more harm than good." Blue Chip Stamps v. Manor Drug Stores, supra, at 747-748. See also Ernst & Ernst v. Hochfelder, 425 U.S., at 214 ; Ultramares Corp. v. Touche, [485 U.S. 224, 263] 255 N. Y. 170, 179-180, 174 N. E. 441, 444-445 (1931) (Cardozo, C. J.). Yet such a bitter harvest is likely to be the reaped from the seeds sewn by the Court's decision today.

IV

In sum, I think the Court's embracement of the fraud-on-the-market theory represents a departure in securities law that we are ill suited to commence - and even less equipped to control as it proceeds. As a result, I must respectfully dissent.

[ Footnote 1 ] The earliest Court of Appeals case adopting this theory cited by the Court is Blackie v. Barrack, 524 F.2d 891 (CA9 1975), cert. denied, 429 U.S. 816 (1976). Moreover, widespread acceptance of the fraud-on-the-market [485 U.S. 224, 251] theory in the Courts of Appeals cannot be placed any earlier than five or six years ago. See ante, at 246-247, n. 24; Brief for Securities and Exchange Commission as Amicus Curiae 21, n. 24.

[ Footnote 2 ] See, e. g., Zweig v. Hearst Corp., 594 F.2d 1261, 1268-1271 (CA9 1979); Arthur Young & Co. v. United States District Court, 549 F.2d 686, 694-695 (CA9), cert. denied, 434 U.S. 829 (1977); Pellman v. Cinerama, Inc., 89 F. R. D. 386, 388 (SDNY 1981).

[ Footnote 3 ] Cases illustrating these factual situations are, respectively, Zweig v. Hearst Corp., supra, at 1271 (Ely, J., dissenting); Abrams v. Johns-Manville Corp., [1981-1982] CCH Fed. Sec. L. Rep. � 98,348, p. 92,157 [485 U.S. 224, 252] (SDNY 1981); Fausett v. American Resources Management Corp., 542 F. Supp. 1234, 1238-1239 (Utah 1982).

The Abrams decision illustrates the particular pliability of the fraud-on-the-market presumption. In Abrams, the plaintiff represented a class of purchasers of defendant's stock who were allegedly misled by defendant's misrepresentations in annual reports. But in a deposition taken shortly after the plaintiff filed suit, she testified that she had bought defendant's stock primarily because she thought that favorable changes in the Federal Tax Code would boost sales of its product (insulation).





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Two years later, after the defendant moved for summary judgment based on the plaintiff's failure to prove reliance on the alleged misrepresentations, the plaintiff resuscitated her case by executing an affidavit which stated that she "certainly [had] assumed that the market price of Johns-Manville stock was an accurate reflection of the worth of the company" and would not have paid the then-going price if she had known otherwise. Abrams, supra, at 92,157. Based on this affidavit, the District Court permitted the plaintiff to proceed on her fraud-on-the-market theory.

Thus, Abrams demonstrates how easily a post hoc statement will enable a plaintiff to bring a fraud-on-the-market action - even in the rare case where a plaintiff is frank or foolhardy enough to admit initially that a factor other than price led her to the decision to purchase a particular stock.

[ Footnote 4 ] This view was put well by two commentators who wrote a few years ago:

"Of all recent developments in financial economics, the efficient capital market hypothesis (`ECMH') has achieved the widest acceptance by the legal culture. . . .

"Yet the legal culture's remarkably rapid and broad acceptance of an economic concept that did not exist twenty years ago is not matched by an equivalent degree of understanding." Gilson & Kraakman, The Mechanisms of Market Efficiency, 70 Va. L. Rev. 549, 549-550 (1984) (footnotes omitted; emphasis added).

While the fraud-on-the-market theory has gained even broader acceptance since 1984, I doubt that it has achieved any greater understanding.

[ Footnote 5 ] For example, Judge Posner in his Economic Analysis of Law 15.8, pp. 423-424 (3d ed. 1986), submits that the fraud-on-the-market theory produces the "economically correct result" in Rule 10b-5 cases but observes that the question of damages under the theory is quite problematic. Not withstanding the fact that "[a]t first blush it might seem obvious," the proper calculation of damages when the fraud-on-the-market theory is applied must rest on several "assumptions" about "social costs" which are "difficult to quantify." Ibid. Of course, answers to the question of the proper measure of damages in a fraud-on-the-market case are essential for proper implementation of the fraud-on-the-market presumption. Not surprisingly, the difficult damages question is one the Court expressly declines to address today. Ante, at 248, n. 27.

[ Footnote 6 ] See E. Salin, Just Price, 8 Encyclopaedia of Social Sciences 504-506 (1932); see also R. de Roover, Economic Thought: Ancient and Medieval Thought, 4 International Encyclopedia of Social Sciences 433-435 (1968).

[ Footnote 7 ] This is what the Court's rule boils down to in practical terms. For while, in theory, the Court allows for rebuttal of its "presumption of reliance" - a proviso with which I agree, see supra, at 251 - in practice the Court must realize, as other courts applying the fraud-on-the-market theory have, that such rebuttal is virtually impossible in all but the most extraordinary case. See Blackie v. Barrack, 524 F.2d, at 906-907, n. 22; In re LTV Securities Litigation, 88 F. R. D. 134, 143, n. 4 (ND Tex. 1980).





