WHEN business communicators think about disclosure rules, they typically worry most about Regulation Fair Disclosure (Reg FD) – but for all the angst this particular regulation causes, the Securities and Exchange Commission’s list of enforcement actions is surprisingly short.
Still, there’s much that can be learned from looking at prior enforcement actions. This article will briefly review the Commission’s Reg FD cases and provide you with links to the original files where you can find a full summary of the underlying facts that were relevant in each matter. We’ll also take a quick look at certain types of communications that are exempt from Reg FD.
The SEC’s Division of Enforcement can bring an action against a company, an individual or both, for failing to comply with Reg FD. Remedies available to the SEC generally include injunctive relief, such as cease-and-desist orders, monetary penalties and required disclosure of the violation. However, there is no private cause of action for failing to comply with Reg FD, so a company’s shareholders can’t sue on the basis of a Reg FD violation alone.
Since Reg FD’s adoption in 2000, the SEC has only brought about a dozen enforcement actions. Reading each of these cases can be highly informative and they show how our prior discussions about public disclosure and materiality apply in real-world situations.
Raytheon Company (NYSE: RTN)
Raytheon’s CFO selectively disclosed material earnings guidance to certain analysts by indicating that their estimates were “too high”, “aggressive” or “very aggressive”.
The Commission brought an administrative action against the Company and its CFO resulting in each consenting to a cease-and-desist order.
Secure Computing Company (acquired by McAfee, Inc. in 2008)
Secure Computing’s CEO selectively disclosed information about a material contract to two institutional advisors. Following the disclosure, and after the markets’ close, the company issued a press release announcing the contract.
The Commission brought an administrative action against the Company and its CEO resulting in each consenting to a cease-and-desist order.
Siebel Systems, Inc. (acquired by Oracle Corporation in 2005)
At a private, invitation-only investor conference, Siebel’s CEO selectively disclosed material information about the Company’s outlook that was different from information that had previously been publically disclosed.
Motorola Solutions, Inc. (formerly Motorola, Inc. NYSE: MSI)
In a public conference call Motorola’s IR Director stated that the Company was expecting “significant” weakness in its quarterly sales. Following the call the IR Director concluded that certain analysts had misunderstood the term “significant” and, after seeking advice of counsel, called the analysts to clarify that “significant” meant a “25% or more decline”.
The Commission issued a report, rather than bring an enforcement action, because the IR Director sought the advice of counsel and, even though incorrect, counsel’s advice was given in good faith. The Commission noted that it would be less likely to accept a reliance-on-counsel defense in the future actions.
Schering-Plough Corporation (acquired by Merck & Co. Inc. in 2009)
Schering-Plough’s CEO selectively disclosed material earnings guidance to certain analysts and institutional investors by indicating that third-quarter estimates were too high and, several days later, that the following year’s earnings would be “terrible”. After the second disclosure the Company issued a press release with publicly revising its earning guidance.
The Commission brought an administrative action against the Company and its CEO resulting in each consenting to a cease-and-desist order and the CEO paying a civil penalty of $50,000. The Commission also brought a civil action against the Company resulting in it paying a civil penalty of $1,000,000.
Senetek PLC (ADR) (OTC: SNKTY)
Senetek engaged two firms, each of which prepared and submitted for review a draft report containing financial projections about the Company. Senetek’s CEO and CFO made revisions to the financial projections based on material nonpublic information, but did not simultaneously, or promptly thereafter, disclose that information.
The Commission brought an administrative action against the Company resulting in it consenting to a cease-and-desist order.
Siebel Systems, Inc. (acquired by Oracle Corporation in 2005)
At a private, invitation-only investor conference, Siebel’s CEO, in the presence of its IR Director, allegedly selectively disclosed information about the Company’s outlook that was different from information that had been previously publically disclosed.
The Commission brought a second civil action against the Company for violating its prior cease-and-desist order, for failing to comply with Regulation FD and for failing to maintain adequate disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. The Commission also brought civil actions against the Company’s CEO and IR Director as aiders and abettors of the violations.
