SEC Selective Disclosure Rules
On August 15, 2000, the SEC adopted Regulation FD (http://www.sec.gov/rules/final/33-7881.htm), which is designed to restrict selective disclosure of material nonpublic information by issuers. The new regulation, which is effective October 23, 2000, will require public companies to evaluate their processes for dealing with analysts and institutional investors and may require them to institute new compliance programs. The attached materials are designed to assist in this effort. They include
- A summary of the scope and mechanics of Regulation FD;
- A list of commonly asked questions, and answers; and
- A suggested corporate policy dealing with disclosure of material
The SEC, having become "increasingly concerned about the selective disclosure of material information by issuers" with what it saw as a concurrent risk of "loss of investor confidence in the integrity of our capital markets" adopted Regulation FD to restrict selective disclosure of material nonpublic information. Regulation FD applies to all issuers of publicly held securities except certain investment companies and foreign governments or foreign private issuers.
In order to respond appropriately to the regulation, issuers need to know
- What communications are covered?
- What company personnel are covered?
- What communications are material?
- When must issuers make follow-up disclosures?
- How must the disclosure be made?
- What communications are exempt?
- What are the consequences of non-compliance?
- What additional procedures should be implemented?
What communications are covered?
Regulation FD only applies to communications to either securities market professionals or holders of an issuer.s securities under circumstances in which it is reasonably foreseeable that the security holder will trade on the basis of the information.
Securities market professionals are broker-dealers and their associated persons; investment advisers, certain institutional investment managers and their associated persons; and investment companies, hedge funds and their affiliated persons. Covered personnel therefore include sell-side analysts, buy-side analysts and large institutional investors.the key targets of any financial communications program.
The other category.holders of an issuer.s securities under circumstances in which it is reasonably foreseeable that the security holder will trade on the basis of the information.is not so clearly defined. If an issuer is in communication with anyone who holds its shares, it should assume that any disclosure of material information to that person is covered by the regulation.
What company personnel are covered?
Regulation FD applies to an issuer or a "person acting on behalf of an issuer". Persons acting on behalf of an issuer are senior officials of the issuer (any director, executive officer, investor relations or public relations officer, or other person with similar functions) and any other officer, director, employee or agent of the issuer who regularly communicates with securities market professionals or issuer security holders. Anyone who discloses material nonpublic information in breach of a duty of trust or confidence to the issuer is not considered acting on behalf of the issuer.
In addition, if a person within the covered group directs another employee to make a selective disclosure, that disclosure would be considered made by a person "acting on behalf of the issuer".
What communications are material?
The regulation only applies to the selective disclosure of material nonpublic information. The SEC noted that information is material if "there is a substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision. It declined to provide a more specific materiality definition, leaving the determination to the exercise of judgment (and the risk) of issuers in each particular fact situation. Information is nonpublic, of course, if it has not been disseminated in a manner making it available to investors generally, e.g., by the issuance of a press release.
The SEC did list several types of information or events that should be carefully reviewed for materiality: (1) earnings information; (2) mergers, acquisitions, tender offers, joint ventures, or changes in assets; (3) new products or discoveries, or developments regarding customers or suppliers; (4) changes in control or management; (5) change in auditors or auditor notification that the issuer may no longer reply on an audit report; (6) events regarding the issuer.s securities, e.g., defaults on senior securities, calls for redemption, repurchase plans, stock splits, dividend changes, changes to rights of security holders and public or private sales of additional securities; and (7) bankruptcies or receiverships.
It is no accident that earnings information leads the list. In its introductory statement of concerns, the SEC pointed to advance warnings of earnings results as a matter of concern. It also addressed at length the provision of "guidance" to analysts regarding earnings forecasts:
One common situation that raises special concerns about selective disclosure has been the practice of securities analysts seeking "guidance" from issuers regarding earnings forecasts. When an issuer official engages in a private discussion with an analyst who is seeking guidance about earnings estimates, he or she takes on a high degree of risk under Regulation FD. If the issuer official communicates selectively to the analyst nonpublic information that the company.s anticipated earnings will be higher, lower than, or even the same as what analysts have been forecasting, the issuer likely will have violated Regulation FD. This is true whether the information about earnings is communicated expressly or through indirect "guidance," the meaning of which is apparent though implied. Similarly, an issuer cannot render material information immaterial simply by breaking it into ostensibly non-material pieces. (Emphasis added.)