Consequently, while the Court considers it significant that the fraud-on-the-market presumption it endorses is a rebuttable one, ante, at 242, 248, the majority's implicit rejection of the "pure causation" fraud-on-the-market theory rings hollow. In most cases, the Court's theory will operate just as the causation theory would, creating a nonrebuttable presumption of "reliance" in future Rule 10b-5 actions.

[ Footnote 8 ] See Stock Exchange Practices, Hearings on S. Res. 84, 56, and 97 before the Senate Committee on Banking and Currency, 73d Cong., 2d Sess., pt. 15, p. 6638 (1934) (statement of Richard Whitney, President of the New York Stock Exchange); Stock Exchange Regulation, Hearing on H. R. 7852 and 8720, before the House Committee on Interstate and Foreign Commerce, 73d Cong., 2d Sess., 226 (1934) (statement of Richard Whitney).

[ Footnote 9 ] None of the Court of Appeals cases the Court cites as endorsing the fraud-on-the-market theory, ante, at 246-247, n. 24, involved seller-plaintiffs. Rather, all of these cases were brought by purchasers who bought securities in a short period following some material misstatement (or similar act) by an issuer, which was alleged to have falsely inflated a stock's price.

Even if the fraud-on-the-market theory provides a permissible link between such a misstatement and a decision to purchase a security shortly thereafter, surely that link is far more attenuated between misstatements made in October 1977, and a decision to sell a stock the following September, 11 months later. The fact that the plaintiff-class is one of sellers, and that the class period so long, distinguish this case from any other cited in the Court's opinion, and make it an even poorer candidate for the fraud-on-the-market presumption. Cf., e. g., Schlanger v. Four-Phase Systems Inc., 555 F. Supp. 535 (SDNY 1982) (permitting class of sellers to use fraud-on-the-market theory where the class period was eight days long).

[ Footnote 10 ] The Court recognizes that a person who sold his Basic shares believing petitioners' statements to be false may not be entitled to recovery. Ante, at 249. Yet it seems just as clear to me that one who bought Basic stock under this same belief - hoping to profit from the uncertainty over Basic's merger plans - should not be permitted to recover either.

[ Footnote 11 ] See W. Shakespeare, Julius Caesar, Act I, Scene II.

[ Footnote 12 ] The ease with which such a post hoc claim of "reliance on the integrity of the market price" can be made, and gain acceptance by a trial court, is illustrated by Abrams v. Johns-Manville Corp., discussed in n. 3, supra. [485 U.S. 224, 264]






Reed Hastings Facebook Post July 3 2012

Netflix to Announce Second-Quarter 2012 Financial Results

\N

Jul 03, 2012

LOS GATOS, Calif., July 3, 2012 /PRNewswire/ -- Netflix, Inc. (NASDAQ: NFLX) today announced it will post its second-quarter 2012 financial results and business outlook on its investor relations website at http://ir.netflix.com on Tuesday, July 24, 2012, at approximately 1:05 p.m. Pacific Time. At that time the company will issue a brief advisory release via newswire containing a link to the second-quarter 2012 financial results and letter to shareholders on its website.

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Netflix management will host a live Q&A session at 3:00 p.m. Pacific Time to discuss the Company's financial results and business outlook, with questions submitted via email. Please email your questions to [email protected]. The company will read the questions aloud on the call and respond to as many questions as possible.

A live webcast and the replay of the earnings Q&A session can be accessed on the investor relations section of the Netflix website at http://ir.netflix.com. For those without access to the Internet, a replay of the call will be available from 6:00 p.m. Pacific Time on July 24, 2012 through midnight on July 28, 2012. To listen to the replay, call (855) 859-2056, conference ID# 90944941.

About Netflix, Inc. With more than 26 million streaming members in the United States, Canada, Latin America, the United Kingdom and Ireland, Netflix, Inc. (NASDAQ: NFLX) is the world's leading Internet subscription service for enjoying movies and TV programs. For about US$7.99 a month, Netflix members can instantly watch unlimited movies and TV programs streamed over the internet to PCs, Macs and TVs. Among the large and expanding base of devices streaming from Netflix are the Microsoft Xbox 360, Nintendo Wii and Sony PS3 consoles; an array of Blu-ray disc players, Internet-connected TVs, home theatre systems, digital video recorders and internet video players; Apple iPhone, iPad and iPod touch, as well as Apple TV and Google TV. In all, more than 800 devices that stream from Netflix are available. For additional information, visit www.netflix.com. Follow Netflix on Facebook and Twitter.

