Eight years after its adoption, Regulation Fair Disclosure is a part of the daily lives of corporate executives. That doesn’t mean compliance with it has become old hat.
By now, public company executives are almost universally familiar with the rules, adopted by the SEC in 2000 to level the playing field when companies disclose material information. Intended to thwart insider trading, “Reg FD,” as it is known, prohibits executives from selectively disclosing important company information: If you tell any party, you must tell everyone.
For most companies, Reg FD compliance “has become ingrained in their procedures,” says Peter Rossiter, a partner at the law firm Schiff Hardin. “That doesn’t mean they don’t think about it. Investor relations executives and in-house lawyers think about all the time.”
Cevik
Arzu Cevik, director of strategic research at Thomson Financial, agrees. “It’s habitual, but I don’t think that makes it any easier,” she says. Cevik and others say navigating Reg FD is still a constant challenge: “No matter what kind of training people have, there are always new scenarios they may not have anticipated,” she says.
Indeed, Brian Lane, a former director of the SEC’s Division of Corporation Finance and now a partner at the law firm Gibson Dunn & Crutcher, says he still gets calls from companies with Reg FD compliance questions practically every day. Still, he credits the rule for largely accomplishing what the SEC wanted: an end to quiet whispers about earnings that helped large investors, but left individual investors on the curb.
Lane
“Yes, there has been some chill on communications, but it has mostly been on the kind of whispered earnings that the SEC wanted to chill,” Lane says.
Steven Bochner, a partner in the law firm Wilson Sonsini Goodrich & Rosati, agrees. “To the extent that [Reg FD] did chill communications, it was a good trade-off because it’s a much fairer system now,” he says. “If you’re a shareholder, T. Rowe Price doesn’t get the information any sooner than you do.”
Prior to the adoption of Reg FD, Bochner says it was common for companies to issue a press release with historical information, then invite a select few to a private conference call where company executives might “ballpark” earnings. Reg FD has essentially eliminated that practice, he says.
Despite the maturation of the rule, observers say it still poses potential pitfalls to companies. For instance, Bochner says private communications with analysts and stockholders “remain very hazardous.”
“If executives choose to engage in those communications, they have to make sure they don’t say anything that could move the stock, or they’re setting themselves up for a potential FD problem,” he says.
Brown
Gary Brown head of the corporate department at Baker, Donelson, Bearman, Caldwell & Berkowitz agrees that such one-on-one discussions can easily trip up executives. “If you’re going to have that sidebar, have somebody else with you, so there’s always another person who knows what was said,” he says.
The best way to avoid violating FD, Brown says, is to adopt clear, written policies for how to communicate with investors and to make sure any executives who speak on the company’s behalf are well-versed in the rule’s requirements. (For a copy of Brown’s Reg FD Policy template, please see the box above right.)
“In the cases where the SEC brought enforcement actions, companies didn’t have good policies in place” for compliance, Brown says. “Companies must also make sure their executives are properly sensitized to these issues.”
Best, and Worst, Practices
One of a company’s biggest challenges in complying with Reg FD is how to handle questions from investors, where sloppy answers could violate the rule. In a recent survey of 102 investor relations executives by Thomson Financial, hedge funds topped the list of groups that ask the most questions with potential Reg FD concerns, followed by sell-side analysts, then mutual and pension funds and retail investors.
TALKING UNDER REG FD
Below are some recommendations from Thomson Financial on how to navigate investor meetings and similar corporate events without violating Regulation FD.
Before the meeting:
Limit the one-on-ones to those experienced in dealing with investors.
Always have someone from IR present.
Consider having one to two members of the disclosure committee attend.
Prepare and review past disclosures to ensure consistency.
Use handouts that have previously been released.
Keep commentary to what was discussed in the latest earnings conference call script and IR presentation.
Anticipate potential investor questions and draft a list of responses.
Brief everyone in advance about details/issues that may arise that may be material and non-public.
Rehearse.
Maintain a binder/folder of pertinent information and bring to meetings. Include all previously disclosed, public information; potential Q&A list; and most recent earnings release and guidance.
At the meeting:
Remind all about safe harbor disclosure prior to each meeting.
Try to adhere to Reg FD no matter how aggressive investors may be.
Guidance discussion should reflect last public statements.
Take notes during the meetings.
If anything material is disclosed at the meeting, consult with legal and/or the disclosure committee and issue a prompt 8-K and/or press release within 24 hours.
Offer to follow up if an unanticipated question is asked.
After the meeting:
Debrief to confirm that no material, non-public information was disclosed.
Review notes with legal to ensure that no violations occurred.
Source
Thomson Financial .
As Lane puts it: “The problem is that it’s not illegal for people to try to convince the company to break the rule.”
Carr
Steve Carr, managing director of Dresner Corporate Services, says modern technology can go a long way to satisfying Reg FD requirements. A variety of mediums, including conference calls, electronic regulatory filings, Webcasts, podcasts, corporate Website postings, e-mail, and electronic newswires all disseminate information quickly and universally.
Observers say a number of Reg FD best practices have emerged. Rossiter even says the dissemination of earnings releases has “developed into a drill.”
Typically, companies announce, well in advance and via newswire, when they will release their earnings, with details on how investors can access the earnings conference call. On the day of the conference call—which these days is usually a Webcast— companies file a Form 8-K with the Securities and Exchange Commission before the call. The call itself is highly scripted.
“For any press release with financial or important ramifications, I tell clients: ‘Wrap it in a protective Reg FD 8-K,’” Brown says.
Brown also advises that companies formally designate a limited group of people as authorized to speak on behalf of the company and direct all others to refer inquiries that could raise Reg FD issues to an authorized person.
Similarly, Rossiter says, “The centralization of communications became more important with Reg FD.” In particular, Rossiter says inquiries from individual analysts during the quarter “are moments of hazard” for companies.
Rossiter
“You’ve got to have the right people, and only the right people, talking to analysts,” Rossiter says. “It should be a very narrow group of people who are quite familiar with the requirements.”
Rossiter also says he has seen companies stipulate that one-on-one analyst meetings follow a delayed-use agreement, where the analyst agrees not to use any of the information for 24 hours. That allows the company time to evaluate “whether anything slipped through the FD guard wicket, so they can file an 8-K before the analyst is able to do anything with the information,” he says.
Brown also recommends adopting a corporate policy of not commenting on market rumors. “That’s hardest to get people to come to grips with,” he says. “Most people misunderstand the company’s duty to disclose.”
Rossiter encourages companies that choose to participate in analyst conferences to file their presentations in an 8-K with the SEC the morning that those presentations will be made. Some also file a transcript of their analyst calls afterward, but that’s not common enough to be called a best practice yet, he adds.
One strategy Cevik says isn’t yet a best practice, but may become one, is establishing a Reg FD disclosure committee. Among the executives surveyed by Thomson, 65 percent said their companies have a Reg FD disclosure committee.
For a draft template policy on communicating with analysts, security holders and others in compliance with Reg FD, see the box above right.
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