Reg FD Settlement Gives Valuable Insights

A settlement between the Securities and Exchange Commission and a corporate executive for violating the SEC’s Regulation Fair Disclosure offers guidance that could potentially help public companies avoid enforcement trouble over executives talking out of turn.

Experts say the SEC’s Sept. 24 civil action against Christopher Black, the former chief financial officer of American Commercial Lines, is among only a handful of actions brought since the 2000 adoption of “Reg FD,” which prohibits selective disclosure of material nonpublic information.

The SEC is signaling that Reg FD is still “alive and well,” says William Kelly, a partner in the law firm Davis Polk & Wardwell. He describes the Commission’s action as “a shot across the bow to keep people awake.”

Indeed, Sudhir Shenoy, a lawyer the law firm Womble Carlyle, notes that the settlement is the first Reg FD action brought by the SEC since 2007.

In its complaint, the SEC alleged that Black aided and abetted ACL’s violation of Regulation FD and Section 13(a) of the Securities Exchange Act by selectively disclosing material, nonpublic information regarding the company’s second quarter 2007 earnings forecast.

Specifically, the SEC alleged that Black, in his capacity as the company’s designated investor relations contact, and without informing anyone at ACL, provided “additional color” on the company’s previously announced earnings guidance in an email sent on a Saturday to a handful of sell-side analysts. Black’s selective disclosure and the resulting analysts’ reports triggered a sharp drop in ACL’s stock price on unusually high volume the following Monday.

Without admitting or denying the allegations, Black agreed to pay a $25,000 civil penalty and consented to a cease and desist order.

“The settlement is significant not because of the penalty imposed on Mr. Black, but because of the steps ACL had taken which contributed to the SEC’s decision not to bring an enforcement action against ACL itself,” Shenoy says.

Most notably, the complaint against Black includes a rare explanation of why the Commission decided not to bring an enforcement action against the company. “That’s something people ought to look at,” says former SEC attorney Thomas Gorman, now a partner in the law firm Porter Wright Morris & Arthur. Gorman says that sort of explanation by the Commission is “very unusual.”

The SEC said it considered several factors, including how, prior to the violation, ACL “cultivated an environment of compliance” by providing training on the requirements of Regulation FD and adopting policies that implemented controls to prevent violations. The complaint noted that Black put together ACL’s investor relations policy, which included a section addressing the requirements of Regulation FD, and that he received training from ACL on Reg FD’s requirements on at least two occasions.

The SEC also said Black was solely responsible for the violation and acted “outside the control systems established by ACL to prevent improper disclosures.”

Once ACL discovered the illegal disclosure, the SEC noted that the company “promptly and publicly” disclosed the information by filing a Form 8-K the same day and self-reported the conduct to SEC staff the next day. The Commission further noted that the company provided “extraordinary cooperation” with the staff’s investigation and took remedial measures, including the adoption of additional controls, to prevent such conduct in the future.

The outcome for ACL “underscores the importance of having effective compliance procedures in place and a crisis management plan in place to quickly address any shortcomings in those procedures,” says Michael Littenberg, a partner with Schulte Roth & Zabel.

Likewise, Kelly says, the SEC’s decision not to take action against the company “sends the message that if you have a serious compliance program and respond to a problem promptly and aggressively, the SEC will take that into account.”

“The company in this case had all of the right procedures in place before [the violation] and took all of the right steps after,” says Littenberg. “They had a designated IR contact, a written FD policy, ongoing training, a policy on earnings guidance, a policy of having communications reviewed in advance by outside counsel, and as soon the violation occurred, the company took prompt corrective action.”

Experts say the action is also a reminder to all public companies to review and assess the effectiveness of their existing procedures.

Shenoy says the SEC’s decision not to take action against ACL also illustrates the importance of self-reporting in the event of a violation and cooperating with any subsequent investigation.

Generally, Kelly says Reg FD compliance “is in pretty good shape at most companies. The rule isn’t terribly complicated, and most people understand it.”

However, he says it’s not enough to simply have a formal, written Reg FD compliance policy. “You have to have an active compliance program” that includes training, periodic refreshers, written certifications and the like, says Kelly.

He says giving executives a Reg FD refresher can be “as simple as sending out a memo about the case and reminding them about their responsibilities.”