Risk & Compliance

Reg FD Memo: Don’t Talk to Reporters

Investor relations official advises CFOs not to talk to journalists about material information.
David KatzApril 10, 2001

If CFOs talk to reporters about market-moving information, they might as well be talking to Wall Street analysts…at least when it comes to Regulation Fair Disclosure.

This means these types of conversations could easily lead to a violation of Reg FD—and enforcement actions and penalties from the Securities and Exchange Commission (SEC).

Jane W. McCahon, who chairs the board of the National Investor Relations Institute (NIRI), expressed that heretical view at the recent CFO Best Practices conference in Dallas.

She acknowledged to CFO.com that the SEC specifically excludes disclosures to the media from Reg FD’s strictures. (The rule bars “selective disclosure” by securities issuers of “material nonpublic information” to broker-dealers, investment companies, and other parties who would stand to benefit from such disclosures. Click here to view Reg Fd.)

With selective disclosure to analysts now forbidden, senior financial executives might be tempted to call journalists, McCahon suggests.

That, however, is “going to get you into trouble,” she warned CFOs. That’s because the reporter would be likely to immediately reveal the information to an analyst in order to get a quote for the story.

Further, with analysts appearing more and more in journalistic roles on CNBC and other TV stations, she asks rhetorically, “How do you tell an analyst from a reporter?”

Keeping Track of the Competition

Another way CFOs can avoid making selective disclosures is to keep a close eye on what other companies in their industries are disclosing, she advised.

When a competitor issues a press release reporting a bad quarter, CFOs at competing companies should be on the alert, McCahon said. If the information in the earnings release is specific to the company issuing the release, competitors can rest easy.

“If it’s industry specific,” however, “it’s time to get out a release” telling why that is or isn’t the case at the CFO’s own company, McCahon said.

Otherwise, CFOs risk letting out information about their own companies in response to questions about the performance of their industries.

McCahon also urged CFOs to communicate their corporations’ disclosure policies to employees and let them know that they’re “much more likely to get a call from an analyst or a hedge-fund manager” than they were before Reg FD went into effect Oct. 23, 2000.

Employees will be more of a target because senior corporate officers and other officials who regularly release material information must now keep mum between official corporate releases.

To get a step up on information that his or her competitors might have, an analyst is likely to reason that, instead of phoning a senior executive, “you can call a guy on a loading dock and ask [him] how many boxes are going out tonight,” McCahon said.

The NIRI chair told CFO that corporations should be on their guard against shareholders’ suits buttressed by the increasing amount of public information now available because of Reg FD.

While the SEC specifically excluded companies from such suits under Reg FD, “that doesn’t mean [shareholders and their lawyers] aren’t going to try” to pursue judgments against corporations, she said.

McCahon thinks one effect of Reg FD has been to spawn market volatility because it encourages companies to release earnings information abruptly and without gradual warning. To smooth the volatility, she thinks, companies should consider communicating earnings estimates as a range rather than as a specific figure.

Another speaker at the conference, Lynn Atchison, senior vice president of finance and CFO of Hoover’s, Inc., expressed a much brighter view of Reg FD than did McCahon. “I’m happy with Reg FD,” she said.

Before the regulation went into effect, the company didn’t know how to convey information to analysts to contribute to their calculations of consensus earnings estimates, she said.

“As a brand-new public company, we didn’t know how to transmit information,” recalled Atchison.

She said that Reg FD provides helpful guidance for Hoover’s, which went public in 1999. “I like being able to say, `This is what we think’ and put it out there,” Atchison added. For Atchison’s description of her company’s experience with the IPO, click here.

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