Risk & Compliance

Reg FD and The Big Chill

A new SEC rule causes one company to circle its wagons.
David KatzNovember 27, 2000

If you think Reg FD won’t have a chilling effect on the way public companies communicate the details of their inner workings, consider Eric K. Brandt, the 38-year-old CFO and corporate vice president of Allergan, a high- tech health care corporation in Irvine, Calif. He’s only one of six people you could talk to at the firm.

That’s been true since last month, when the company circled its wagons in response to the Securities and Exchange Commission Regulation Fair Disclosure, which went into effect Oct. 23. In the era of Reg FD, the threat of being singled out as one of the first violators of the rule has become an abiding nightmare for Brandt.

As part of the communications policy Allergan recently put into effect, only six people can talk to the investor community about the company—Brandt; the company’s CEO and president, David E.I. Pyott; Lester J. Kaplan, president of research and development; and three investor-relations contacts.

Allergan’s revamped approach to communication is a good example of the rule’s powerful effect in changing the way corporations talk to the world. Besides limiting the number of people with the power to speak for the company, Allergan has ordered employees at trade shows “not to talk to anyone they don’t recognize as a physician or a customer,” Brandt told CFO.com. That piece of the policy went into effect at the American Academy of Ophthalmology’s annual conference in Dallas on Oct. 22 to Oct. 25, a key trade meeting for the company.

Analysts have long prowled the aisles of pharmaceutical trade shows, trying to pick up tasty inside tidbits for a possible trading advantage, Brandt says.

At Allergan’s Oct.20 third-quarter earnings- release conference call, simultaneously broadcast on the Web, the company launched another Reg FD-inspired move. Following the regular financial information given in the conference call, an Allergan investor- relations official read into the record “every piece of information we intend to give out…all of the information we intend to present in the remainder of the quarter,” says Brandt, who had been with Boston Consulting Group for 10 years before joining Allergan in May 1999.

Among the items the company now formally reports are such things as market-share information, comparisons with competitors, and detailed information about the company’s performance in terms of product segments. Among the company’s key product offerings are drugs to treat glaucoma, devices to treat cataracts, and contact lenses.

In response to Reg FD, the company has also decided to communicate its expectations for the following quarter in the quarterly conference call and to report its expectations for the following year at the end of the year. While Allergan might give out some information in press releases, it won’t report or comment on the progress it’s made during a quarter.

Brandt, who earns a base salary of about $194,000 plus receiving a bonus last year of about $211,000, has some misgivings about the regime he thinks Reg FD has made necessary.

The CFO says Allergan’s practice of giving out so much information in its quarterly call is “not terribly attractive from a competitive standpoint,” since the corporation is now “revealing a lot of information directly to our competitors.”

Still, says Brandt, providing the information in this controlled way is worth it if it protects the company from violations of Reg FD. The new rule states that when issuers disclose information to brokers and stockholders that can make a stock move, then they must disclose the information publicly. When the issuer makes the selective disclosure intentionally, it must disclose the information to the public at the same time. If the information gets out even though the company hasn’t released it, the company must disclose it to the public within 24 hours.

For more on Reg FD, click here.

Brandt says that although there may be a cost to revealing inside company information to competitors following its earnings calls, the expense is justified because it could help Allergan avoid stumbling into a Reg FD violation. “We don’t want to be the poster child” for the SEC’s campaign against selective disclosure, he said.

Rule Could Boost Volatility

While one of the SEC’s intentions in issuing Reg FD may have been to curb volatility, the rule could actually increase it by forcing abrupt formal disclosure of information that might have emerged in a more gradual way through informal talks with analysts, the CFO says. Previously, if analysts’ estimates– based on the performance of a particular product line, say–were way off, the company could help steer them in the right direction.

“In the past, companies had ways to communicate subtle changes,” he says. But now the SEC has taken away the flexibility to reveal information in that way, a situation that could spawn “tectonic shifts” and a great deal of momentum in the market, the CFO adds.

A report of mistaken estimates can come out of the blue and shock the markets, he suggests. Says Brandt: “The markets do not like intra- quarter press releases, up or down.”

Reg FD also puts more pressure on a company to make accurate forecasts and to hit their targets, according to Brandt.

Brandt says that the company could have taken the approach of disclosing nothing. Instead, it decided to disclose internal facts and financial expectations publicly because it has a policy that stresses such disclosure. “It’s important for people who invest in your company to understand the underlying dynamics of your business,” he says.

Still, the decision has placed pressure on Allergan, which operates internationally, to match its forecasts closely. Since the company has decided to make public forecasts of its financials, “forecast accuracy becomes a big deal,” Brandt says.

To maintain that accuracy, Brandt has been watching the company’s financial results, “top- line or bottom-line, on a weekly basis,” making changes along the way to match changes in the company’s product mix and other alterations, he says.

Brandt says that such weekly scrutiny of changes in the company’s financial picture is also crucial because he must provide information on matters that demand action to the CEO with adequate lead time—two months before the quarter ends, say, rather than two weeks before.

One example of a change the CEO might choose to make in response to receiving timely data could involve pulling back on spending on a specific sales or marketing effort in response to fluctuation in the value of the Euro, according to a company spokesperson.

Each month, to make sure Allergan’s business is on track to meet its forecasts, Brandt and Pyott review 400 pages of operational information—100 pages each from its four sales and marketing units, in North America, South America, Europe-Africa, and Asia-Pacific. The information includes market share, gross profit margins, performance by region, and details about competitive threats. The executives also scan the numbers of the company’s manufacturing unit.

Brandt and Pyott together go through the operational information “in excruciating detail” for as much as a day and a half every month.

Despite such close probing of the company’s forecasts, Brandt still worries about an error. “Is there a systemic bias in those numbers?” he sometimes finds himself wondering. And once that happens, and the forecasts prove wrong, there’s “no way to rein back analysts.”

“You’ve got to provide an answer they’ll take to the bank,” he concludes.