On August 10, 2000, the Securities and Exchange Commission (the "SEC") adopted Regulation FD (Fair Disclosure) establishing new disclosure requirements for public companies that communicate material information selectively to security market professionals or to holders of the company's securities. The new regulation takes effect October 23, 2000.
Executive Summary
Senior officers, directors, investor relations officers and other employees of public companies who communicate with analysts and investors must take note of the SEC's new Regulation FD. The new regulation will change the practices followed by many public companies when they communicate with analysts and investors. At issue is the disclosure of material information to analysts and investors privately (such as in one-on-one meetings, at analyst conferences or on quarterly conference calls), before or without disclosure of the same information to the public. As a result of the adoption of Regulation FD, all conversations, conference calls and other communications with analysts and investors by any senior officer, director, investor relations officer or other employee who regularly communicates with analysts or investors must be carefully considered to avoid disclosing material nonpublic information to them. If you do disclose material nonpublic information to analysts or investors who are not restricted from acting on such information, Regulation FD requires that you publicly disclose the information by filing a Form 8-K or otherwise ensuring that the information is widely disseminated immediately.
Background
The SEC has long encouraged disclosure of material information by public companies. Federal securities laws, however, do not require disclosure of all significant corporate developments at the time they occur. Although the regulations of most major stock exchanges typically require prompt disclosure of material information, control over the timing of public disclosures of material information remains in the hands of the disclosing company.
As a result, current investor relations practices at many public companies may provide disclosure of material information to financial analysts or major investors before the information is disclosed generally to the investing public. For example, information regarding actual or projected earnings may be discussed in a company's quarterly conference call with financial analysts or at a meeting of security holders before the information is announced to the public in a press release.
The SEC views this "selective disclosure" of material information as providing an unfair advantage to the persons who receive this information. Regulation FD is intended to address this unfair advantage by requiring public disclosure of any material information that is disclosed selectively by a public company,1 its directors or certain employees to specified securities professionals or investors in the disclosing company.
General Regulation
The new regulation generally provides that whenever a public company, or a person acting on behalf of a public company, discloses material nonpublic information to specified securities market professionals or holders of the disclosing company's securities, it must make public disclosure of the same information either simultaneously, in the case of an intentional disclosure, or promptly, in the case of a non-intentional disclosure. While this appears simple enough, the regulation contains many terms that are uniquely defined and raises many questions regarding its scope and application. This Update provides brief, general answers to the questions listed below; however, you should consult with your corporate counsel to determine appropriate procedures for your company.
- What disclosures trigger the requirement of a public disclosure under Regulation FD?
- What is material information?
- What is nonpublic information?
- What "persons acting on behalf of a public company" can trigger Regulation FD?
- To whom may selective disclosures not be made?
- What constitutes "public disclosure" of the information under Regulation FD?
- When must public disclosure be made?
- When is a disclosure "intentional"?
- When is public disclosure deemed to be made "promptly" after a non-intentional disclosure?
- What liability will you have if you violate Regulation FD?
- What steps should you take now to prepare for compliance with Regulation FD?
What disclosures trigger the requirement of a public disclosure under Regulation FD?
Regulation FD applies to disclosures of material nonpublic information made by a public company or any person acting on its behalf to specified securities market professionals and holders of the disclosing company's securities.
- What is material information? The word "material" is not defined in the regulation. According to current case law, information is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding whether to buy, sell or retain the security. In other words, material information is any information that could reasonably be expected to affect the price of a company's securities. Common examples of information that may be regarded as material information are:
- Actual quarterly or annual operating results.
- Changes in financial performance or liquidity.
- Projections of future earnings or losses.
- Significant changes in management.
- Significant new products, patents or developments.
- The gain or loss of a substantial customer or supplier.
- Award of a significant contract.
- Significant deterioration in the credit quality of a significant customer.
- Actual or threatened major litigation, or the resolution of such litigation.
- News of a pending or proposed merger, acquisition or tender offer.
- News of a significant sale of assets or the disposition of a subsidiary.
- Information regarding a major joint venture.
- Changes in dividend policies or the declaration of a stock split or the offering of additional securities.
Both positive and negative information may be material.
- What is nonpublic information? The word "nonpublic" is not defined in the regulation, however, the SEC characterizes information as nonpublic if the information has not been disseminated in a manner making it available to investors generally. (See also the discussion below regarding "public disclosure.")