On the other hand, the SEC disclaimed any intention of prohibiting issuers from disclosing non-material information to analysts even if that piece of information (unbeknownst to the issuer) helps the analyst complete a "mosaic" of information that, taken together, is material. The key is not whether the information disclosed is material to the analyst but whether it would be similarly significant to a reasonable investor.
When must issuers make follow-up disclosures?
If an issuer or a person acting on its behalf intentionally discloses material nonpublic information, simultaneous public disclosure of that information must be made. If the selective disclosure is "non-intentional", public disclosure must be made promptly, i.e., as soon as reasonably practical but in no event after the later of 24 hours or the commencement of the next day.s trading on the New York Stock Exchange. For purposes of the regulation, selective disclosure is "intentional" if the person making the disclosure knows or is reckless in not knowing that the information disclosed is material and nonpublic. "Public disclosure" means the filing of a Form 8-K or release of the information through another method (or combination of methods) of disclosure reasonably designed to provide broad, non-exclusionary distribution of the information to the public.
For example, if an issuer wished to hold a conference call with analysts to disclose a 50% shortfall versus anticipated earnings for a quarter, it would have to make simultaneous public disclosure of that information. If during that call the company.s chief financial officer responded to a question and disclosed material information that he or she reasonably believed was already publicly available, the issuer would have 24 hours to make a follow-up public disclosure of that information.
How must the disclosure be made?
The SEC discussed at length how disclosures of material information should be made to comply with the rule. One method will be by furnishing or filing the information under cover of a Form 8-K. While that may be useful in some situations (as, for example, when an issuer wants to get information into a shelf registration statement), it may raise liability or red flag issues (e.g., incorporation of projections into shelf registration statements, admission that a Regulation FD disclosure is required because of inadvertent selective disclosure) that issuers would prefer to avoid.
As alternatives the SEC endorsed press releases distributed through a widely circulated news or wire service and announcements through press conferences or conference calls that interested members of the public may attend or listen to in person, by telephone or over the Internet (provided they have been given adequate notice of the event). At present, posting on a Web site by itself may not be adequate disclosure, but the SEC left that question open and clearly endorsed use of Web sites to distribute information in conjunction with the other techniques described above.
What communications are exempt?
There a number of types of communications that might otherwise fall within the terms of the regulation but are specifically exempted from coverage:
- Disclosures to a person who owes a duty of trust or confidence to the issuer, e.g., attorneys, accountants, investment bankers.
- Disclosures to persons who have expressly agreed to keep the information confidential. To the extent there is any lack of clarity as to whether someone falls into the first category (e.g., commercial bankers or investment bankers who have not been formally retained), execution of a confidentiality agreement would remove any doubt.
- Disclosures to credit rating agencies, so long as the information is disclosed solely for the purpose of developing a credit rating and the ratings are publicly available.
- Disclosures in connection with most 1933 Act registered offerings. For example, "road show" communications in connection with an underwritten public offering should be exempt. In the SEC.s view, existing 1933 Act requirements are sufficient to accomplish the policy goals of Regulation FD in the context of registered offerings.
In addition, ordinary course business communications with customers, suppliers, regulatory agencies and strategic partners should fall outside the scope of the regulation since they are not being made to securities professionals or security holders.
What are the consequences of non-compliance?
