Greenberg Traurig Alert
The SEC's New Selective Disclosure Rules Under Regulation FD
By Clifford E. Neimeth, Greenberg Traurig,
New York Office
View or download the PDF version of this Alert here.
After extensive public comment from investor activists,
market professionals, academicians and the corporate and securities bar, on
August 15, 2000, the Securities and Exchange Commission ("SEC")
adopted Regulation FD (fair disclosure) to redress the practice by issuers of
selectively imparting material, non-public information to securities analysts,
institutional investors and other market participants.
Reasons for Adoption
Regulation FD provides the SEC with a direct remedy against
exclusionary disclosure practices of public companies. The regulation is not
intended to impose a new general requirement on issuers to publicly disclose
material corporate developments as and when they occur, nor is it intended to
chill the orderly flow of corporate information into the marketplace or obstruct
conversations between issuers and analysts that do not confer an informational
advantage vis a vis the general investor public. Rather, it constitutes an SEC
disclosure (and not an antifraud) rule designed to level the corporate
informational playing field.
Disclosures Subject to Regulation FD; When Must Public
Disclosure be Made?
The new rules, which become effective on October 23, 2000, generally require
public companies to make widespread, non-exclusive disclosure of material,
non-public information that (i) previously was disclosed on a selective and
unintentional basis or (ii) that is intentionally disclosed on a selective
basis. In the case of an unintentional disclosure (e.g., an
"off-the-cuff" disclosure to a securities analyst of information that
the issuer’s spokesperson mistakenly believed was already in the public
domain), corrective public disclosure must be made "promptly" (i.e.,
within the later of 24 hours or commencement of the next NYSE trading day) after
discovery by a senior official of the wrongful selective disclosure. In the case
of an intentional selective disclosure (i.e., where the disclosing person either
knows or is reckless in not knowing that the information being disclosed is both
material and non-public), the remedial public disclosure must be disseminated
simultaneously with the intentional selective disclosure.
Notably, the rules do not cover information disclosed by senior officials to
(i) the issuer’s investment bankers (e.g., in connection with a pending or
proposed underwritten securities offering or M&A transaction, or in
connection with a similar confidential financial advisory engagement); (ii)
so-called "temporary insiders" - - persons who owe a duty of
confidence or trust to the issuer (e.g., lawyers, accountants or other
professional advisors); or (iii) persons who otherwise have entered into express
confidentiality agreements with the issuer (e.g., a business combination
candidate or creditors’ committee representatives participating in an issuer
debt restructuring). While communications made in the context of an underwritten
registered offering, other than shelf registrations, are excluded, such
exclusion does not extend to private placements (e.g., Regulation D or Rule 144A
debt offerings, or offshore offerings pursuant to Regulation S).
Moreover, the rules are not applicable to disclosures made to the general
media, public and governmental authorities, ratings agencies (such as Moody’s
and S&P - - if the disclosure is made solely to facilitate development of a
rating and the ratings are publicly available), customers and suppliers, and
strategic business partners.
Who is Subject to Regulation FD?
Regulation FD applies only to public reporting companies
(i.e., issuers with a class of securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
who otherwise are required to file periodic reports with the SEC pursuant to
Section 15(d) of the Exchange Act), but the Regulation does not apply to foreign
private issuers. Regulation FD does not apply to communications made by any
issuer-employee. Rather, it only covers communications made by "senior
officials" (i.e., any director, executive officer, investor relations or
public relations employee, or any other officer, employee or agent of the issuer
who regularly communicates on behalf of the issuer with market professionals,
investors and other categories of information recipients within the ambit of the
Those "recipients" covered by the rule include
broker-dealers, investment advisors, investment companies, hedge funds and
securityholders of the issuer as to whom it is reasonably foreseeable that they
will trade on the basis of the imparted material, non-public information.
Which Information is Material?
