Selective disclosure is a serious corporate governance issue that strikes at the heart of market fairness and investor trust. It occurs when a company discloses material, non-public informationto a select group of investors, analysts, or stakeholders before making it available to the general public. In an environment of heightened regulatory scrutiny, real-time information flow, and growing shareholder activism, understanding selective disclosure is critical for boards, executives, and compliance teams alike. This article explains what selective disclosure is, how it occurs, why it is prohibited, its legal consequences, and how organisations can prevent it.
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Selective disclosure refers to the practice of sharing price-sensitive or material information with a limited audience instead of disclosing it broadly and simultaneously to the public.
The issue is not merely what is disclosed, but who receives it and when.
Material information typically includes any information that could reasonably influence an investor’s decision to buy, sell, or hold securities.
Examples include:
Financial results or earnings guidance
Mergers and acquisitions
Major contracts or losses
Changes in leadership
Regulatory actions or investigations
When such information reaches a select few ahead of others, it creates an unfair informational advantage.
Why Selective Disclosure Is a Serious Concern?
Capital markets operate on the principle of equal access to information. Selective disclosure violates this principle in several ways:
Creates information asymmetry
Distorts stock prices
Erodes investor confidence
Undermines market transparency
Regulators treat selective disclosure as a market abuse issue because it compromises fairness, even if there is no intent to manipulate prices.
Selective Disclosure vs Insider Trading
While closely related, selective disclosure and insider trading are not the same.
Aspect
Selective Disclosure
Insider Trading
Core issue
Unequal information sharing
Trading on unpublished information
Trading required
No
Yes
Intent
Maybe inadvertent
Typically deliberate
Regulatory focus
Disclosure fairness
Market abuse
Selective disclosure can lead to insider trading, but a violation may exist even if no trading takes place.
Common Forms of Selective Disclosure
Selective disclosure does not always occur through formal announcements. In many cases, it happens informally or unintentionally.
Private Analyst or Investor Calls: Sharing non-public financial performance or forward-looking guidance during one-on-one meetings or closed analyst calls is a common risk area.
Selective Earnings Guidance: Providing earnings expectations to select analysts to “manage expectations” before public disclosure can amount to selective disclosure.
Informal Conversations: Casual remarks by senior executives during conferences, site visits, or social interactions can unintentionally reveal material information.
Leaks to Media or Market Participants: Providing exclusive information to journalists or market intermediaries before official disclosure creates uneven access.
Differential Disclosure During Fundraising or Transactions: Sharing detailed non-public information with select investors without appropriate confidentiality and disclosure safeguards can trigger regulatory scrutiny.
What Constitutes "Material" Information?
Not all information qualifies as material. However, regulators apply a reasonable investor test.
Information is considered material if:
A reasonable investor would consider it important
It could influence investment decisions
It could affect the share price
Materiality depends on context, timing, and magnitude, not just intent.
Who is Responsible for Selective Disclosure?
Responsibility for selective disclosure typically lies with those authorised to communicate on behalf of the company.
This includes:
CEOs and CFOs
Senior management
Investor relations teams
Board members
Authorised spokespersons
However, companies can also be held liable for failures in internal controls and disclosure policies.
Legal and Regulatory Framework
Selective disclosure is regulated to ensure fairness and transparency in capital markets.
Regulators generally require:
Timely disclosure of material information
Equal and simultaneous access to information
Clear disclosure policies and controls
Violations may lead to enforcement action even if:
The disclosure was unintentional
There was no personal gain
No trading occurred
The focus is on market impact, not just intent.
Consequences of Selective Disclosure
Selective disclosure can attract serious consequences for both companies and individuals.
Regulatory Action
Monetary penalties
Public reprimands
Compliance directives
Increased regulatory oversight
Civil Liability
Investor lawsuits
Claims for losses due to unequal information
Reputational Damage
Loss of investor trust
Negative market perception
Heightened shareholder activism
Leadership Fallout
Scrutiny of disclosure practices
Board-level accountability
Personal exposure for executives
In capital markets, reputational damage often outlasts regulatory penalties.
Why Selective Disclosure Happens?
Selective disclosure often results from a combination of pressure and poor controls rather than deliberate wrongdoing.
Pressure to Manage Market Expectations: Executives may attempt to “soften the blow” of bad news or guide select analysts ahead of public announcements.
Weak Disclosure Controls: Lack of clear disclosure policies or inadequate training increases risk.
Informal Communication Culture: Casual or unstructured interactions with analysts and investors can lead to unintended disclosures.
Overreliance on Investor Relations Teams: Without proper oversight, even well-intentioned communications can cross regulatory lines.
Role of Boards and Senior Leadership
Preventing selective disclosure is ultimately a leadership responsibility.
Boards and senior management must:
Set a culture of transparency
Approve disclosure policies
Monitor compliance with disclosure norms
Ensure accountability for violations
An engaged board and empowered compliance function are critical safeguards.
Preventing Selective Disclosure
Organisations can significantly reduce risk by adopting structured controls.
Clear Disclosure Policies
Defined materiality thresholds
Approved spokespersons
Standardised disclosure processes
Training and Awareness
Regular training for executives and IR teams
Guidance on informal interactions
Centralised Disclosure Control
Disclosure committees
Legal and compliance review of communications
Simultaneous Public Disclosure
Use of stock exchange filings
Press releases and public calls
Documentation and Audit Trails
Records of analyst calls and meetings
Consistent messaging across platforms
Responding to Selective Disclosure
If selective disclosure occurs, prompt corrective action is essential.
Typical steps include:
Immediate public disclosure of the information
Internal investigation
Review of disclosure controls
Communication with regulators, if required
Disciplinary action, where appropriate
Swift remediation can mitigate regulatory and reputational fallout.
Selective Disclosure and Management Liability
Selective disclosure often leads to allegations of:
Breach of fiduciary duty
Failure of oversight
Market manipulation
As a result, disclosure failures increasingly expose individual leaders to regulatory and civil liability, making disclosure governance a personal risk issue.
Conclusion
Selective disclosure undermines the principle of equal access to information that capital markets rely on. Whether intentional or inadvertent, it exposes companies and leadership to regulatory action, investor backlash, and lasting reputational harm.
In today’s transparency-driven environment, robust disclosure controls, disciplined communication, and strong governance are not optional; they are essential.
For organisations operating in public markets, fair disclosure is not just a regulatory requirement; it is a leadership responsibility.
Disclaimer: Above mentioned insurers are arranged in alphabetical order. Policybazaar.com does not endorse, rate, or recommend any particular insurer or insurance product offered by an insurer.
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