Violation of the regulation could subject an issuer to SEC enforcement action, but it would not render the issuer ineligible to use short-form registration statements (e.g., Forms S-2, S-3 and S-8), nor would it make Rule 144 unavailable to selling shareholders of the issuer. In addition, the regulation states that no failure to make a public disclosure required solely by Regulation FD will be deemed to be a violation of Rule 10b-5 and thereby expose the issuer to private securities actions. In any context where significant selective disclosure issues arise, however, there are likely to be other bases on which 10b-5 claims may be made.
What additional or modified procedures should be implemented?
Regulation FD reflects a clear intent on the part of the SEC to make information access more of a level playing field. While the special role of analysts is still acknowledged, special treatment in terms of access to inside information will no longer be permitted. Maintaining an effective financial communications program will still be possible (assuming analysts accept the proposition they have to work for a living), but it will require careful discipline in a number of areas. Issuers may want to consider the following steps in their compliance program:
1. Designate the individuals within the company who are authorized to speak with securities professionals and security holders.
2. Identify who at the company is authorized to permit the release of certain types of sensitive information. For example, disclosure (or authority to permit disclosure) of projections might be limited to the chief executive officer and the chief financial officer. A sample corporate policy covering disclosure of material information is attached for reference.
3. Design releases of major corporate news to meet the requirements of the regulation for public disclosure. For example, quarterly earnings releases or other major news might be announced initially by a press release followed by an open telephone conference call for analysts, permitting investors to listen in by telephonic means or through Internet webcasting. (Advance notice of the time and date of, and means of access to, the call should also have been provided.)4. Sensitize corporate personnel who will be dealing with securities professionals and security holders as to materiality issues, both in general terms and in terms of company-specific issues.
5. Exercise great caution in providing specific comments on analyst reports and refrain altogether from commenting on the accuracy of their earnings estimates versus the company.s expectations. For more detailed suggestions on the process of monitoring and managing analysts. reports, see "Questions and Answers" below.
6. When major developments are involved, (a) prepare an advance script of any statements and review it for the presence of material nonpublic information, and (b) have a second party listen in on any conversations or presentations or debrief the speaker to ensure that no inadvertent disclosures of material information have been made.7. Since the period for corrective action is limited to 24 hours, identify in advance who would need to be involved to consider action to be taken if an inadvertent disclosure of material information occurs.
QUESTIONS AND ANSWERS
Q: Can I still talk to analysts?
A: Yes. There.s no way that discussions with analysts and institutional investors can be avoided. They want information, on as close to a real-time basis as possible, and issuers must deal with them. The key, however, is to come up with a disciplined process that allows the proper types of information to be provided without unfairly favoring certain recipients.
Q: Should I avoid one-on-one meetings or closed-door sessions?
A: No. Individual sessions with analysts and key investors will still be part of how a company conducts an effective financial communications program. Company officials participating in these sessions must not, however, cross the line into disclosing material nonpublic information. If a closed-door presentation (e.g., a speech to a key group of analysts) is being used to introduce any major corporate news, a press release or other public distribution of the information must be made at the same time as the speech.
Q: How should I conduct conference calls? Do I have to make them public?
A: The SEC hasn.t (and probably can.t) require companies to hold public conference calls. They have, however, issued a gold-plated invitation for companies to allow public access to analyst calls. (Note that only access to listen is required; most companies will still permit only analysts and institutional investors to ask questions.)
To take the most common example, if a company issues its quarterly earnings release and then has a follow-up conference call in which the public can participate and of which it has reasonable notice, what.s said in the call won.t be treated as selective disclosure under the regulation. (One note of caution.there will be a common sense test here. It wouldn.t be advisable to make a big announcement of something totally unrelated to quarterly earnings in the call, e.g., a major acquisition, or issue detailed projections of the next year.s earnings without a separate press release.)
Q: How do I give "reasonable notice" of a call?
A: The SEC didn.t establish any hard-and-fast rule. If it.s a new thing for the company, it would probably be advisable to put out some kind of introductory release, noting the practice and telling investors where they can find the contact information. Once it.s established, web-site postings, notices in shareholder mailings, e-mail or fax alerts to investors who are on the company.s "alert lists", open response to telephone inquiries by investor relations or corporate secretary.s offices, and the like would probably suffice, so long as an interested investor can find out reasonably easily. The SEC does warn against changing practices without notice. For example, if a call were being made to give an earnings alert and it fell outside normal patterns, more effort to get notice of the call out would probably be required.