The SEC’s adopting release for the Regulation does not contain a
"litmus test" for determining materiality. Rather, the release makes
reference to the ostensibly objective (but functionally subjective) standard
announced by the courts in a seminal antifraud case: i.e., information is
material if "there is a substantial likelihood that a reasonable [person]
would consider it important in making an investment decision, or if it would
significantly alter the total mix of information made available [to
investors]." That said, the SEC has indicated that earnings information
would always be deemed material and that information pertaining to extraordinary
corporate transactions and events (i.e., mergers, business combinations and
joint ventures; the loss or attainment of a material contract; changes in
relationships with significant customers or suppliers; the receipt, lapse or
revocation of material regulatory approvals; changes in management and in
control of the issuer; bankruptcy and receivership events; impending or past
defaults on securities; recapitalizations, stock splits and dividend payment
events; changes in assets, financial condition and outside auditors; and the
like), while not per se material, should raise a "red flag" for
issuers and their senior officials because there is a strong presumption of
materiality. Of course, many of these parenthetical illustrations involve events
that give rise to Form 8-K (Current Report) disclosures and mandatory
disclosures pursuant to stock exchange listing requirements, not to mention
disclosure simply as a matter of sound information dissemination practice.
Whether information is material is an issuer-specific
case-by-case analysis. It, therefore, is important for issuers to properly
educate their authorized spokespersons regarding the categories of information
which, if discussed selectively, might inadvertently lead to violations of
What Constitutes Widespread Public Dissemination?
Regulation FD counsels that material information must be
disseminated by methods which are "reasonably designed to achieve broad,
non-exclusionary distribution of information to the public."
There are two principal means of satisfying this requirement. First, the
filing of a Current Report on Form 8-K containing the material information will
always satisfy the Regulation. In practice, if Form 8-K is used, the issuer can
elect to "submit" (without filing) the Form 8-K or file the Form 8-K
with the SEC under the Exchange Act. The distinction is important in terms of
potential liability - - in that a "filed" report subjects the contents
of the Form 8-K to the various strict liability and antifraud provisions of the
Securities Act of 1933, as amended (the "Securities Act") and the
Exchange Act. By contrast, a "submitted" report is not deemed filed
under the Exchange Act and, therefore, is not incorporated by reference into any
of the issuer’s other SEC filed documents (including its Securities Act
registration statements and Exchange Act periodic reports). The second means of
public disclosure is the issuance of a press release via Dow Jones, Reuters,
Bloomberg, the Associated Press or a similar news service of widespread
If the issuer’s news accounts are not routinely tracked and redistributed
by the leading wire services, the issuer needs to supplement its press release
with additional means of widespread communication (e.g., filing or submitting a
Current Report on Form 8-K, distribution through the general media, posting the
information on the issuer’s website, or using a news service that republishes
the press release through other media sources and/or retains the press release).
Does Disclosure on the Web Satisfy Regulation FD?
No. Significantly, the SEC has admonished that merely posting
disclosures on the web, without more, is not adequate public dissemination for
purposes of Regulation FD. (As technology evolves and the web becomes a more
widely used and accepted source of investor and securities market information,
the SEC has noted that issuers whose internet sites are extensively followed by
the marketplace might be able to rely on website postings alone - - but the SEC
observed that this stage has not yet been reached.)
Earnings Releases; Analysts’ Calls and Investor Conferences
Generally, issuers announce their quarterly earnings by means of press
release with a prompt follow-up analysts’ calls to respond to street queries
and often to provide certain forward-looking information (in the form of
earnings "guidance" or otherwise) that is not included in the four
corners of the earnings release.
With the adoption of Regulation FD, issuers will now have to examine this
practice more carefully to avoid exclusionary disclosure of material, non-public
information during the analysts’ call. In its adopting release, the SEC offers
a disclosure model - - namely, issuers may continue to publish press releases as
an initial means of disclosure, followed by an analysts’ call during which
"additional material details related to the original disclosure" are
disclosed. Unfortunately, the SEC offers no definition of what
"related" details means and has not addressed the extent to which the
disclosure of additional unrelated information might violate the Regulation’s
non-selective dissemination mandate.
Providing as much advance notice (to media representatives and potential
investors) of the analysts’ call as practicable, together with at least a
"heads up" indication of the topics proposed to be discussed during
the call (and, if applicable, the fact that certain forward-looking information
is intended to be disclosed) should help demonstrate that good faith attempts
were made by the issuer to provide adequate notice and to maximize participation
in the call.
Moreover, the SEC has observed that the call or conference must be open to
all potential investors and media representatives either by telephone or
real-time webcast. If this method is used in conjunction with other disclosure
mechanisms, the SEC suggests that issuers should consider making recorded
webcasts or scripts of analysts’ calls and press conferences available for a
limited time period of time (e.g., one week or less) following the conclusion of
the call or conference to enable non-real time participants to review the
information disclosed in the real time session.
