The SEC's Renewed Focus on Regulation FD

According to a survey conducted by the Investment Company Institute and the Securities Industry Association, approximately 57 million households, half of all U.S. households, a threefold increase from the early 1980s, own stocks directly or through a mutual fund. The democratization of stock ownership, combined with the advancement and widespread usage of technology-based communication platforms, such as e-mail, Twitter, Facebook and corporate blogs, by the world's largest public companies to communicate information to customers and shareholders has: 1) facilitated the dissemination of information, and 2) resulted in an increased amount of scrutiny on the performance of, and the disclosures made by, public companies. Without question, public corporations and capital markets have had, and will continue to have, an increasingly more visible role in contemporary America. Accordingly, corporate counsel, compliance directors, executive officers and boards of directors should take note: The investing public is demanding more transparency and accountability of corporate America ' more accurate financials, more detailed compensation disclosures and more internal controls.

The fundamental purpose of federal securities laws, in general, and Regulation Fair Disclosure (“Regulation FD”), in particular, is to promote “full disclosure”: the accurate, full and timely disclosure of material information to investors, so that each investor is afforded the opportunity to make a fully informed investment decision. The importance of maintaining fully informed capital markets is predicated on fairness and economic theory (see the Efficient Market Hypothesis theory: sustainable and efficient capital markets establish prices that fully reflect all publicly available information). Regulation FD provides the SEC a platform to regulate and curtail the informational asymmetries in the marketplace. In the past 18 months, the SEC has brought two Regulation FD enforcement actions. While this number may not appear particularly significant, past history (the SEC brought seven enforcement actions from 2002 to 2005) and recent SEC guidance indicates that the SEC has renewed its emphasis on enforcing Regulation FD.

Regulation FD

Regulation FD prohibits selective disclosure of material, nonpublic information by public companies, or a person acting on behalf of a public company, to “securities market professionals” (e.g., securities analysts, broker-dealers, investment advisers and institutional investors) or to stockholders that are likely (i.e., reasonably foreseeable) to purchase or sell securities on the basis of the nonpublic information, without simultaneously, for intentional disclosures, or “promptly,” for non-intentional disclosures, disclosing the same information to the public. “Promptly” is defined as “as soon as reasonably practicable,” but in no event later than 24 hours after a senior official learns that there has been a non-intentional disclosure of material, nonpublic information by or on behalf of the issuer.

Materiality and Nonpublic Information

Regulation FD neither provides a bright-line test as to what constitutes “material nonpublic” information nor provides independent definitions of the terms “material” and “nonpublic.” However, per the Regulation FD Adopting Release (SEC Release No. 33-7881), information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision, or “if the information would be viewed by a reasonable investor as having significantly altered the total mix of information that is available about the company.” To further clarify, the SEC has provided the following non-exclusive list of categories of information that should be reviewed for materiality: 1) earnings information; 2) mergers, acquisitions or changes in assets; 3) new products or developments regarding customers or suppliers; 4) changes in auditors; 5) events relating to the company's securities, such as defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, and sales of additional securities; and 6) bankruptcies or receivership.

Determining whether information is “nonpublic” is considerably more straightforward and intuitive: Information is nonpublic if it has not been disseminated in a manner that makes it available to all investors. Naturally, the question remains: How does a company “publicize” information? Public companies are permitted to disseminate and disclose (i.e., publicize) information on a Form 8-K, which includes a special item for Regulation FD disclosures, or by any other method or combination of methods “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” Acceptable methods include press releases distributed through widely circulated news and press conferences and conference calls accessible to the public. In addition, the SEC, recognizing the Internet's impact on the global business environment, in terms of decreasing transaction costs and facilitating the exchange of information, has stated that certain information posted on a corporate website will be deemed “public” information, if the following conditions are satisfied: 1) the corporate website is a “recognized channel of distribution,” 2) the posting of such information disseminates it in a manner so as to make it “available to the securities marketplace in general,” and 3) such information is posted for a sufficient period of time so as to allow for its absorption by the market.

Recent Regulation FD Enforcement Actions

American Commercial Airlines, Inc.

The SEC filed a civil action against the former CFO of American Commercial Airlines, Inc. (“ACL”) for selectively disclosing material, nonpublic information. The SEC alleged that ACL's CFO, Christopher Black, sent an e-mail to eight sell-side analysts stating that ACL's earnings per share would likely be lower than the guidance publicly forecasted only a few days earlier. On the first trading day after Black's e-mail, ACL's stock price dropped 9.7% on unusual volume. Significant to this recent enforcement action is the fact that the SEC limited the enforcement action to Black, individually. An enforcement action was not brought against ACL, because ACL: 1) “cultivated an environment of compliance,” by providing Regulation FD training and adopting policies and controls aimed at preventing Regulation FD violations; 2) publicly disclosed the revised earnings; 3) self-reported the incident to the SEC; and 4) implemented remedial measures to prevent such conduct in the future.

Presstek, Inc.