SOURCE Netflix, Inc.

https://pr.netflix.com/WebClient/getNewsSummary.do?newsId=579

http://ir.netflix.com/

http://photos.prnewswire.com/prnh/20101014/SF81638LOGO

mailto:[email protected]

http://ir.netflix.com/

http://www.netflix.com/

http://www.facebook.com/netflix

http://twitter.com/#!/NETFLIX

https://pr.netflix.com/WebClient/getNewsSummary.do?newsId=579

Reed HastingsDecember 6, 2012 ·

SEC staff questions a Facebook post. Fascinating social media story.

We use blogging and social media, including Facebook, to communicateeffectively with the public and our members.

In June we posted on our blog that our members were enjoying “nearly a billionhours per month” of Netflix, and people wrote about this. We did not also issue apress release or 8-K filing about this.

In early July, I publicly posted on Facebook to the over 200,000 of you whosubscribe to me that our members had enjoyed over 1 billion hours in June,highlighting how strong our content was. There was press coverage as there aremany reporters and bloggers among you, my public followers. Some of you re-posted my post. Again, we did not also issue a press release or file an 8-K aboutthis.

SEC staff informed us yesterday that they are recommending that the SEC bring acivil action against us for my July 1 billion hour public post, asserting we violated“Reg FD”. This rule is designed to ensure that individual investors have equalaccess to information as large institutional investors, by prohibiting selectivedisclosure of material information. The SEC staff believes that I gave you all“material” investor information in my post and that we needed to instead releasethe June viewing fact “publicly” with an 8-K filing or press release.

I want to note a few things.

First, we think posting to over 200,000 people is very public, especially becausemany of my subscribers are reporters and bloggers.

Second, while we think my public Facebook post is public, we don’t currently useFacebook and other social media to get material information to investors; weusually get that information out in our extensive investor letters, press releasesand SEC filings. We think the fact of 1 billion hours of viewing in June was not“material” to investors, and we had blogged a few weeks before that we wereserving nearly 1 billion hours per month.

Finally, while our stock rose the day of my public post, the increase started wellbefore my mid-morning post was out, likely driven by the positive Citigroupresearch report the evening before.

We remain optimistic this can be cleared up quickly through the SEC’s reviewprocess.

-Reed

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99.1 Exhibit Statement

http://www.sec.gov/Archives/edgar/data/1065280/000106528012000025/a991exhibitstatement.htm[8/10/2014 2:08:54 PM]

EX-99.1 2 a991exhibitstatement.htm EXHIBIT

Exhibit 99.1

SEC staff questions a Facebook post. Fascinating social media story.

We use blogging and social media, including Facebook, to communicate effectively with the public and our members.

In June we posted on our blog that our members were enjoying “nearly a billion hours per month” of Netflix, and people wrote about this. We didnot also issue a press release or 8-K filing about this.

In early July, I publicly posted on Facebook to the over 200,000 of you who subscribe to me that our members had enjoyed over 1 billion hours inJune, highlighting how strong our content was. There was press coverage as there are many reporters and bloggers among you, my publicfollowers. Some of you re-posted my post. Again, we did not also issue a press release or file an 8-K about this.

SEC staff informed us yesterday that they are recommending that the SEC bring a civil action against us for my July 1 billion hour public post,asserting we violated “Reg FD”. This rule is designed to ensure that individual investors have equal access to information as large institutionalinvestors, by prohibiting selective disclosure of material information. The SEC staff believes that I gave you all “material” investor information inmy post and that we needed to instead release the June viewing fact “publicly” with an 8-K filing or press release.

I want to note a few things.

First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.

Second, while we think my public Facebook post is public, we don't currently use Facebook and other social media to get material information toinvestors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think the fact of 1 billion hoursof viewing in June was not “material” to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.

Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positiveCitigroup research report the evening before.

We remain optimistic this can be cleared up quickly through the SEC's review process.

-Reed

1

SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE ACT OF 1934 Release No. 69279 / April 2, 2013 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings I. Introduction

The Division of Enforcement has investigated whether Netflix, Inc. (“Netflix”) and its Chief Executive Officer, Reed Hastings (“Hastings”) violated Regulation FD (17 C.F.R. §243.100 et seq.) and Section 13(a) of the Securities Exchange Act of 1934 (“Exchange Act”). The Commission has determined not to pursue an enforcement action in this matter. The investigation concerned Hastings’s use of his personal Facebook page, on July 3, 2012, to announce that Netflix had streamed 1 billion hours of content in the month of June. Neither Hastings nor Netflix had previously used Hastings’s personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings’s Facebook page would be used to disclose information about Netflix. The post was not accompanied by a press release, a post on Netflix’s own web site or Facebook page, or a Form 8-K.

The investigation raised questions regarding: 1) the application of Regulation FD

to Hastings’s post; and 2) the applicability of the Commission’s August 2008 Guidance on the Use of Company Web Sites1 to emerging technologies, including social networking sites, such as Facebook.

Regulation FD and Section 13(a) of the Exchange Act prohibit public companies,

or persons acting on their behalf, from selectively disclosing material, nonpublic information to certain securities professionals, or shareholders where it is reasonably foreseeable that they will trade on that information, before it is made available to the general public. The Commission’s 2008 Guidance explained that for purposes of complying with Regulation FD, a company makes public disclosure when it distributes information “through a recognized channel of distribution.”

