SEC Regulation FD: “Fair” Disclosure, Not “Fear” Disclosure7 minute read
SEC Regulation FD has been with us for 18 years, and even when new it did not introduce any radical new concepts. However, it remains one of the most misunderstood SEC rules. For its entire lifespan, it’s been used as a reason why companies, their managements, and their directors should fear disclosure in the form of talking to investors. Even in an era when companies are expected to engage with investors, Reg FD has been raised as a reason – sometimes the reason – for not doing so.
Before we get into what Reg FD is (and is not), it’s important to note some caveats:
– While Reg FD did not radically change the disclosure landscape, some of its provisions are complex.
– Also, the SEC – specifically, its Enforcement Division – has on occasion interpreted Reg FD in ways that are counterintuitive, over the top, or in some cases just plain silly.
– For those and other reasons, it’s important that you talk to counsel before speaking with investors.
– However, if your counsel’s only response is “no” – in other words, that you should not talk to investors because of Reg FD – you might consider getting new counsel. Lawyers sometimes have to say no, and that may be the case with some areas of FD, but if that’s the only word your counsel knows how to utter when you ask about FD, it may be time to move on.
What Is Reg FD (and What Is It Not)?
The FD in Reg FD stands for “fair disclosure.” Its basic premise is that companies (and their representatives) should not engage in selective disclosure of material nonpublic information. In other words, if you’ve got important news, you need to get it out to everyone at the same time, rather than tell a small number of people. The reason for this seems obvious – if you tell just one person about it, that person may use it to gain an unfair trading advantage. As noted, this was not a new concept, even when Reg FD was first adopted in 2000. (Selective disclosure had long been frowned upon and was one of the elements of illegal insider trading; what prompted the adoption of Reg FD was a relatively new phenomenon in which companies would selectively “guide” analysts towards specific EPS or other performance numbers well before the end of quarterly and other reporting periods.)
However, Reg FD does not mean you cannot talk to a limited number of investors. You can, and in today’s engaged world you are likely to have to talk to investors on a one-on-one basis or in small groups. What you can’t do is tell a limited group some major news that you don’t tell others. Moreover, FD tells you what to do if you inadvertently blurt out something that you shouldn’t.
Reg FD specifically prohibits selective disclosure to investment professionals, or to investors if it is “reasonably foreseeable” that they will trade on the basis of the information. So far, so good (or bad, depending upon your point of view). However, it expressly permits disclosure to lawyers, bankers, accountants and others who owe “a duty of trust or confidence” to the company, to rating agencies, and to any “person who expressly agrees to maintain the…information in confidence.” And that agreement need not be in writing. See – Reg FD isn’t so bad after all!
The Good and the Bad News
The good news is as above – Reg FD doesn’t in any way prohibit companies from engaging with investors. And while most investors won’t “expressly” agree to maintain inside information in confidence, most (at least the honest ones) don’t want inside information in the first place, precisely because they don’t want to be forced into a position where they can’t trade in your stock. In fact, it’s been my experience that some investors will actually tell a CEO not to say anything more, because they’re afraid they’ll learn something that would prevent them from trading.
There’s more good news. Reg FD provides a remedy if an executive errs by blurting out something she shouldn’t have said. Unfortunately, this is one of the areas where Reg FD has some odd complexities, and the remedial action may depend upon whether the “blurt” is intentional or unintentional. You’ll need to talk to your lawyer to figure out how to fix the problem – but there is a fix in most cases.
The bad news is that there are traps for the unwary, not only in the wording of Reg FD, but also in the way it’s been interpreted by the SEC. For example, companies have been found to have violated Reg FD when:
– their representatives have communicated by facial expressions or gestures, even though the words they used did not convey any material nonpublic information;
– the SEC found certain information to be material (because the stock moved on the information), even though counsel had reviewed the information prior to disclosure and had determined that it was not material (though no penalties were imposed in this case); and
– the company said that there was no change in their guidance (in other words, saying everything was the same was deemed to be material nonpublic information).
What to Do?
Given the complexities of Reg FD and how it’s been enforced, combined with the fact that its application depends upon the unique facts and circumstances of each case, it’s not practicable to say what you can and cannot do to make sure you don’t blow it where Reg FD is concerned. However, there are some guiding principles to consider:
– Get a lawyer who understands Reg FD and your business, to help you determine how to apply Reg FD. As noted above, the SEC may second-guess you, but merely consulting an attorney can help you avoid or reduce liability.
– Prepare a disclosure policy that, among other things:
– identifies who is authorized to speak to investors, the media, etc. (note: this should be limited to a very small number of people);
– reminds people (including your board members) to refer all investor and media inquiries to a central source; and
– states that the response to rumors must always be “no comment” or “we don’t respond to rumors.” (Most companies squeal like the proverbial stuck pig when a rumor is false but say “no comment” when it’s true.)
– Script out what you plan to say – and what you don’t want to say – prior to any meeting with investors or other third parties. Winging it can have dangerous consequences, and planning ahead can help – for example, in determining whether a violation of Reg FD is intentional or inadvertent.
– If you’re really nervous about it, ask investors if you can bring an attorney to the meeting. Sometimes it’s not a good idea, but in many cases investors will be fine with it.
“Fair,” not “Fear”
Reg FD is not and never was intended to prevent open communication with investors and other third parties. In most cases it really isn’t hard to understand and comply. Don’t use it as a shield against engagement, because establishing credibility with your investors through engagement can be critical when there’s a problem. And don’t bar your directors from speaking to investors because of Reg FD concerns – there are matters on which it’s critical that directors rather than management speak to investors, and if you don’t trust your directors to speak with investors, why and how can you trust them to oversee the company?