Continuing its focus on Regulation FD, the SEC filed an action against Presstek, Inc. (“Presstek”) and its former CEO, Edward Marino, for selectively and intentionally disclosing material nonpublic information relating to Presstek's financial performance to an investment firm that held a significant equity stake in Presstek. The SEC alleged that Marino accepted a telephone call from the firm's managing partner, and, when asked about Presstek's performance in Europe, Marino stated that Presstek's performance was “not as vibrant as expected in North America and Europe” and a “mixed picture” overall. Within minutes of completing the call, the managing partner instructed his firm's trader to “sell all Presstek stock.” Nearly 400,000 shares were sold, contributing to a 19% decline in Presstek's stock price at market close.

Assessing Potential Liability: The Scope of Regulation FD

In assessing liability concerns, one must be cognizant of the scope and application of Regulation FD. In determining whether to bring an enforcement action, the SEC evaluates the: 1) nature of the selective disclosure, and 2) circumstances under which a selective disclosure is made. Selective disclosure of new or additional information does not necessarily subject a company to liability under Regulation FD, particularly if the selective disclosure does not add to, contradict or significantly alter the information available to the investing public. Further, a Regulation FD violation will arise only when management knows, or is reckless in not knowing, that the selectively disclosed information is both material and nonpublic (i.e., a company would not be liable under Regulation FD because it makes a mistake in judging whether a piece of information is material, unless it is reckless in coming to that conclusion).

Practical Considerations: Regulation FD Compliance

The recent enforcement actions highlight the importance of implementing and maintaining a Regulation FD compliance program. The SEC has stated that “the existence of a disclosure policy, and the issuer's general adherence to it, may often be relevant in determining the issuer's intent with regard to a selective disclosure.” At a minimum, your company should adopt the following protocols:

1. Adopt a Regulation FD Compliance Policy and conduct regular training sessions to educate and inform management;
2. Adopt standardized protocols regarding the preparation of press releases, speeches, website postings and other communications that are distributed to the public, especially those that contain material nonpublic information;
3. Adopt policies regarding what may and may not be discussed in private meetings with analysts or other securities market professionals, accounting for what questions analysts are likely to ask and what questions should not be answered;
4. Maintain records of written and oral disclosures to the market, including press releases and other public communications; and
5. Review and update the company's website structure and disclaimers.

Jay V. Shah is an attorney with McKenna Long & Aldridge LLP and practices in the firm's Atlanta office, where he is a member of the Corporate Practice Group. He represents clients in a variety of business, financial and securities matters. He may be reached at 404-527-4593 or [email protected].

According to a survey conducted by the Investment Company Institute and the Securities Industry Association, approximately 57 million households, half of all U.S. households, a threefold increase from the early 1980s, own stocks directly or through a mutual fund. The democratization of stock ownership, combined with the advancement and widespread usage of technology-based communication platforms, such as e-mail, Twitter, Facebook and corporate blogs, by the world's largest public companies to communicate information to customers and shareholders has: 1) facilitated the dissemination of information, and 2) resulted in an increased amount of scrutiny on the performance of, and the disclosures made by, public companies. Without question, public corporations and capital markets have had, and will continue to have, an increasingly more visible role in contemporary America. Accordingly, corporate counsel, compliance directors, executive officers and boards of directors should take note: The investing public is demanding more transparency and accountability of corporate America ' more accurate financials, more detailed compensation disclosures and more internal controls.

The fundamental purpose of federal securities laws, in general, and Regulation Fair Disclosure (“Regulation FD”), in particular, is to promote “full disclosure”: the accurate, full and timely disclosure of material information to investors, so that each investor is afforded the opportunity to make a fully informed investment decision. The importance of maintaining fully informed capital markets is predicated on fairness and economic theory (see the Efficient Market Hypothesis theory: sustainable and efficient capital markets establish prices that fully reflect all publicly available information). Regulation FD provides the SEC a platform to regulate and curtail the informational asymmetries in the marketplace. In the past 18 months, the SEC has brought two Regulation FD enforcement actions. While this number may not appear particularly significant, past history (the SEC brought seven enforcement actions from 2002 to 2005) and recent SEC guidance indicates that the SEC has renewed its emphasis on enforcing Regulation FD.

Regulation FD

Regulation FD prohibits selective disclosure of material, nonpublic information by public companies, or a person acting on behalf of a public company, to “securities market professionals” (e.g., securities analysts, broker-dealers, investment advisers and institutional investors) or to stockholders that are likely (i.e., reasonably foreseeable) to purchase or sell securities on the basis of the nonpublic information, without simultaneously, for intentional disclosures, or “promptly,” for non-intentional disclosures, disclosing the same information to the public. “Promptly” is defined as “as soon as reasonably practicable,” but in no event later than 24 hours after a senior official learns that there has been a non-intentional disclosure of material, nonpublic information by or on behalf of the issuer.