In its investigation, the SEC staff learned (and some public commentary further suggested) that there is uncertainty concerning how Regulation FD and the Commission’s 2008 Guidance apply to disclosures made through social media channels. Since the issuance of the 2008 Guidance, the use of social media has proliferated and the Commission is aware that public companies are increasingly using social media to communicate with shareholders and the market generally. The ways in which companies may use these social media channels, however, are not fundamentally different from the ways in which the web sites, blogs, and RSS feeds addressed by the 2008 Guidance are

1 Commission Guidance on the Use of Company Web Sites, Release No. 34-58288 (Aug. 7, 2008) (“2008 Guidance”).

2

used. Accordingly, the Commission deems it appropriate and in the public interest to issue this Report of Investigation (“Report”) pursuant to Section 21(a) of the Exchange Act to provide guidance to issuers regarding how Regulation FD and the 2008 Guidance apply to disclosures made through social media channels.2

II. Background of Regulation FD and the 2008 Commission Guidance on the Use of Company Web Sites

Regulation FD provides that when an issuer, or a person acting on its behalf, discloses material, nonpublic information to securities market professionals or shareholders where it is reasonably foreseeable that they will trade on the basis of the information, it must distribute that information in a manner reasonably designed to achieve effective broad and non-exclusionary distribution to the public.3 When the disclosure of material, nonpublic information is intentional, distribution of the same information to the public must be made simultaneously. When the disclosure of material, nonpublic information is inadvertent, distribution of the same information to the public must be made promptly afterwards. Regulation FD was adopted out of concern that issuers were selectively “disclosing important nonpublic information, such as advance warning of earnings results, to securities analysts or selected institutional investors before making full disclosure of the same information to the general public.”4 In our previous statements on Regulation FD, we have recognized that the “regulation does not require use of a particular method, or establish a ‘one size fits all’ standard for disclosure.”5 We did, however, “caution issuers that a deviation from their usual practices for making public disclosure may affect our judgment as to whether the method they have chosen in a particular case was reasonable.”6 We have since encouraged “honest, carefully considered attempts to comply with Regulation FD.”7

In August 2008, in response to the changing electronic landscape of issuer

disclosure and the wide-spread use of web sites to disseminate information electronically

2 Section 21(a) of the Exchange Act authorizes the Commission to investigate violations of the federal securities laws, and, in its discretion, “to publish information concerning any such violations.” This Report does not constitute an adjudication of any fact or issue addressed herein. The facts discussed in Section III, infra, are matters of public record or based on documentary records. 3 17 C.F.R. § 243.100. Final Rule: Selective Disclosure and Insider Trading, Exchange Act, Release No. 34-43154, 65 Fed. Reg. 51,716 (Aug. 15, 2000) (the “Adopting Release”). Regulation FD applies generally to selective disclosures made to persons outside the issuer who are (1) a broker or dealer or persons associated with a broker or dealer, (2) an investment advisor or persons associated with an investment advisor, (3) an investment company or persons affiliated with an investment company, or (4) a holder of the issuer’s securities under circumstances in which it is reasonably foreseeable that the person will trade in the issuer’s securities on the basis of the information. 17 CFR § 243.100(b)(1). 4 Id., at 51,716. 5 Id., at 51,724. 6 Id. 7 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Motorola, Inc., Release No. 34-46898 (Nov. 25, 2002).

3

to investors and the market, the Commission issued its 2008 Guidance.8 As the 2008 Guidance explained, the Commission has “long recognized the vital role of the Internet and electronic communications in modernizing the disclosure system under the federal securities laws and in promoting transparency, liquidity and efficiency in our trading markets.”9 Additionally, the guidance detailed the many steps we have taken over the years to encourage the dissemination of information electronically, “as we believe that widespread access to company information is a key component of our integrated disclosure scheme, the efficient functioning of the markets, and investor protection.”10

The Commission has not explicitly addressed the application of Regulation FD

and the 2008 Guidance to disclosures made through social media channels. The 2008 Guidance was directed primarily at the use of issuer web sites as a method of disseminating information in compliance with Regulation FD. Yet the guidance also contemplated other “push” technology forms of communication such as email alerts and RSS feeds, along with “interactive” communication tools such as blogs.11 In light of the rapid “development and proliferation of company web sites since 2000” and with the expectation of “continued technological advances,” the 2008 Guidance was designed to be flexible and adaptive.12 Accordingly, the guidance provided issuers with a factor-based framework for analysis, rather than static rules applicable only to web sites.

As explained in the 2008 Guidance, “whether a company’s web site is a recognized channel of distribution will depend on the steps that the company has taken to alert the market to its web site and its disclosure practices, as well as the use by investors and the market of the company’s web site.”13 The guidance offered a non-exhaustive list of factors to be considered in evaluating whether a corporate web site constitutes a recognized channel of distribution.14 The central focus of this inquiry is whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information. III. Facts

Netflix is an on-line entertainment service that provides movies and television programming to subscribers by streaming content through the internet and by distributing DVDs through the mail. Over the last two years, Netflix has stated that it is increasingly focused on expanding its internet streaming business. 8 2008 Guidance, at 10. 9 Id., at 6. 10 Id., at 7. 11 Id., at 9 n.20, 21, & n.51. 12 Id., at 5. 13 Id., at 18-19. 14 Id., at 20-22.

