Did Apple Break SEC Disclosure Rules Re: Steve Jobs's Health?

Last Updated Jan 22, 2009 3:33 PM EST

A timely issue, to be sure. Having dealt with this sort of thing before, I thought I'd provide some clarity or, worst case, fuel the debate.

According to the SEC's Regulation Fair Disclosure, better known to all concerned as Reg FD, public companies are required to disclose "material information" to all investors simultaneously. The idea behind Reg FD - enacted in 2000 - was to limit insider trading that occurred because of selective disclosure.

What that means is this: if you're going to disclose "material information" about a security, then you must disclose it simultaneously to the entire investment community at once, typically in a press release, conference call, or on a corporate website.

The definition of "material information" is somewhat subjective, but it's essentially anything that investors would likely find important in making investment decisions regarding that security.

Now here's the rub. While Canadian rules call for "immediate" disclosure of material information, Reg FD makes no mention of timetables, except when selective disclosure has already occurred, in which case companies have to remedy the situation "promptly," if the disclosure was unintentional, or "simultaneously," if intentional.

The subjective nature of "materiality" and disclosure "timing."
Materiality is actually more straightforward than you might think. Anything that might have a substantial effect on revenues, earnings, or in the case of Apple CEO Steve Jobs's health, anything that might have a substantial effect on the company's securities, is material. If you're not sure, then disclose. It's that simple.

Disclosure timing is tougher, more interesting, and really comes down to this: how long can a company keep material information confidential before it leaks? If there's a reasonable chance the news will leak, then the company is acting more responsibly by disclosing sooner rather than later. Once news leaks, the company is in violation of Reg FD.

It's essentially a game of chicken.

So, did Apple screw up? There are essentially two ways that could have happened.

First, did the news leak? Asked another way, was there substantial trading in Apple stock prior to the media advisory, containing the email Steve Jobs sent to employees, on January 14th at 4:35 PM EST? If so, the news probably leaked. Assuming the leak was unintentional, and only a matter of hours, then fair disclosure occurred "promptly" and all is well. If it leaked days before the advisory, well, that probably violates Reg FD. If the leak was intentional, then it also violates Reg FD.

Second, did Apple mislead investors by saying it was a nutritional problem caused by a hormone imbalance just nine days prior to announcing Jobs's sabbatical? If that's what they (directors and officers) thought was true at the time, then their hands are clean. If not, then they screwed up and, again, violation of Reg FD.

All that said, to my knowledge the SEC has steered clear of prosecuting when the company reacted to material information with reasonable expediency and straightforwardness (if that's even a word). The SEC has all kinds of ways of looking at securities trading to determine if a leak occurred and the timing relative to fair disclosure.

In the case of Apple, I think an investigation is certainly warranted. But barring extreme stupidity, i.e. misleading of shareholders, I think Apple is clean on this one.

My advice to officers and directors faced with a similar situation regarding significant changes in key executive health: if you know it, disclose it, and do it as soon as you reasonably can. People talk and information leaks. The longer you hold information, the more likely a leak and a subsequent SEC investigation.

And for all you privacy nuts out there: for officers and directors of public companies, when privacy intersects securities regulations, privacy loses. Like it or not, that's part of the deal.