The Commission’s complaint was ultimately dismissed by the United States District Court for the Southern District of New York, which essentially found that based on the facts the Commission had applied an excessively strict interpretation of Regulation FD.
Flowserve Corporation (NYSE: FLS)
Flowserve’s CEO and IR Director affirmed the Company’s previous earnings guidance and selectively disclosed additional material nonpublic information to certain analysts in a private meeting.
The Commission brought an administrative action (PDF 53KB) against the Company, its CEO and its IR Director resulting in each consenting to a cease-and-desist order. The Commission also brought a civil action against the Company and its CEO resulting in the Company paying a civil penalty of $350,000 and the CEO a civil penalty of $50,000.
American Commercial Lines, Inc. (Nasdaq: ACLI)
American Commercial’s CFO, without the Company’s knowledge or consent, selectively disclosed earnings guidance to a certain group of analysts in an email communication.
The Commission brought administrative (PDF 105KB) and civil actions against the CFO for aiding and abetting a violation of Regulation FD, resulting in his consenting to a cease-and-desist order and a paying civil penalty of $25,000.
The Commission did not bring an enforcement action against the Company because, prior to the violation, the Company had cultivated a culture of compliance through training and the adoption of policies and controls meant to prevent violations. The Company also promptly disclosed the material information on a Form 8-K and, immediately thereafter, self-reported the violation to the Commission, cooperated with the investigation and took remedial actions to address the conduct, including by adoption of additional controls.
Presstek, Inc. (Nasdaq: PRST)
Presstek’s CEO selectively disclosed material earnings guidance to an investment advisor but did not simultaneously publicly disclose the information.
The Commission brought a civil action against the Company and its CEO resulting in the Company consenting to a cease-and-desist order and a paying civil penalty of $400,000. As of March 16, 2011, the civil action against Presstek’s now former CEO remains ongoing.
Office Depot, Inc. (NYSE: ODP)
Office Depot’s IR Director, with the knowledge and consent of its then-CEO and CFO, indirectly selectively disclosed material earnings guidance to certain analysts by referencing the analysts to comparable companies experiencing declining results. Six days later the Company publicly disclosed the information.
Communications exempt from Reg FD
Certain disclosures fall outside of the scope of Reg FD, such as information disclosed to customers, suppliers or strategic partners for legitimate business reasons. Reg FD also specifically exempts information disclosed:
- to anyone owing a duty of confidence to a company, such as its employees, accountants, attorneys and investment bankers;
- to anyone who expressly agrees to confidentiality; and
- in connection with certain registered securities offerings.
The first two exemptions are fairly straight-forward, but let’s take a closer look at the third one:
Reg FD does not apply to material information disclosed in connection with certain registered securities offerings (public offerings), including information disclosed during the course of a road show or other presentation held in conjunction with such an offering. If an offering is underwritten, the exemption period begins when the company reaches an understanding with its managing underwriter and ends when the underwriter is required to deliver a prospectus or when the securities are sold, whichever is later. If an offering is not underwritten, when the exemption period begins will depend on the type of offering that the company is conducting.
Exceptions to this exemption include certain registered securities offerings that are made on a continuous basis, for example secondary offerings—made on behalf of someone other than the company, such as when a company registers securities for resale after closing a PIPE transaction—or offerings made pursuant to a dividend reinvestment plan, interest reinvestment plan or employee benefit plan.
It’s important to understand that the exemption is limited to material information disclosed in connection with a registered securities offering. For example, if, while conducting a registered securities offering, a company’s CFO discloses material nonpublic information concerning its future financial performance to a group of analysts on a regularly scheduled conference call, that disclosure will not be considered to have been made in connection a registered securities offering just because one is ongoing.
In contrast, Reg FD does apply to material information disclosed in connection with unregistered securities offerings (private placements), as well as to material information disclosed in the context of proxy solicitations and tender offers. In each case a company must either publicly disclose the material information—simultaneously, in the case of an intentional disclosure, or, promptly, in the case of an unintentional disclosure—or the person to whom the information is disclosed must expressly agree to keep it confidential.