Q: What can.t I say to analysts one-on-one?
A: There.s no doubt the SEC considers direct or indirect earnings guidance out-of-bounds. Other types of clearly material news can.t be conveyed individually (see "What communications are material?" in the Summary section for a discussion of other items that are generally considered material). You can, however, talk to an analyst in more detail than you use in your public filings and releases as long as the information you.re providing isn.t independently material. The SEC recognizes that analysts have a role to play in sifting through available information about a company and providing the public with the benefit of their analysis. Even if you give the analyst the last piece of information he or she requires to break through to something material, you won.t violate the rule. The key, however, is that the analyst must be doing what the name implies, analysis, and not being spoon-fed information.
Q: How do I respond if an analyst calls and asks if I.m comfortable with his or her earnings forecast?
A: "You know I can.t comment on that."
Q: Can I review and comment on analysts. reports?
A: Reviewing is not a problem; in fact, you need to know as much as you can about what is being said about your company. Commenting can be a problem. The traditional cautious advice was that a company shouldn.t go beyond correcting factual errors in an analyst.s report. Now more than ever, that.s probably good advice.
Q: Why should I restrict who should talk with analysts?
A: First, an issuer is responsible for anyone "acting on its behalf". To the extent you can keep this group of people small, and make sure the group is well-informed on compliance rules, your exposure is minimized. If someone makes an unauthorized selective disclosure, the company isn.t responsible for under Regulation FD. Second, as a matter of internal control, it.s important to establish expectations within the company about who should be speaking to analysts, especially with the stakes having been raised. For example, under the regulation, an outside director would fall within the "acting on behalf" group. Most outside directors probably would not want to find themselves in the position of having inadvertently disclosed material nonpublic information in violation of the regulation. A policy that senior management be the company.s sole contact with analysts could help avoid this ever arising.
Q: Should I change my disclosure practices to deal with the new regulation?
A: At the most basic level, no. Companies that did not release their own projections before don.t necessarily have to do so now. You should, however, look at every chance for "free" communications about performance expectations to avoid potential gaps between analyst expectations and actual performance. For example, almost every public company issues press releases within a month after quarter end. Sometime in the next month or so, the company will be filing its 10-Q or issuing a shareholder report. These should be viewed as opportunities to discuss business trends and lay groundwork for financial professionals to understand where the company.s going. In addition, to the extent you.ve already made public disclosure about a trend, it.s easier to discuss it in a follow-up conversation with an analyst without disclosing something that.s independently material.
Q: Can I do anything about an analyst whose expectations are way out of line?
A: Only with the exercise of great caution. You can.t call him or her up and say you.re uncomfortable with the forecast. (Nor, if he or she were in line, could you communicate comfort.) You can talk about known trends in your business and publicly available information, e.g., commodity prices, consumer buying, etc. In other words, you can try to get the analyst to think, but you can.t do the thinking for him.
Q: What do I do if I make a mistake?
A: There are two types of mistakes.intentional and unintentional. If an authorized person goes into a meeting intending to disclose something material and discloses it, without any benefit of any broader distribution, you.re in violation of the regulation and you can.t really cure it. You can mitigate the situation by putting out a press release or otherwise effectively getting disclosure into the record, and you would most likely be well advised to do so.
On the other hand, if in the middle of a question and answer session, someone slips up and discloses something, you have a limited amount of time to make a follow-up disclosure. That disclosure must be made within the later of 24 hours or the next opening of the New York Stock Exchange.
The disclosure must be made either on a Form 8-K or by other method(s) "reasonably designed to provide broad, non-exclusionary distribution of the information to the public". A press release generally should meet the latter test and will be preferable to an 8-K filing because it raises fewer liability issues (both because it.s not a "filed" document under the securities laws and because you don.t have to highlight the existence of a Regulation FD issue).
