Regulation Fair Disclosure, better known as Reg FD, is a regulation on corporate communication promulgated by the SEC. The regulation limits public companies from disclosing material nonpublic information to select members of the investment community. This type of information must be broadly disseminated through broad, non-exclusionary, public distribution. The purpose of Reg FD is to prevent publicly traded companies from selective disclosure to enumerated members of the investment community with the intent of leveling the playing field to ensure all investors and potential investors have access to the same information at the same time.
Enacted in 2000 as a result of concerns around market integrity and selective disclosure by companies to certain institutional investors, the regulation has had significant and broad impacts on corporate communications. Now companies regularly use SEC Form 8-K, press releases and conference calls to disseminate news broadly to the public.
Reg FD is applicable to both intentional and unintentional disclosure of material non-public information. Intentional communication of material nonpublic information to an enumerated person must be simultaneously disclosed to the public. Unintentional or accidental communication of material nonpublic information must be disclosed publicly promptly afterward.
For CEOs and CFOs this means private calls and meetings with investors, including conferences, non-deal roadshows, as well as any private interactions with sell-side analysts, present Reg FD violation risks.
To prevent Reg FD violations, it is important to establish boundaries for discussions with the investment community by disclosing key metrics and performance indicators on a planned and established cadence. Delivering clear messages around these metrics through press releases, earnings calls, and webcast presentations will demonstrate corporate accomplishments and progress providing investors with the tools they need to evaluate your business. These public disclosures will guide your conversations with investors.
Here is an example of a violation and the penalty it carries. In 2003 the SEC brought an administrative action against Schering-Plough and the CEO of the company through cease-and-desist orders and additional civil actions resulting in the company paying a civil penalty of $1 million and the CEO paying a civil penalty of $50,000. It was determined that the CEO selectively disclosed earnings guidance to certain analysts and investors by indicating that estimates were too high through a combination of spoken language, tone, emphasis, and demeanor. Days later the CEO again selectively disclosed that the next year’s earnings would be “terrible” and after those who had not talked to management began to question the rumors, the company finally issued a press release revising earnings guidance.
Other company employees and any person acting on behalf of the company who regularly communicate with the investment community are also held accountable under Reg FD. This means IR and PR agencies too. It is best practice for companies to designate specific investment community contacts and limit the contacts to a containable number of people. This helps ensure that all messaging to the investment community is consistent.
The Office Depot Director of IR violated Reg FD by selectively disclosing material earnings guidance to certain analysts. This was done with the knowledge and consent of the then-CEO and CFO. This resulted in an SEC administrative and civil action against the company resulting in it consenting to a cease-and-desist order and paying a civil penalty of $1 million. Not only are these penalties costly but the damage to management credibility and corporate brand can be more severe.
There are many components and implications of Regulation Fair Disclosure. We help companies navigate the complex disclosure landscape every day. Please contact us to let us know if you have any Reg FD or corporate communication best practices questions!
Philip Taylor, Associate