Reg. FD is Alive and Kicking at the SEC

Those in the financial community are well aware of Regulation Fair Disclosure (Reg. FD) — the Securities and Exchange Commission (SEC) ruling adopted in August 2000 with the goal of leveling the information playing field for all market participants. There may be less awareness, however, that Reg. FD is still very much alive in the eyes of the SEC, and that companies are being monitored for compliance and penalized for violations. LHA encourages executives at all public companies to take basic precautions to ensure employees are indoctrinated into Reg. FD best practices.

In summary, Reg. FD requires that when publicly traded companies disclose material nonpublic information, they must make broad public disclosure of that information.

The SEC Continues to Enforce Reg. FD
While there have been several Reg. FD actions over the past decade, most recently Office Depot was cited in October 2010 for an event that occurred in June 2007. At that time, according to the SEC complaint, the company phoned covering sell-side analysts to discuss recent public statements by comparable companies regarding the impact of the slowing economy on their businesses, while reminding the analysts of Office Depot’s prior cautionary public statements.

According to the SEC, the CEO and CFO were not present during these calls but were aware of the analysts’ declining estimates while others at the company held the discussions. The executives encouraged the calls to be completed, which continued despite the CFO being notified of some analysts’ concerns about the lack of public disclosure.

An interesting aspect of this alleged violation is that the company did not directly communicate that results would miss analyst expectations, and did not specifically discuss analyst models or guide them to more achievable projections. In addition, the complaint states that Office Depot did not have any Reg. FD education or policy in place at the time. Office Depot agreed to settle the SEC’s charges without admitting or denying the allegations, and will pay a $1 million penalty.

Recommended Practices

• Convene your senior management team for an annual review and discussion of Reg. FD.
• Provide review participants with hypothetical examples and rehearse responses. For example, during a private meeting an investor asks, “Is the company on track to meet guidance or analyst consensus figures?” or “Are you affirming your guidance today?” The wrong choice of words could be a Reg. FD violation.
• Create a Reg. FD policy, similar to a trading policy, and have existing and new employees read and sign the document.
• Incorporate Reg. FD training into orientations for new managers.
• Periodically review investment community communication practices among those interfacing with the Street.

LHA provides strategic counsel and best practices programming to public companies regarding Reg. FD, Reg. G., guidance policies, missed expectations, crisis management and more. We welcome the opportunity to help ensure your IR program is robust and fully compliant.