Securities: Compliance with Regulation FD
Kenneth B. Abel
410-347-7394
kbabel@ober.com
Introduction to Regulation FD
Regulation FD (the "Rule") is designed to regulate a public company's selective disclosure of material nonpublic information. Generally, the Rule requires a public company to publicly disclose any material nonpublic information that it discloses to certain market participants. This disclosure to the public must be simultaneous if the disclosure to the market participant is intentional. If the disclosure is unintentional, the information must be made public either within twenty-four hours of the disclosure or before the opening of the next day's trading on the New York Stock Exchange. The SEC adopted the Rule so that market professionals and institutional investors are not given an informational advantage to the detriment of general investors.
This memorandum outlines the key aspects of Regulation FD. However, the memorandum is necessarily general and may not be applicable to your particular circumstances. If you have any questions please do not hesitate to call Ken Abel at (410) 347-7394.
Whose Disclosures are Regulated?
The Rule governs disclosures made by a company's directors, executive officers, investor relations or public relations officers and any other officer, employee or agent who regularly communicates to securities market professionals or security holders. The Rule only applies to those individuals who are authorized to speak on behalf of the company. Therefore, the company should (i) make sure that all authorized individuals are aware of the Rule and its implications and (ii) make sure that unauthorized individuals, such as employees, are aware that they are not authorized to make material disclosures to market participants regarding the company's business or finances.
Which Recipients are Regulated?
The Rule applies to disclosures made to market participants who are (i) broker-dealers including the company's market makers, (ii) investment advisers and institutional investment managers, (iii) investment companies and hedge funds, and (iv) any person associated with the foregoing entities.
The Rule also applies to a holder of the company's securities if it is reasonably foreseeable that the holder will trade on the basis of the information disclosed. The company should err on the side of caution and assume that a holder will trade on the basis of any material nonpublic disclosure.
The Rule does not apply to (i) a person who owes a duty of confidence to the issuer such as an attorney, investment banker or accountant, (ii) a person who expressly agrees to maintain the disclosed information in confidence and (iii) a credit rating agency if the information is disclosed to develop a credit rating and the company's ratings are publicly available. Disclosures to the media are not covered by the Rule.
It should be noted that the Rule does not preclude disclosure to a person who is not a securities professional and who does not own securities even if it is reasonably foreseeable that the person may trade on the basis of the information. However, the disclosure of non-public information under such circumstances and the trading on the basis of such information would result in a violation of the securities laws (Rule 10b-5) by the person providing the information (tipper) and the person receiving the information (tippee).
What is Material Information?
The Rule does not provide a definition of "material." Therefore, information should be considered material if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision. In order to protect itself, the company should consider the following types of disclosures to be material. This list is not intended to be exhaustive.
- Earnings information;
- Information pertaining to mergers, acquisitions, tender offers or joint ventures;
- Information regarding a significant new product or service;
- Information indicating a change in control or significant change in management;
- Information indicating a change in auditors or auditor notification that the issuer
may no longer rely on an auditor's audit report;
- Information pertaining to an issuer's securities such as the sale of a significant
amount of additional securities, repurchase plans, stock splits or changes in dividend;
- Information regarding changes in compensation policy;
- Information regarding the purchase or sale of significant assets; and
- Information regarding bankruptcies, receiverships or significant litigation.
The company may disclose information to an analyst that would be immaterial to a reasonable investor, even if the analyst is able to use his expertise to take that piece of information and create a "mosaic" that eventually leads to material information. The company will not be liable as long as it did not know that it was helping to complete the mosaic. This mosaic theory underscores the fact that the "material to the reasonable investor" test should be applied to the reasonable investor, rather than an analyst who may be more sophisticated.
The following practices would require simultaneous public disclosure under the Rule. This list is not intended to be exhaustive.