In sum, factors including the adequacy of notice of the call, the number and
character of the call participants and conference invitees, whether replays and
scripts are made available for a reasonable time after the live disclosure
event, whether additional topics discussed during the call are germane and
logically incidental to the original press release disclosure, and the issuer’s
past custom and practice with respect to earnings disclosure, will be
determinative when assessing compliance with Regulation FD.
In all cases, distribution of the earnings press release should precede the
analysts’ call or conference.
One-on-Ones with Analysts
The adopting release for Regulation FD notes that "if a [senior
official] communicates selectively to the analyst nonpublic information that the
[issuer’s] anticipated earnings will be higher than, lower than, or even the
same as what analysts have been forecasting, the issuer likely will have
violated Regulation FD."
The foregoing is a flat prohibition against exclusionary "earnings
guidance" practices, including talking street estimates up or down or
issuing confirmatory statements. Reviewing analysts’ models and draft reports
also will subject the issuer to potential liability to the extent the issuer’s
comments are deemed (often with hindsight) to impart material, non-public
information or provide "soft" guidance that enables the analyst to
more accurately project the issuer’s earnings.
In view of the SEC’s heightened scrutiny of earnings guidance (and other
analogous forms of corroborative communications), the watchword here may well be
"total abstinence." As a practical matter, however, because such
guidance can serve legitimate corporate and marketplace interests, issuers will
need to reexamine their procedures for providing earnings guidance and craft
methods to achieve widely disseminated communications.
Consistency is Key
The adopting release warns against inconsistent disclosure
practices. Where, for example, an issuer typically releases earnings information
in a particular form and at a particular time following the end of the fiscal
quarter but preceding the filing of its Form 10-Q or Form 10-K, as applicable -
- any deviation from past custom and practice could be viewed with skepticism by
the SEC and carefully scrutinized under the Regulation. Accordingly, issuers
should design a tailor-made program for compliance with Regulation FD and
strictly adhere thereto without modification, except under compelling
Consequences of Violating Regulation FD
As noted above, Regulation FD is not an antifraud rule.
Accordingly there is no private right of action for violations. The Regulation
does, however, empower the SEC to bring direct enforcement proceedings against
violators, and in such cases the SEC would have the burden of demonstrating that
a selective disclosure of material, non-public information was either reckless
Compliance with Regulation FD does not immunize an issuer (or
its senior officials) from private causes of action and SEC enforcement
proceedings under Exchange Act Rule 10b-5 (including newly adopted Rules 10b5-1
Moreover, of significance, failure to comply with Regulation FD will not
affect the issuer’s ability (if otherwise eligible) to utilize short-form
Securities Act registration statements (e.g., Forms S-2, S-3, and S-8) or the
issuer’s compliance with the "current public information
requirements" of Securities Act Rule 144.
Companion Adoption of New SEC Insider Trading Rules
To address uncertainty in the U.S. federal circuit courts as
to the appropriate standard of liability for insider trading, concurrently with
the adoption of Regulation FD, the SEC adopted new Exchange Act antifraud Rules
10b5-1 and 10b5-2 which are designed to help clarify the instances where
specified persons are deemed to have engaged in insider trading practices.
The new antifraud rules, which become effective on October
23, 2000, provide for "awareness" (i.e., where a person trades in
securities while aware of material, non-public information) and
"misappropriation" (i.e., where the person trading on material,
non-public information misappropriated the information by violating a duty of
trust or confidence) standards of liability and afford the SEC a more
well-defined enforcement tool against violators.
An analysis of these rules and their practical effect will be
examined in a forthcoming GT Alert.
By virtue of Regulation FD, public companies will need to
design and self-police strict disclosure practices and procedures - - lest they
risk being held responsible by the SEC for (recklessly or intentionally) making
exclusionary releases of material, non-public information.
A carefully planned and proactive posture is vitally
important to avoid potential SEC enforcement proceedings under the Regulation.
Early consultation with and the involvement of experienced outside corporate and
securities counsel will be useful in this process to help the publicly traded
issuer design appropriate internal compliance policies and procedures for public
Suggestions for Compliance with Regulation FD
© 2000 Greenberg Traurig
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Securities Practice description, or feel free to contact one of our attorneys.
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
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