What does safe harbor mean in business and finance?
In: Economics
In general, a safe harbor is a law or regulation which explicitly makes an action legal so long as certain conditions are met. For example, a law might say if you build a fence a certain height, you are not responsible if your dog bites someone reaching over from the other side.
In finance, this refers to US laws about how a company discloses its financial projections to the public. So long as they follow the correct procedure, they are not liable if those projections don’t come true and people lose money. Otherwise, companies wouldn’t make those projects and investors would have less to go on.
It is a established regulatory carve out. So an activity will be prohibited unless it is within the safe harbor guidelines. Then the prohibited activity is permitted. An easy example is soft dollars under section 28E of the Exchange Act is 1934. Rule is gotta get best execution. Safe harbor would be slightly more than “best” price can be incurred on execution of trades if it is for specific brokerage or research services as described in letters outside of the regulation (the safe harbor)
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