Regulation FD in 2011
NIRI - San Diego Chapter – September 15, 2011
© 2011 Cooley LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, CA 94306
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Regulation FD Refresher

Designed to prevent “selective disclosure” of material non-public
information (oral or written) to analysts or institutional investors prior
to disclosure to the general public

Rules took effect on October 23, 2000

Overlaps with Rule 10b-5 obligations
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Regulation FD Refresher

Whenever an issuer, or any person acting on its behalf, discloses
any material nonpublic information regarding that issuer or its
securities to any person described in paragraph (b)(1) of this
section, the issuer shall make public disclosure of that information
as provided in Rule 101(e)

Simultaneously, in the case of an intentional disclosure; and

Promptly, in the case of a non-intentional disclosure

Material non-public information disclosed to certain categories of
outsiders by certain corporate insiders must also be disclosed to the
general public

Information

Must be material

Must be non-public
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What is Material Information?

If there is “a substantial likelihood that a reasonable shareholder
would consider the information important” in making a decision to
buy or sell the securities, the information is material

SEC says it will not second guess judgment calls of materiality if the
judgment was made in good faith and is not clearly incorrect

A specific piece of information should not be material if:


Unbeknownst to the issuer
It helps an analyst complete a “mosaic” of information that when taken
together with other information lawfully received, is material

Determining lack of materiality is very difficult to predict in advance

If disclosure is followed by significant market activity, movement in
stock price or revision of expectations, heavy burden on issuer to
demonstrate it resulted from piecing together a “mosaic”
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What is Material Information?

Matrixx Lawsuit: In March 2011, the U.S. Supreme Court issued
an opinion involving Matrixx’s lack of disclosure of reports that
Zicam caused a loss of the sense of smell. The Court declined to
adopt a “bright line” materiality standard based on the statistical
significance of the risk.

Standard remains whether a reasonable investor would have viewed the
undisclosed information as having significantly altered the total mix of
information made available.

Companies can control what it is required to disclose, by controlling
what its says to the market.
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To Whom Does Regulation FD Apply?

Categories of insiders defined in Rule:

Senior officers and directors

Investor relations or public relations personnel, including IR and PR
firms hired by the company

Other employees or agents who regularly communicate with outside
investors or securities market professionals
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To Whom Does Regulation FD Apply?

Categories of outsiders defined in Rule to whom selected disclosure
may not be made:

Broker dealers and securities market professionals, including sell-side
analysts

Investment advisors, institutional investment managers and buy-side
analysts

Investment companies, hedge funds

Any stockholder, if the disclosure is under circumstances in which it is
reasonably foreseeable that such holder will purchase or sell the issuer's
securities on the basis of the information
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Persons or Entities Excluded From Regulation FD

Persons who owe a duty of trust to the issuer such as an attorney,
investment banker or accountant

Persons who expressly agree to maintain the disclosed information
in confidence
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Methods of Public Disclosure

Furnish or file a Form 8-K disclosing the information

Another method (or combination of methods) of disclosure that is
reasonably designed to provide broad, non-exclusionary distribution
of the information to the public including:


Press releases

Exchange Act Reports (10-Q’s, 10-K’s)

Conference calls open to the public (advance notice required)
Posting information on Company website generally is not, by itself,
sufficient public disclosure
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Situations Where Regulation FD Will Apply

Analyst conference calls

Individual meetings or calls with analysts or investors

Industry or investment banking conferences

Roadshows for private placements, PIPES, 144A and Regulation S
offerings
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SEC Enforcement Actions

From 2002 to 2005, the SEC brought seven Reg FD enforcement
actions
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
Twice against Siebel Systems
From 2006 to September 2009, the SEC brought only one Reg FD
enforcement action
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SEC Enforcement Actions

Recent Enforcement Actions


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Christopher Black (American Commercial Airlines, Inc.); September
2009 – weekend email to analysts that earnings would be lower than guidance a few days
earlier; company not pursued.
Presstek/Marino; March 2010 – call with registered investment adviser two days
before end of quarter; company paid $400,000 fine and implemented remedial measures.
Office Depot; October 2010 (actions relate to 2007) –

concerned that analyst estimates were too high

considered issuing a press release, but internal estimates were incomplete

directed employees to conduct one-on-one calls with analysts referring to recent public
statements of comparable companies that cautioned the impact of the slowing economy