4

On January 4, 2012, Netflix announced by press release that it had streamed two

billion hours of content in the fourth quarter of 2011. Netflix also featured the two billion hours streaming metric in the opening paragraph of the January 25, 2012, letter to shareholders signed by Hastings that accompanied Netflix’s quarterly financial results included in its earnings release, a copy of which was also furnished on EDGAR on a Current Report on Form 8-K. During Netflix’s 2011 year-end and fourth quarter earnings conference call on January 25, 2012, Hastings was asked why this streaming metric was relevant (since Netflix’s revenues are derived through fixed subscriber fees, not based on the number of hours of programming viewed). Hastings explained that streaming was “a measure of an engagement and scale in terms of the adoption of our service and use of our service. . . . . It [two billion hours streaming in a quarter] is a great milestone for us to have hit. And like I said, shows widespread adoption and usage of the service.” He also stated that although he did not anticipate that Netflix would regularly report the number of hours of streamed content, Netflix would update the metric “on a milestone basis.”

In an early June posting on Netflix’s official blog, Netflix made a brief reference

to people “enjoying nearly a billion hours per month of movies and TV shows from Netflix.” The blog was technical in nature, announcing a new content delivery network available to Internet Service Providers, and there was no further detail given about the streaming metric. Beyond that, Netflix did not make any milestone announcements regarding streaming hours between January 25, 2012 and the beginning of July 2012.

On July 3, 2012, just before 11:00 a.m. Eastern time, Hastings posted the

following message on his personal Facebook page:

Congrats to Ted Sarados, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!

This announcement represented a nearly 50% increase in streaming hours from Netflix’s January 25, 2012 announcement that it had streamed 2 billion hours over the preceding three-month quarter.

Prior to his post, Hastings did not receive input from Netflix’s chief financial officer, the legal department, or investor relations department. Netflix did not file with or furnish to the Commission a Current Report on Form 8-K, issue a press release through its standard distribution channels, or otherwise announce the streaming milestone. Also on July 3, 2012, and after the Facebook post, Netflix issued a press release announcing the date of its second quarter 2012 earnings release but did not mention Hastings’s Facebook post. Netflix’s stock continued a rise that began when the market opened on July 3, increasing from $70.45 at the time of Hastings’s Facebook post to $81.72 at the close of the following trading day.

5

The announcement of the streaming milestone reached the securities market

incrementally. The post was picked up by a technology-focused blog about an hour later and by a handful of news outlets within two hours. Approximately an hour after the post, Netflix sent it to several reporters, but did not disseminate it to the broader mailing list normally used for corporate press releases. After the markets closed early at 1:00 p.m., several articles in the mainstream financial press picked up the story. Research analysts also wrote about the streaming milestone, describing the metric as a positive measure of customer engagement, indicative of a reduction in the rate Netflix is losing customers, or “churn,” and possibly suggesting that quarterly subscriber numbers would be at the high end of guidance.15

Facebook members can subscribe to Hastings’s Facebook page, which had over

200,000 subscribers at the time of the post, including equity research analysts associated with registered broker-dealers, shareholders, reporters, and bloggers. Neither Hastings nor Netflix had previously used Hastings’s Facebook page to announce company metrics. Nor had they taken any steps to make the investing public aware that Hastings’s personal Facebook page might be used as a medium for communicating information about Netflix. Instead, Netflix has consistently directed the public to its own Facebook page, Twitter feed, and blog and to its own web site for information about Netflix. In early December 2012, Hastings stated for the public record that “we [Netflix] don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings.” IV. Discussion

A fundamental question raised during the staff’s investigation was the application of Regulation FD and the 2008 Guidance to issuer disclosures through rapidly changing forms of communication, including social media channels. We do not wish to inhibit the content, form, or forum of any such disclosure, and we are mindful of placing additional compliance burdens on issuers. In fact, we encourage companies to seek out new forms of communication to better connect with shareholders. We also remind issuers that the analysis of whether Regulation FD was violated is always a facts-and-circumstances analysis based on the specific context presented.

We take this opportunity to clarify and amplify two points. First, issuer

communications through social media channels require careful Regulation FD analysis comparable to communications through more traditional channels. Second, the principles outlined in the 2008 Guidance — and specifically the concept that the investing public should be alerted to the channels of distribution a company will use to disseminate material information — apply with equal force to corporate disclosures made through social media channels.

15 On July 24, 2012, after the close of market, Netflix announced its second quarter earnings, including quarterly subscriber numbers on the low end of guidance. The stock dropped from the previous day’s close of $80.39 to $60.28 per share on July 25, 2012.

