When Regulation Fair Disclosure (FD) was adopted in August 2000, many public companies adopted policies addressing the permissible manner of communications with analysts and the investment community. Now, 12 years later, it is critically important for public companies to revisit their policies, or adopt a new policy if none exists.
Lessons from the SEC’s enforcement of Regulation FD
Under Regulation FD, whenever a company, or persons acting on its behalf, discloses material non-public information to securities professionals and investors, the company must make public disclosure of that same information. The SEC adopted Regulation FD in response to the perceived problem of selective disclosure of material non-public information to analysts, institutional investors and others.
Over the past 12 years, the SEC has brought more than a dozen enforcement actions against companies and individuals for Regulation FD violations. It is evident from the SEC’s actions that private meetings with analysts or institutional investors are particularly fraught with risk from a Regulation FD perspective and as a result, public companies must ensure that their policies employ special precautions whenever such meetings take place.
With the variability of financial results driven by recent economic conditions, executive officers of public companies have increasingly found themselves in situations where they risk violating Regulation FD by providing selective disclosure with respect to prior earnings guidance. Analysts and investors often press for information about management’s comfort with prior earnings guidance, particularly in circumstances where there is a substantial level of uncertainty about future results. As a result, companies should consider whether it is prudent to implement a “no comment” policy regarding confirmation of prior guidance, particularly in those situations where there is a heightened risk for selective disclosure regarding the prior guidance, such as when the timing of the confirmation of guidance or the context in which the confirmation is made conveys additional material information.
Perhaps most importantly, the SEC’s recent enforcement actions have emphasized the importance of having an effective Regulation FD policy in place, along with the training and updating that is necessary to maintain the effectiveness of the policy in preventing potential Regulation FD violations.
Key elements of an effective Regulation FD policy
A Regulation FD policy should address, in a comprehensive manner, the procedures for dealing with situations where a potential Regulation FD violation could occur. Key provisions of an effective Regulation FD policy include:
- Control of the flow of material non-public information outside of an organization by substantially limiting the number of officers, directors or employees that are authorized to speak publicly on behalf of the company, as well as establishing a “central clearinghouse” for the information by appointing a compliance officer for the purposes of the policy.
- Recognition (both as part of the Regulation FD policy and as an aspect of the overall disclosure controls and procedures) that disclosure of material information is required only in situations where an affirmative disclosure obligation exists. This could arise, for example, as a result of a duty to comply with specific SEC and securities exchange disclosure requirements, disclose material information before trading in the company’s own securities, correct inaccurate prior statements, speak truthfully and not mislead once a statement of material fact is made, comply with Regulation FD because of an inadvertent disclosure of material non-public information or update previous statements made about new developments under certain circumstances.
- Pre-approval of presentations to analysts or investors, no matter what the forum, by the compliance officer. Any requests for information, comments or interviews made to officers, directors or employees should likewise be presented for consideration by the compliance officer (subject to some limited exceptions for normal course communications).
- Limitations on communication with analysts, so that earnings guidance and other sensitive information is not provided to securities analysts, unless the guidance is provided strictly in accordance with the Regulation FD policy, and that any review of analyst reports, if permitted, is limited to historical items and similar factual matters.
- Limitations on the use of social media, including blogs, Twitter, Facebook, LinkedIn and other similar outlets, to the extent that communications through these channels may be inconsistent with the Regulation FD policy.
- Ongoing monitoring of unusual trading activity, analyst and investor communications, and market rumors to determine if any corrective disclosure is necessary.
- Ongoing training, so that the policy can be effectively communicated to officers, directors and employees in order for them to fully understand the application of the policy and the potential consequences for noncompliance.