SAMPLE CORPORATE POLICY
1. All material information about the company will be disclosed to the public accurately and on a timely basis, unless it is determined that temporary nondisclosure will serve a legitimate corporate purpose.2. Disclosures of material information must be coordinated, approved and released to the news media through the [Public Relations Department]. Company management is responsible for keeping the [Public Relations Department] informed of material developments in the company's business.
3. Only the following persons may discuss material information with securities professionals and holders of the company.s securities:
- the Chief Executive Officer;
- the Chief Financial Officer;
- the Treasurer;
- the Controller; and
- the Director of Investor Relations
4. All material information about the company that has not been publicly disseminated may be distributed within the company only on a strict "need-to-know" basis. All directors, officers and employees with access to material information must maintain its confidentiality to avoid improper disclosure, and may not use such information to personal advantage or for the benefit of others.
1. Objectives of Policy - The objectives of this policy are to ensure that communications to the public about the company (a) are factual and accurate, (b) are disseminated on a timely basis and widely so that all investors have relatively equal access to the information contained in them, and (c) meet all legal requirements.
2. Scope of Policy - This policy applies to all public disclosure of material information about the company. Accordingly, it applies to statements directed to the news media and the investment and financial community (e.g., securities professionals, institutional investors and other holders of the company.s securities) or made in filings with the SEC or other regulatory agencies as well as to statements by company personnel in contexts such as negotiations with creditors, labor unions, environmental agencies, etc.; proceedings before courts, commissions or other governmental bodies; and public utility rate cases.
3. Material Information - Information about the company is considered material if a reasonable person would attach importance to it in determining whether to buy, sell or hold the company's securities. Information about the following could be material:
- quarterly or annual earnings results
- mergers, acquisitions, tender offers, joint ventures, divestitures or other changes in assets
- stock splits
- management changes or changes in control
- public or private sale of additional securities
- major litigation
- significant labor disputes
- major plant closings
- establishment of a program to buy the company's own shares
- new products or discoveries, or developments regarding customers or suppliers
- change in auditors or disagreements with auditors
- deterioration in the company.s credit status
4. Projections . The Chief Executive Officer or the Chief Financial Officer must approve disclosure of any material "projections" about the company. Projections must be made in good faith (e.g., with no intent to manipulate the price of the company's securities) and must have a reasonable basis. Key assumptions underlying a projection must be disclosed if necessary to meet the good faith and reasonable basis standards. The term "projections" includes forward looking statements relating to (a) revenues, income (loss), earnings per share, capital expenditures, dividends, cost improvements, capital structure or other financial matters and (b) management's plans and objectives for future operations. A material projection must be corrected or updated if management has reason to know that it no longer has a reasonable basis (e.g., if subsequent events render the underlying assumptions invalid). It is against company policy to comment on any projections about the company (e.g., analyst earnings forecasts) made by others
5. Information Considered Public - Information that has been publicly disseminated such that investors have had the opportunity to evaluate it, or that has been filed with governmental agencies as a matter of public record, is considered public and is available to anyone upon request. Examples include press releases, annual and quarterly earnings reports to stockholders, published speeches, reports to the SEC (e.g., reports on Forms 10-K, 10-Q, and 8-K), registration statements, prospectuses and proxy materials.
6. Corrections of Misinformation - The [Public Relations Department] will determine with senior management and company counsel whether the company should correct inaccurate or misleading information about the company circulated publicly from non-company sources.
The McGuireWoods homepage is intended to provide information of general interest to the public and is not intended to offer legal advice about specific situations or problems. McGuireWoods does not intend to create an attorney-client relationship by offering this information, and anyone's review of the information shall not be deemed to create such a relationship. You should consult a lawyer if you have legal matter requiring attention. For further information, please contact a McGuireWoods lawyer. ) 2000 McGuireWoods LLP