Regulation Fair Disclosure (Reg FD) was enacted in 2000 to preserve the integrity of the capital markets. Its purpose is to prevent unfair trading advantages via the selective disclosure of material nonpublic information to people who might trade on the news. The significance of Reg FD was recently reinforced by the SEC’s charge that AT&T selectively disclosed material information on quarterly gross revenue to Wall Street analysts.
There have only been a limited number of cases where the SEC has enforced Reg FD through lawsuits and fines. But the AT&T case is a good reminder that there are risks associated with selective disclosure. Every public company should (1) know what constitutes material information and how to disclose it and (2) commit to continued education and training on this topic long after becoming public.
In the case of AT&T, the CFO had directed its investor relations team “to work the analysts” in an effort to lower its Q1 2016 earnings estimates to a more achievable level. Subsequently, every one of the 20 analysts who were contacted reduced their revenue forecasts. “Executives allegedly disclosed internal smartphone sales data…,” the SEC noted, “despite the fact that… internal documents stated such information was generally considered ‘material’ to AT&T investors and prohibited from selective disclosure under Regulation FD.”
Navigating the Rule
While the outcome of the AT&T case is still unknown (the company calls the charges “meritless”), it presents an opportunity for all public companies to revisit and evolve their disclosure practices. Here are some best practices that can help protect a company from becoming the next Reg FD cautionary tale.
Build Reg FD training and ongoing education into the onboarding and professional development curriculum. While in the process of going public, educating staff members on selective disclosure risks is critical. This holds true for executives who will engage directly with Wall Street and the financial press as well as employees in support roles. Firms may conduct an initial training session at the time of the IPO.
Unfortunately, too many don’t incorporate Reg FD training into their standard new employee onboarding process or provide periodic disclosure reminders in employee communications. To create a culture of compliance, companies should combine regular training and disclosure reminders with real-life examples on the drawbacks of selective disclosure.
Leverage quarterly earnings calls to disclose the correct information. Since the typical analyst covers about 25 companies, earnings season is a hectic time. Most analysts tune into earnings calls to get the information they need to update their models accurately. In preparing for these calls, most companies spend a lot of time thinking about what to discuss in prepared remarks, which issues are top-of-mind with Wall Street, and what questions they should anticipate. A critical step in preparing for earnings calls is to review the analysts’ models relative to the company’s. Then, give some thought to the information executives can provide to clarify disconnects and misunderstandings since earnings calls are a forum for public disclosure. The more information provided publicly, the less risk there is of selective disclosure violations in substantive post-call discussions with analysts, investors, and others.
Maintain a Reg FD “cheat sheet.” Since most of us exist in a state of information overload, it can be helpful for the investor relations team to maintain a “cheat sheet” on current publicly disclosed material information. Such a summary document typically includes guidance, milestones, metrics, new clients, partnerships, technology or products, and M&A transactions. A quick look at this cheat sheet before engaging with investors, analysts, and the financial media ensures safe, compliant, and productive dialogues with those audiences.
If you’re planning to call your analysts to help them understand why their estimates are wrong and need to be revised, or you’re on the road meeting with investors and think you have accidentally disclosed material information, ask yourself, “Why not just publicly disclose this?”
When in doubt, disclose it. If you’re planning to call your analysts to help them understand why their estimates are wrong and need to be revised, or you’re on the road meeting with investors and think you have accidentally disclosed material information, ask yourself, “Why not just publicly disclose this?” In the case of inadvertent disclosure, a company can simply issue a press release or file an 8-K filing within 24 hours to entirely mitigate Reg FD risk. Materiality is not always black and white. When there are gray areas, or you think you may be pushing the limit, consider the worst-case scenario. By following the spirit of full disclosure, a company can avoid the severe consequences of a highly publicized breach.
Adopt a quiet period that keeps the company out of harm’s way. The purpose of a quiet period is to limit the risk of unintentional material disclosures. While Reg FD is always in effect, the amount of information known by management and others shortly before earnings announcements can create undue risk. Investors and analysts are always on the lookout for shifts in tone and body language; it’s not only what you say but how you say it. Quiet period policies vary with respect to length, the specific information that can be communicated, and permissible marketing activities. Each company must determine its own practices before establishing protocols that consider factors such as management’s experience working with Wall Street and its familiarity with Reg FD.
Social media policy. Companies that don’t have a social media policy as part of their disclosure policy are behind the eight-ball. In crafting a social media policy, considering disclosure and corporate reputation are equally important. For example, an executive who posts photos of the family’s luxury vacation on Facebook as their firm’s earnings plummet can trigger an adverse reaction from Wall Street.
Protect yourself and your team. A risky investor communication decision can have severe consequences for the company, yourself, and, importantly, the people who report to you. In the AT&T case, the SEC bypassed the harder-to-prove actions of the C-suite and opted to charge more “hands-on” offenders — mid-level investor relations professionals who were just following orders.
Moira Conlon is the founder and president of Financial Profiles.