CFO assisted in preparing talking points for calls

At least one analyst expressed concern over lack of press release

six days after calls to analysts, 8-K filed to disclose the earnings would be negatively
impacted due to continued soft economic conditions (7.7% drop in price over that period)

Company paid $1 million; CFO and CEO each paid $50,000
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Responsive Actions

Office Depot hired a new General Counsel and Vice President of
Investor Relations in July 2007 and significant changes were made

Developed written policy on Fair Disclosure to and communications with
the investment community

Provided extensive Regulation FD training to all approved
spokespersons

Instituted mandatory “two-person rule” for all contact with the street

Developed call log for all one-on-one conversations and group meetings

Instituted a “total blackout” quiet period four weeks prior to quarterly and
eight weeks prior to full-year earnings announcements
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Responsive Actions

Office Depot changes (continued):
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Created “Investor FAQ” section on website to address topical issues

Established policy to not update or affirm any financial outlook following
earnings calls unless 8-K was filed

Insisted that all industry conference presentations be webcast

Established policy that any inadvertent disclosures, regardless of
perceived materiality, must be reviewed with General Counsel
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General Observations

Must be consistent at all times

Watch tone, body language, slight wording differences

Consult counsel
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One on ones, private meetings are areas of focus

Balance the practicalities

Review written disclosure/Reg FD policies

Refresh training on a regular basis
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Who is authorized to speak for the Company?


Identify individuals who are authorized to speak on behalf of the
company. All inquiries should be directed to these individuals.

Provides consistent messaging.

Control flow/timing of disclosure.

Protect confidential information (e.g., customer relationships,
R&D).

Limit liability.
Spokespersons should understand Reg. FD, but also:

What information the company discloses (and what it does not)

When to use forward looking statement disclaimers.

When to use GAAP / non-GAAP reconciliations.
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Tips for Dealing with One-on-Ones

Hold conversations shortly after a public release of information and,
if applicable, related conference call when the universe of material
nonpublic information is smaller

Avoid conversations during black-out periods

Establish ground rules for questions that will not be answered

Company reps should be fully informed about what information is
publicly available

Consider debriefing IR or counsel immediately after one-on-ones

Consider keeping log of one-on-one conversations
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Tips on Guidance

Establish policy as to whether you will update guidance



communicate this policy when asked to update (i.e., “our policy is to not
update guidance given in our conference calls”)
If you intend to update guidance, you should issue a press release
prior to the conversation
If material, you can’t confirm guidance currently in a one-on-one

can’t say “nothing has changed” or “we remain comfortable with our prior
guidance” as this constitutes a new statement
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Analyst Conferences and Roadshows

No material non-public information in presentation and breakout
sessions

otherwise must disclose the information publicly in advance, e.g., file the
presentation on an 8-K and post on website

Rehearse presenters

Scrub slides for material non-public information

Once a decision is made to disclose information, later developments
must be considered in light of Matrixx; subsequent information that
is not disclosed must not significantly alter the "total mix" of
information
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Analyst Conferences and Roadshows

Some companies are insisting that they be allowed to webcast their
presentations for full access

Sponsors of these meetings are generally offering webcast services,
but it is the company’s responsibility to provide notice to interested
investors and media that the live webcast is being conducted, and
how to access it

Even if the company does not plan to provide any new material
information, the webcast is your insurance policy against allegations
of selective disclosure if during a webcast Q&A a material disclosure
occurs
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Communications with Employees

If employees leak information, the company may need to respond
publicly.


If employees trade while aware of the information, it could result in
insider trading liability and/or negative publicity.
If sensitive information is disclosed internally:



Indicate that information is confidential and label documents
appropriately - confidential / for internal use only / do not forward outside
the company.
To the extent possible, limit the amount of information disclosed – what
do employees need to know to understand what you are
communicating?
If necessary or appropriate, restrict trading under the insider trading
policy.
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