- What "persons acting on behalf of a public company" can trigger Regulation FD? The regulation applies to disclosures made by any of the following persons:
(1) Any director,
(2) Any executive officer,
(3) Any investor relations or public relations officer or any person with similar functions, or
(4) Any other officer, employee or agent of a public company who regularly communicates with any of the specified securities market professionals (see discussion below) or with holders of the disclosing company's securities.2 - To whom may selective disclosures not be made? Generally, Regulation FD requires public disclosure of material information when it is disclosed to certain securities market professionals, such as analysts and large institutional investment managers, or to holders of the disclosing company's securities. Subject to a few exceptions discussed below, disclosures to any of the following persons can trigger the requirement of a public disclosure under Regulation FD:
(1) Any broker, dealer or person associated with a broker or dealer,3
(2) Any investment adviser,4 certain institutional investment managers,5 or persons associated with either of the foregoing,6
(3) Any investment company,7 hedge fund or persons affiliated with either of the foregoing,8 and
(4) Any holder of the disclosing company's securities.9
Exceptions: The following disclosures do not trigger Regulation FD's requirement of public disclosure:
(1) Disclosures made to attorneys, accountants, investment bankers and others who owe the disclosing company a duty of trust or confidence;
(2) Disclosures made to a person who expressly agrees to maintain the disclosed information in confidence. Such agreement need not be in writing and may be obtained after the disclosure is made if it is obtained before the recipient has used or disclosed the information. Generally, such an agreement would also contain a prohibition against buying or selling securities of the disclosing company until after public disclosure has been made;
(3) Disclosures made to a rating agency for the purpose of obtaining a publicly disclosed credit rating; and
(4) Disclosures made in connection with registered securities offerings (other than certain shelf or continuous offerings).
What constitutes "public disclosure" of the information under Regulation FD?
If you are required to make public disclosure of information under Regulation FD, you may either file a Form 8-K with the SEC or use another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public. By permitting disclosing companies to use a combination of methods to achieve public disclosure, Regulation FD intends to give companies flexibility to choose appropriate methods of disclosing information. Such methods may include press releases that are distributed through widely circulated news or wire services, pre-announced press conferences or conference calls that may be listened to or attended by investors either in person, by telephone or by electronic transmission, including transmission over the Internet (provided adequate notice of the conference or call is given to investors generally, including information about how to access the conference). Posting the material information on the disclosing company's website may be part of a combination of methods designed to provide the broad distribution of the information required by the regulation, however, such a posting without more will not be a sufficient means of distributing the information. Consequently, while companies have flexibility under the regulation to determine the method(s) of disclosing the information, if a disclosing company chooses not to make the public disclosure by means of a Form 8-K, then the disclosing company must consider and choose disclosure methods that are appropriate, and will be viewed in retrospect as "reasonably designed," to provide the required broad disclosure under the circumstances. For example, a press release issued by a disclosing company whose stock is not listed on a national exchange may not be disseminated by a major wire service and, thus, may not provide sufficiently broad disclosure.
When must public disclosure be made?
Regulation FD requires that a disclosing company must make public disclosure of information it has selectively disclosed either (i) simultaneously, in the case of an intentional disclosure, or (ii) promptly, in the case of a non-intentional disclosure.
- When is a disclosure "intentional"? The regulation provides that a selective disclosure is "intentional" when the person making the disclosure either knows or is reckless in not knowing that the information is both material and nonpublic. The regulation does not define "reckless," but current case law suggests that reckless conduct requires a highly unreasonable omission involving an extreme departure from ordinary care. Determining whether behavior was the result of recklessness, then, will depend on all the facts and circumstances, and what may be reckless in the case of a scripted announcement may not be reckless in the context of an answer to an unexpected question.
- When is public disclosure deemed to be made "promptly" after a non-intentional disclosure? A public disclosure will be deemed to be made promptly if it is made before (i) 24 hours or (ii) the commencement of the next day's trading on the New York Stock Exchange, whichever is later, after a director, executive officer, investor relations or public relations officer or other person with similar functions learns that there has been a non-intentional selective disclosure of information that such person knows, or is reckless in not knowing, is both material and nonpublic.
What liability will you have if you violate Regulation FD?
Regulation FD imposes new disclosure requirements under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"). These are the same sections that impose the periodic reporting requirements of Forms 10-K and 10-Q (collectively, reports required under these sections of the Exchange Act may be referred to in this Update as "Exchange Act Reports"). Failure to comply with the requirements of Regulation FD could result in an SEC enforcement action, an administrative action (seeking a cease-and-desist order), or a civil action seeking an injunction and/or civil money penalties. In addition, individuals who are responsible for a violation of Regulation FD may be the target of an SEC enforcement action.