6

A. Disclosures Triggering Regulation FD Regulation FD applies when an issuer discloses material, non-public information

to certain enumerated persons, including shareholders and securities professionals.16 It prohibits selective disclosure “[w]henever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer to any person described in paragraph (b)(1) of this section.”17 Although the Regulation FD Adopting Release highlights the Commission’s special concerns about selective disclosure of information to favored analysts or investors, the identification of the enumerated persons within Regulation FD is inclusive, and the prohibition does not turn on an intent or motive of favoritism. Nor does the rule suggest that disclosure of material, non-public information to a broader group that includes both enumerated and non-enumerated persons but that still falls short of a public disclosure negates the applicability of Regulation FD. On the contrary, the rule makes clear that public disclosure of material, nonpublic information must be made in a manner that conforms with Regulation FD whenever such information is disclosed to any group that includes one or more enumerated persons.

Accordingly, we emphasize for issuers that all disclosures to groups that include

an enumerated person should be analyzed for compliance with Regulation FD. Specifically, if an issuer makes a disclosure to an enumerated person, including to a broader group of recipients through a social media channel, the issuer must consider whether that disclosure implicates Regulation FD.18 This would include determining whether the disclosure includes material, nonpublic information.19 Further, if the issuer were to elect not to file a Form 8-K, the issuer would need to consider whether the information was being disseminated in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”20

B. Broad, Non-Exclusionary Distribution of Information to the Public

Our 2008 Guidance was directed primarily at the use of corporate web sites for the disclosure of material, non-public information. Like web sites, corporate social media pages are created, populated, and updated by the issuer. The 2008 Guidance, furthermore, specifically identified “push” technologies, such as email alerts and RSS feeds and “interactive” communication tools, such as blogs, which could enable the automatic electronic dissemination of information to subscribers.21 Today’s evolving social media channels are an extension of these concepts, whereby information can be

16 See supra n.3. 17 17 CFR § 243.100(a) (emphasis added). 18 We reiterate that nothing in Regulation FD is intended to interfere with “legitimate, ordinary-course business communications” or communications with the press. Adopting Release, 65 Fed. Reg. at 51,718. 19 17 CFR § 243.100(a). 20 17 CFR § 243.100(e)(1)-(2). 21 See supra n.10.

7

disseminated to those with access. Thus, the 2008 Guidance continues to provide a relevant framework for applying Regulation FD to evolving social media channels of distribution.

Specifically, in light of the direct and immediate communication from issuers to

investors that is now possible through social media channels, such as Facebook and Twitter, we expect issuers to examine rigorously the factors indicating whether a particular channel is a “recognized channel of distribution” for communicating with their investors.22 We emphasize for issuers that the steps taken to alert the market about which forms of communication a company intends to use for the dissemination of material, non-public information, including the social media channels that may be used and the types of information that may be disclosed through these channels, are critical to the fair and efficient disclosure of information. Without such notice, the investing public would be forced to keep pace with a changing and expanding universe of potential disclosure channels, a virtually impossible task. Providing appropriate notice to investors of the specific channels a company will use for the dissemination of material, nonpublic information is a sensible and expedient solution. It is not expected that this step would limit the channels of communication a company could use after appropriate notice or the opportunity for a company and investors to benefit from technological innovation and changes in communications practices. The 2008 Guidance encourages issuers to consider including in periodic reports and press releases the corporate web site address and disclosures that the company routinely posts important information on that web site. Similarly, disclosures on corporate web sites identifying the specific social media channels a company intends to use for the dissemination of material non-public information would give investors and the markets the opportunity to take the steps necessary to be in a position to receive important disclosures — e.g., subscribing, joining, registering, or reviewing that particular channel. These are some, but certainly not all, of the methods a company could use, with minimal burden, to enable evolving social media channels of corporate disclosure to be used as recognized channels of distribution in compliance with Regulation FD and the 2008 Guidance.

Although every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to qualify as a method “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” within the meaning of Regulation FD.23 This is true even if the individual in question has a large number of subscribers, friends, or other social media contacts, such that the information is likely to reach a broader audience over time. Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information. Without adequate notice that such a site

22 2008 Guidance, at 20-22. 23 17 CFR § 243.101(e)(2).

8

may be used for this purpose, investors would not have an opportunity to access this information or, in some cases, would not know of that opportunity, at the same time as other investors. V. Conclusion

There has been a rapid proliferation of social media channels for corporate communication since the issuance of the Commission’s 2008 Guidance. An increasing number of public companies are using social media to communicate with their shareholders and the investing public. We appreciate the value and prevalence of social media channels in contemporary market communications, and the Commission supports companies seeking new ways to communicate and engage with shareholders and the market. This Report is not aimed at inhibiting corporate communication through evolving social media channels. To the contrary, we seek to remind issuers that disclosures to persons enumerated in Regulation FD, even if made through evolving social media channels, must still be analyzed for compliance with Regulation FD. Moreover, we emphasize that the Commission’s 2008 Guidance, though largely focused on the use of web sites, is equally applicable to current and evolving social media channels of corporate communication. The 2008 Guidance explained that issuers must take steps sufficient to alert investors and the market to the channels it will use for the dissemination of material, nonpublic information. We believe that adherence to this guidance will help, with minimal burden, to assure compliance with Regulation FD and the fair and efficient operation of the market.