Materiality and Nonpublic Information

Regulation FD neither provides a bright-line test as to what constitutes “material nonpublic” information nor provides independent definitions of the terms “material” and “nonpublic.” However, per the Regulation FD Adopting Release (SEC Release No. 33-7881), information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision, or “if the information would be viewed by a reasonable investor as having significantly altered the total mix of information that is available about the company.” To further clarify, the SEC has provided the following non-exclusive list of categories of information that should be reviewed for materiality: 1) earnings information; 2) mergers, acquisitions or changes in assets; 3) new products or developments regarding customers or suppliers; 4) changes in auditors; 5) events relating to the company's securities, such as defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, and sales of additional securities; and 6) bankruptcies or receivership.

Determining whether information is “nonpublic” is considerably more straightforward and intuitive: Information is nonpublic if it has not been disseminated in a manner that makes it available to all investors. Naturally, the question remains: How does a company “publicize” information? Public companies are permitted to disseminate and disclose (i.e., publicize) information on a Form 8-K, which includes a special item for Regulation FD disclosures, or by any other method or combination of methods “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” Acceptable methods include press releases distributed through widely circulated news and press conferences and conference calls accessible to the public. In addition, the SEC, recognizing the Internet's impact on the global business environment, in terms of decreasing transaction costs and facilitating the exchange of information, has stated that certain information posted on a corporate website will be deemed “public” information, if the following conditions are satisfied: 1) the corporate website is a “recognized channel of distribution,” 2) the posting of such information disseminates it in a manner so as to make it “available to the securities marketplace in general,” and 3) such information is posted for a sufficient period of time so as to allow for its absorption by the market.

Recent Regulation FD Enforcement Actions

American Commercial Airlines, Inc.

The SEC filed a civil action against the former CFO of American Commercial Airlines, Inc. (“ACL”) for selectively disclosing material, nonpublic information. The SEC alleged that ACL's CFO, Christopher Black, sent an e-mail to eight sell-side analysts stating that ACL's earnings per share would likely be lower than the guidance publicly forecasted only a few days earlier. On the first trading day after Black's e-mail, ACL's stock price dropped 9.7% on unusual volume. Significant to this recent enforcement action is the fact that the SEC limited the enforcement action to Black, individually. An enforcement action was not brought against ACL, because ACL: 1) “cultivated an environment of compliance,” by providing Regulation FD training and adopting policies and controls aimed at preventing Regulation FD violations; 2) publicly disclosed the revised earnings; 3) self-reported the incident to the SEC; and 4) implemented remedial measures to prevent such conduct in the future.

Presstek, Inc.

Continuing its focus on Regulation FD, the SEC filed an action against Presstek, Inc. (“Presstek”) and its former CEO, Edward Marino, for selectively and intentionally disclosing material nonpublic information relating to Presstek's financial performance to an investment firm that held a significant equity stake in Presstek. The SEC alleged that Marino accepted a telephone call from the firm's managing partner, and, when asked about Presstek's performance in Europe, Marino stated that Presstek's performance was “not as vibrant as expected in North America and Europe” and a “mixed picture” overall. Within minutes of completing the call, the managing partner instructed his firm's trader to “sell all Presstek stock.” Nearly 400,000 shares were sold, contributing to a 19% decline in Presstek's stock price at market close.

Assessing Potential Liability: The Scope of Regulation FD

In assessing liability concerns, one must be cognizant of the scope and application of Regulation FD. In determining whether to bring an enforcement action, the SEC evaluates the: 1) nature of the selective disclosure, and 2) circumstances under which a selective disclosure is made. Selective disclosure of new or additional information does not necessarily subject a company to liability under Regulation FD, particularly if the selective disclosure does not add to, contradict or significantly alter the information available to the investing public. Further, a Regulation FD violation will arise only when management knows, or is reckless in not knowing, that the selectively disclosed information is both material and nonpublic (i.e., a company would not be liable under Regulation FD because it makes a mistake in judging whether a piece of information is material, unless it is reckless in coming to that conclusion).

Practical Considerations: Regulation FD Compliance

The recent enforcement actions highlight the importance of implementing and maintaining a Regulation FD compliance program. The SEC has stated that “the existence of a disclosure policy, and the issuer's general adherence to it, may often be relevant in determining the issuer's intent with regard to a selective disclosure.” At a minimum, your company should adopt the following protocols:

1. Adopt a Regulation FD Compliance Policy and conduct regular training sessions to educate and inform management;
2. Adopt standardized protocols regarding the preparation of press releases, speeches, website postings and other communications that are distributed to the public, especially those that contain material nonpublic information;
3. Adopt policies regarding what may and may not be discussed in private meetings with analysts or other securities market professionals, accounting for what questions analysts are likely to ask and what questions should not be answered;
4. Maintain records of written and oral disclosures to the market, including press releases and other public communications; and
5. Review and update the company's website structure and disclaimers.

Jay V. Shah is an attorney with McKenna Long & Aldridge LLP and practices in the firm's Atlanta office, where he is a member of the Corporate Practice Group. He represents clients in a variety of business, financial and securities matters. He may be reached at 404-527-4593 or [email protected].