Although failure to timely file other Exchange Act Reports can result in the inability of a public company to use the short-form registration statements (e.g., Form S-3 or S-8), the failure to make a public disclosure required under Regulation FD will not prevent the use of such short-form registration statements. Similarly, for purposes of Rule 144, failure to comply with Regulation FD will not affect whether a public company is considered current in filing its Exchange Act Reports.
Regulation FD is not intended to provide a new basis for private actions under Rule 10b-5 of the Exchange Act (anti-fraud liability) and expressly states that a failure to make a public disclosure required solely by Regulation FD will not be deemed to be a violation of Regulation 10b-5. However, under existing case law, selective disclosure to certain persons may result in liability under 10b-5 for "tipping" or insider trading; this case law is unchanged by Regulation FD. Further, a disclosing company may have liability under 10b-5 if the public disclosure that it makes under Regulation FD contains false or misleading information, or omitted material information.
What steps should you take now to prepare for compliance with Regulation FD?
Although the public disclosure requirements of Regulation FD do not take effect until mid-October of this year, we recommend that you begin to handle your communications with investors and securities market professionals as if Regulation FD were in effect now so you will be better prepared to handle these communications as required by Regulation FD when it becomes effective. In addition, we recommend the following:
- Review your current communications practices with counsel.
- Adopt a policy restricting communications with investors and securities market professionals to only one or two spokespersons.
- Your spokesperson(s) should review the range of material nonpublic information that could trigger the public disclosure requirements of Regulation FD. Counsel may assist in this process by reviewing transcripts of prior conference calls or other meetings with analysts.
- Brief your directors, executive officers, investor relations or public relations officer, other persons with similar functions and any other employee or agent who regularly communicates with investors or securities market professionals on the requirements of the new regulation. Even if these persons do not make disclosures themselves they need to know that if they become aware that a selective disclosure has been made, whether by a spokesperson or another person, they should advise the spokesperson(s) so that a public disclosure can be made promptly.
- Consider appropriate methods for public disclosure for material information which may be disclosed in future conference or investor calls so you are prepared to make public disclosure within 24 hours in the event of an inadvertent disclosure.
- If you already conduct your analyst conference calls and other meetings with analysts on the Internet, do you provide adequate notice of the calls to investors as required by Regulation FD? If you do not already conduct your analyst conference calls or other meetings with analysts on the Internet, consider doing so.
- Some public companies may discontinue one-on-one conversations with analysts and institutional investors, however, this is not a practical approach for many public companies. Clearly, these conversations have a high degree of risk for potential violations of Regulation FD. If you continue a practice of having these one-on-one conversations, your spokesperson must restrict his or her comments to avoid inadvertent disclosure of material nonpublic information. In addition, your spokesperson may take notes of such conversations to facilitate a post-conversation review of whether any material nonpublic information was disclosed.
- Public companies should review their existing policies regarding disclosure of information to persons outside of the organization and revise them to comply with Regulation FD.
1. Regulation FD applies to (i) issuers of securities that are registered under Section 12 of the Securities Exchange Act of 1933, as amended and (ii) issuers of securities that are required to file reports under Section 15(d) of the Exchange Act, including closed-end investment companies, but not including any other investment companies. The foregoing are referred to in this Update as "public companies" or "disclosing companies." Certain corporations and other organizations that are incorporated or organized under the laws of a foreign country are not subject to the new regulation.
2. In the case of a closed-end investment company, disclosures by the company's investment adviser can also trigger the need for a public disclosure under the regulation.
3. These terms are defined in Section 3(a) of the Securities Exchange Act of 1934.
4. As defined in Section 202(a)(11) of the Investment Advisers Act of 1940.
5. As defined in Section 13(f)(5) of the Securities Exchange Act of 1934, and provided that the investment manager filed a Form 13F for the most recent quarter of the year. Generally, institutional investment managers are required to file a Form 13F if they exercise investment discretion with respect to accounts holding publicly traded equity securities having an aggregate market value of at least $100 million.
6. As defined in Section 202(a)(17) of the Investment Advisers Act of 1940, assuming for these purposes that an institutional investment manager is an investment adviser.
This Update was prepared by Patricia A. Gritzan, a member of Saul Ewing's Business Department. If you would like more information about Regulation FD, you may contact Ms. Gritzan at (215) 972-7139 or at her email address, pgritzan@saul.com, or you may contact any of the members of Saul Ewing's Securities Law Group listed below by calling (215) 972-7777 or at their respective email addresses. This newsletter is a periodic publication of Saul Ewing LLP and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult with a member of Saul Ewing concerning your own situation and any specific legal questions you may have.