By the Commission.

Form 8-K

http://www.sec.gov/Archives/edgar/data/1065280/000119312513149406/d519782d8k.htm[8/10/2014 2:33:22 PM]

8-K 1 d519782d8k.htm FORM 8-K SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report

Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):April 2, 2013

NETFLIX, INC.(Exact name of registrant as specified in its charter)

Delaware 001-35727 77-0467272(State or other jurisdiction of

incorporation) (CommissionFile Number)

(I.R.S. EmployerIdentification No.)

100 Winchester CircleLos Gatos, CA 95032

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number including area code: (408) 540-3700

(Former name or address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of thefollowing provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01. Other Events.

On December 6, 2012, we announced that Netflix, Inc. (“Netflix”) and its Chief Executive Officer Reed Hastings each received a “Wells Notice”from the Staff of the Securities and Exchange Commission (“SEC”) indicating its intent to recommend that the Commission bring enforcementproceedings against Netflix and Mr. Hastings for alleged violations of Regulation Fair Disclosure, Section 13(a) of the Securities Exchange Act andRules 13a-11 and 13a-15 thereunder. On April 2, 2013, the SEC issued a Report of Investigation in which it announced that the Commission hasdetermined not to pursue an enforcement action.

The SEC’s Report of Investigation provided guidance to issuers such as Netflix regarding the use of social media to disclose material non-publicinformation. In this regard, investors and others should note that we announce material financial information to our investors using our investorrelations website (http://ir.netflix.com), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as socialmedia to communicate with our subscribers and the public about our company, our services and other issues. It is possible that the information wepost on social media could be deemed to be material information. Therefore, in light of the SEC’s guidance, we encourage investors, the media,and others interested in our company to review the information we post on the U.S. social media channels listed below. This list may be updatedfrom time to time on Netflix’s investor relations website.

Form 8-K

http://www.sec.gov/Archives/edgar/data/1065280/000119312513149406/d519782d8k.htm[8/10/2014 2:33:22 PM]

The Netflix Blog (http://blog.netflix.com)

The Netflix Tech Blog (http://techblog.netflix.com)

The Netflix Facebook Page (https://www.facebook.com/netflix)

The Netflix Twitter Feed (https://twitter.com/netflix)

Reed Hastings’ Public Facebook Page (https://www.facebook.com/reed1960)

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

NETFLIX, INC.

/s/ David WellsBy: David WellsTitle: Chief Financial Officer

Dated: April 10, 2013

SEC Regulation G

§244.100 General rules regarding disclosure of non-GAAP financial measures.

(a) Whenever a registrant, or person acting on its behalf, publicly discloses material information that includes a non-GAAP financial measure, the registrant must accompany that non-GAAP financial measure with:

(1) A presentation of the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP); and

(2) A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-GAAP measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-GAAP financial measure disclosed or released with the most comparable financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (a)(1) of this section.

(b) A registrant, or a person acting on its behalf, shall not make public a non-GAAP financial measure that, taken together with the information accompanying that measure and any other accompanying discussion of that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure, in light of the circumstances under which it is presented, not misleading.

(c) This section shall not apply to a disclosure of a non-GAAP financial measure that is made by or on behalf of a registrant that is a foreign private issuer if the following conditions are satisfied:

(1) The securities of the registrant are listed or quoted on a securities exchange or inter-dealer quotation system outside the United States;

(2) The non-GAAP financial measure is not derived from or based on a measure calculated and presented in accordance with generally accepted accounting principles in the United States; and

(3) The disclosure is made by or on behalf of the registrant outside the United States, or is included in a written communication that is released by or on behalf of the registrant outside the United States.

(d) This section shall not apply to a non-GAAP financial measure included in disclosure relating to a proposed business combination, the entity resulting therefrom or an entity that is a party thereto, if the disclosure is contained in a communication that is subject to §230.425 of this chapter, §240.14a-12 or §240.14d-2(b)(2) of this chapter or §229.1015 of this chapter.

Notes to §244.100: 1. If a non-GAAP financial measure is made public orally, telephonically, by Web cast, by broadcast, or by similar means, the requirements of paragraphs (a)(1)(i) and (a)(1)(ii) of this section will be satisfied if:

(i) The required information in those paragraphs is provided on the registrant's Web site at the time the non-GAAP financial measure is made public; and

(ii) The location of the web site is made public in the same presentation in which the non-GAAP financial measure is made public.

2. The provisions of paragraph (c) of this section shall apply notwithstanding the existence of one or more of the following circumstances:

(i) A written communication is released in the United States as well as outside the United States, so long as the communication is released in the United States contemporaneously with or after the release outside the United States and is not otherwise targeted at persons located in the United States;

(ii) Foreign journalists, U.S. journalists or other third parties have access to the information;

(iii) The information appears on one or more web sites maintained by the registrant, so long as the web sites, taken together, are not available exclusively to, or targeted at, persons located in the United States; or

(iv) Following the disclosure or release of the information outside the United States, the information is included in a submission by the registrant to the Commission made under cover of a Form 6-K.

