Watch Your Mouth

When Regulation Fair Disclosure took effect in October 2000, finance executives felt some trepidation that their own words might eventually hang them. As a company's main spokesperson on matters financial, after all, a CFO is in the precarious position of routinely answering analysts' and shareholders' questions—especially about earnings prospects.

The initial wariness has eased a bit. Reg FD's effort to standardize the flow of corporate information to all interested parties has resulted in only five completed federal investigations of violations so far. Four became public in November 2002, and the latest, involving pharmaceuticals giant Schering-Plough Corp., emerged this past September (see "Recapping a Reg," at the end of this article). There's also been just one high-profile CFO casualty: Raytheon Co.'s Franklyn Caine resigned in December 2002, a few weeks after the Securities and Exchange Commission named him in a selective-disclosure action.

But the SEC is still watching. "We've got a number of active investigations in the pipeline," SEC enforcement director Stephen Cutler recently told a group of lawyers at Georgetown University. And Boris Feldman, a securities lawyer with Wilson Sonsini Goodrich & Rosati in Palo Alto, California, says the SEC's regional bureaus are busy "reviewing Reg FD violations" and questioning CFOs about unexplained stock movements.

Still, the enforcement actions taken to date—which Gordon McCoun, senior managing director of New York­based investor-relations firm Financial Dynamics, says target the "most visible and the most obvious transgressions"—are instructive. Feldman, in fact, finds them "quite interesting from an anthropological perspective," and likens the SEC to Talmudic scholars who "have set markers out there." And in response, companies continue to reshape their communication strategies, says McCoun.

In fact, says Robert Profusek, a partner at the New York office of law firm Jones Day, taken together, the SEC's actions have put companies on notice that they can no longer make selective disclosure errors—a conclusion especially obvious after the recent sanction against Schering-Plough. "It's very clear that the incidents [investigated] so far were mistakes, not intentional bad behavior," he explains. But under today's more mature Reg FD, he says, the SEC has zero tolerance for any "accidental" missteps.

Between the Lines
There's no question that companies are now taking a more uniform approach to dealing with the external flow of material information. "Reg FD codified what would be fair and balanced disclosure," says R. Kevin Matz, a senior vice president at $4.5 billion Emcor Group Inc., and a spokesman for the Norwalk, Connecticut, company. Moreover, the rule "has achieved its main objective&it has leveled the playing field," says Chuck Hill, director of research at First Call. "It's forcing analysts to get back to the basics of analysis."

For companies, the new procedures are now almost habit, says Matz. An April survey by the National Investor Relations Institute found that of the 92 percent of companies that conduct earnings conference calls, all use Webcasts or teleconferencing. And in June, NIRI found that one-on-ones and small group meetings with analysts and investors seem to be as popular as ever—an indication that companies are comfortable staying within the confines of the rule.

That doesn't mean everyone is happy with the information being provided. Indeed, Wall Street, which vigorously opposed Reg FD, continues to fume. The Securities Industry Association, its trade group, declares that "the regulation has had the impact the association feared: less information, lower quality, higher costs, and greater volatility."

And Wall Street is particularly upset with the parade of companies that have stopped giving guidance. The trend really started last December, when the Atlanta-based Coca-Cola Co. vowed not to provide quarterly or annual guidance, and companies like McDonald's and AT&T followed suit. They may not be the last. The April NIRI survey found that, overall, 28 percent of companies are considering eliminating guidance.

Material Breaches
The stated idea behind restricting guidance, of course, is to refocus analysts on long term rather than quarterly results. But CFOs know that it also means material slips are less likely to occur. Material revelations have been at the root of the actionable cases to date. So, it's little wonder that in a poll of finance executives two years ago, PricewaterhouseCoopers found that 68 percent wanted the SEC to issue specific guidelines about which information is material and requires disclosure, and which is not.

Some slipups under Reg FD represent seemingly obvious breaches, however. In one case, against Siebel Systems Inc., CEO Thomas Siebel allegedly disclosed material information at an invitation-only technology conference, assuming that it would be Webcast. Last November, Siebel became the first company to pay a fine—of $250,000—to settle a Reg FD case. It promised not to selectively disclose again, but the real message—one CFOs should take to heart, says Feldman—is that Siebel "wouldn't have gotten into trouble if it had Webcast." (As CFO went to press, Siebel revealed in its third-quarter financials that the SEC was investigating it for a second Reg FD violation.The potential enforcement action reportedly involves statements made by CFO Ken Goldman at an April 30 dinner with analysts.)

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