- Providing analysts or selected institutional investors with advanced warnings
of earnings results;
- Giving analysts or institutional investors earnings guidance, hints, winks,
nudges and other explicit or implicit actions regarding the direction of earnings;
- Participating in analyst conference calls where material nonpublic information
is disclosed beyond that contained in press releases or otherwise publicly disclosed; and
- Disclosing material nonpublic information at industry conferences before such
information is broadly disclosed to the general public.
What is Nonpublic Information?
Information is nonpublic if it has not been disseminated, previous to the intentional or non-intentional disclosure at issue, in a manner making it available to investors generally. Also, in general, if the information at issue was available to the public before the disclosure was made, but the company was not the source of that information, then the disclosure will be considered a disclosure of nonpublic information.
What are Intentional and Non-Intentional Disclosures?
A disclosure is intentional if the disclosing person knew or was reckless in not knowing that the information was both material and nonpublic. A person is reckless if no reasonable person under the same circumstances would make the same determination. A non-intentional disclosure is one that is unplanned or accidental, such as a slip of the tongue or a response to an unanticipated question.
What Must the Company Do When a Material Nonpublic Disclosure is Made?
The Company must make a simultaneous, public disclosure any time it makes an intentional disclosure of material nonpublic information to one of the market participants discussed above. This public disclosure can be accomplished by furnishing with the SEC a Form 8-K or by disseminating the information through another method that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public. A press release distributed through a widely circulated news or wire service, such as Dow Jones, Bloomberg or Reuters, would fulfill the Company's public disclosure obligation. However, if the Company has reason to know that such services would not carry its press release, then the Company should use a different service or a different approach that it believes will reach substantially all of its potential investors. The Company cannot fulfill its disclosure obligation by posting the information on its web site.
If the company makes a non-intentional, material disclosure of nonpublic information, then the company must make a public disclosure "promptly." The Rule states that "promptly" means as soon as reasonably practical, but in no event after the later of twenty-four hours or the commencement of the next day's trading on the New York Stock Exchange. This timetable does not begin to run until a "senior official" learns of the non-intentional disclosure. A "senior official" of the company is a director, executive officer, investor relations or public relations officer, or other person with similar functions.
Interplay with Item 2.02 on Form 8-K.
Item 2.02 of Form 8-K requires registrants to furnish all releases or announcements disclosing material nonpublic financial information about completed annual or quarterly fiscal periods on Form 8-K. Registrants must furnish this information within five business days of any public announcement or release disclosing the material nonpublic information. In other words, within five days after a registrant issues an earnings press release, the registrant must furnish the release on Form 8-K.
The release of information requiring disclosure on Item 2.02 of Form 8-K may also require disclosure under Regulation FD. As indicated above, Item 2.02 of Form 8-K requires a disclosure within five business days after the release of the information, while Regulation FD requires a public disclosure (which may be by a Form 8-K) simultaneously with any disclosure to one of the above-referenced market participants. Therefore, a Form 8-K furnished within the timeframe required by Regulation FD (i.e., simultaneously with respect to intentional disclosures) and otherwise complying with Item 2.02 and 7.01 (relating to Regulation FD disclosure) of Form 8-K, could be furnished to the SEC once and would satisfy both Regulation FD and Item 2.02 of Form 8-K. Although not required, the company should consider disclosing the information on its web site to ensure an even broader dissemination of the information.
How is the Rule Enforced?
The SEC may bring an enforcement action seeking administrative, injunctive or civil money remedies. However, a violation of the Rule is not a violation of the 10b-5 antifraud rule, and therefore such a violation of the Rule does not give rise to a private cause of action in and of itself.
Conclusion
Before disclosing information to a market participant, the company should examine the information and determine whether it should be considered material. If the information is material and if it is not already public, the company must arrange for simultaneous public disclosure in conjunction with the disclosure to the market participant. If the company discovers that it has inadvertently disclosed material nonpublic information, the company must take the necessary steps to ensure that the information is publicly disclosed in a prompt manner.
If you have any questions regarding your company's compliance with Regulation FD, please contact Ken Abel at (410) 347-7394.
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