Back to Top

§244.101 Definitions.

This section defines certain terms as used in Regulation G (§§244.100 through 244.102).

(a)(1) Non-GAAP financial measure. A non-GAAP financial measure is a numerical measure of a registrant's historical or future financial performance, financial position or cash flows that:

(i) Excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows (or equivalent statements) of the issuer; or

(ii) Includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented.

(2) A non-GAAP financial measure does not include operating and other financial measures and ratios or statistical measures calculated using exclusively one or both of:

(i) Financial measures calculated in accordance with GAAP; and

(ii) Operating measures or other measures that are not non-GAAP financial measures.

(3) A non-GAAP financial measure does not include financial measures required to be disclosed by GAAP, Commission rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant.



(b) GAAP. GAAP refers to generally accepted accounting principles in the United States, except that:

(1) In the case of foreign private issuers whose primary financial statements are prepared in accordance with non-U.S. generally accepted accounting principles, GAAP refers to the principles under which those primary financial statements are prepared; and

(2) In the case of foreign private issuers that include a non-GAAP financial measure derived from a measure calculated in accordance with U.S. generally accepted accounting principles, GAAP refers to U.S. generally accepted accounting principles for purposes of the application of the requirements of Regulation G to the disclosure of that measure.

(c) Registrant. A registrant subject to this regulation is one that has a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or is required to file reports under Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)), excluding any investment company registered under Section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8).

(d) United States. United States means the United States of America, its territories and possessions, any State of the United States, and the District of Columbia.

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§244.102 No effect on antifraud liability.

Neither the requirements of this Regulation G (17 CFR 244.100 through 244.102) nor a person's compliance or non-compliance with the requirements of this Regulation shall in itself affect any person's liability under Section 10(b) (15 U.S.C. 78j(b)) of the Securities Exchange Act of 1934 or §240.10b-5 of this chapter.

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Analysts Reports – Sample Policy Language

A. Guidance, Quiet Period and Analyst Reports

1. No Authorized Spokesperson shall provide “comfort” with respect to an earnings estimate or otherwise "walk the Street" up or down (i.e., suggest adjustments to an analyst’s estimates). If an analyst inquires as to the reliability of a previously, publicly disseminated projection, the spokesperson should follow the “no comment” policy.

2. Other than publicly disseminated statements, as such term is interpreted in accordance with Regulation FD, the Company will observe a “quiet period,” during which the Company shall not comment on its earnings estimates or other prospective financial results for the period for the Company. The quiet period will begin one month prior to the end of the quarter and continue until the Company’s earnings information for the applicable period is made public.

3. Analyst reports and earnings models may only be reviewed to correct errors that can be corrected by referring to publicly available, historical, factual information or to correct any mathematical errors. No other analyst feedback or guidance on earnings models may be communicated to an analyst.

4. No Company employee should distribute copies of, or refer to, selected analysts' reports to anyone outside the Company. This is consistent with the Company’s intention not to adopt any particular analyst report.

Analyst Models and Reports

It is the Company’s policy to refrain from commenting on analyst reports or models, except that the Company’s Investor Relations Department may, if requested, review analyst modeling assumptions for accuracy with respect to publicly disclosed facts only.

Analyst Models and Reports

Upon request by a market professional or shareholder, an FD Person may elect to review drafts of analysts’ models or reports. It is our policy, however, not to comment on analysts’ projections or their statements and conclusions about us, other than to correct factual errors by reference to information already in the public domain. In addition, no officer or other company representative should allow himself or herself to be quoted in an analyst report. Absent unusual circumstances, we do not distribute copies of analyst reports to non-employee shareholders or other non-employees who aren’t also Board Members as part of investor relations kits or otherwise. If an exception to this policy is made, care should be taken to include a full spectrum of opinions from a broad range of analysts and appropriate disclaimers of the accuracy and/or completeness of the content of the analysts’ reports.

SEC Guidance on the use of Hyperlinks

http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#164-02

Question 164.02

Question: An electronic communication relying on the exemption in Rule 165 must contain the legend required by paragraph (c)(1) of that rule. Some electronic communication platforms, such as those made available through certain social media websites, limit the number of characters or amount of text that can be included in the communication, effectively precluding display of the legend together with the other information. Under what circumstances would the use of a hyperlink to the legend satisfy the Rule 165(c)(1) requirement?

Answer: Recognizing the growing interest in using technologies such as social media to communicate with security holders, the staff will not object to the use of an active hyperlink to satisfy the requirements of Rule 165(c)(1) in the following limited circumstances:

The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;

Including the legend in its entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and

The communication contains an active hyperlink to the required legend and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

Where an electronic communication is capable of including the required legend, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required legend would be inappropriate. This position also applies to written communications that constitute solicitations made in reliance on Exchange Act Rule 14a-12 and pre-commencement written communications subject to Exchange Act Rules 13e-4(c), 14d-2(b) and 14d-9(a). [April 21, 2014]

http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#164-02

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