What are the compliance implications of the SEC's Reg FD update?
At the end of the summer, the SEC updated its advice on how firms should comply with Regulation FD. Lawyers view the update as a gentle reminder from the regulator to issuers about their disclosure obligations at a time when tough business conditions might tempt some to go a little too far when reassuring investors and analysts.
‘Reg FD is not something to be on the wrong side of,’ says Michael Littenberg, a partner at Schulte Roth & Zabel specializing in securities law transactions and public company representation. ‘If you are required to put out corrective disclosure, indicating that you’ve had a violation of Reg FD, it’s often embarrassing; it’s not what companies or their investor relations [IR] professionals aspire to. Also, although it’s rare, the SEC has been known to bring enforcement actions for violations of Reg FD.’
Since its introduction in 2000, Reg FD has cast a long shadow over IR practices in the US. Analyst days, investment conferences, one-on-one meetings, non-deal roadshows: all must be planned with Reg FD in mind. And the IR officer, sitting between management and the investment community, is often tasked with ensuring a firm’s compliance with the rules, as he or she knows best what company information has been released to the market. Littenberg offers companies the following tips on Reg FD compliance.
1. Designate gatekeepers
‘It’s prudent practice to have designated information gatekeepers. In other words, only certain people should be permitted to speak to the press, investors and analysts, to ensure the company stays on message and knows for compliance purposes who is communicating information, as well as what is being said. Usually it’s good to limit authorization to a fairly narrow range of senior employees. This is helpful from a Reg FD perspective, because communications by individuals not authorized to speak on behalf of the firm generally should not result in a violation of Reg FD.’
2. Pen a policy
‘The company should have an articulated communications policy for addressing both ordinary course and crisis communications. This will mitigate the risk of violating Reg FD. You don’t want people to fly by the seat of their pants – that’s when mistakes get made.
‘Outside counsel and IR professionals can be of tremendous assistance in helping to craft a policy that addresses a company’s specific communications needs and concerns. For the do-it-yourselfers, some companies post their policies on their websites, and these can be a helpful starting point (Johnson & Johnson is a good example of this – see www.investor.jnj.com/guidelines.cfm).’
3. Plan for the worst
‘There should be a protocol or procedure in place, in advance, for dealing with potential disclosure issues, including potential violations of Reg FD.
‘Then, if there is a violation – whether it’s inadvertent, which is usually the case, or willful – the company can respond quickly and put appropriate disclosure out into the marketplace.’
4. Education, education, education
‘In order to ensure Reg FD compliance, companies need to educate their personnel about the rule – and, just as importantly, reeducate them from time to time. Personnel changes require ongoing compliance training and, even when there hasn’t been any people turnover, employees’ remembrance of the rules tends to get a little fuzzy over time.
‘Every public company should have a training protocol in place, whether that constitutes written training materials, a seminar, a tutorial from outside counsel or internal personnel, or a combination of all of these. Whatever it takes to make sure company personnel adequately understand at all times how Reg FD works, that’s what you need.’
5. Every company is different
‘It is important to remember that one size does not fit all, and each company’s Reg FD compliance policies and procedures must be tailored to its own particular set of circumstances. Some companies have much more complicated IR functions and needs than others, and every company has its own set of issues.
‘For example, some companies frequently participate in non-deal roadshows and investor conferences. Guidance practices and dissemination of operating results also differ widely from industry to industry and company to company.
‘In certain industries, companies put out monthly flash results. Some issuers put out earnings guidance annually, while others do it quarterly and some don’t put it out at all.’
A version of this article also appears in the October issue of sister publication IR magazine.