by Anna Chason
Investor relations have been described as a fencing match conducted on a tightrope. In providing information to investors and analysts, corporate officers must carefully negotiate the "high wire" and provide full information while avoiding "selective disclosures," or disclosures of material nonpublic information to a select group rather than to the market as a whole.
Walking the High Wire
Regulation FD states: "Whenever a company, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons, the company must make public disclosure of that same information: simultaneously (for intentional disclosures), or promptly (for non-intentional disclosures)." A selective disclosure is "intentional" when the person making the disclosure either knows, or is reckless in not knowing, that the information is both material and nonpublic.
"Enumerated Persons"—Your Fencing Partners
"Enumerated persons" include the following: broker-dealers, investment advisers, mutual funds, hedge funds, institutional investment managers (generally, managers of securities portfolios with an aggregate market value of at least $100 million), and their associated persons and analysts. In addition, any holder of the company's securities whom, under the circumstances, foreseeably could trade on the information is an enumerated person.
Excluded from the definition of "enumerated persons" are the following: ratings organizations, "temporary insiders," such as lawyers, bankers and accountants or other persons who owe the company a duty of trust or confidence, and persons who specifically agree to maintain the information in confidence.
Company or Person Acting on Its Behalf
Persons who can subject the company to operation of the rule include any senior official of the company (such as the President, CEO, CFO, directors) or any other officer, employee, or agent of the company who regularly communicates with market professionals or shareholders who may trade on the information (such as the company's investor relations professional).
Material Information
According to the SEC, information is material if there is a substantial likelihood that a reasonable shareholder would consider it important when making an investment decision, or if the information could be viewed as altering the total mix of available information. A company must determine what is material on a case-by-case basis. There is no bright-line test; however, the SEC has indicated that the following items "should be reviewed carefully" for materiality:
- earnings information;
- mergers, acquisitions, tender offers, joint ventures, or changes in assets;
- new products or discoveries, or developments regarding customers or suppliers (such as the loss or gain of a contract);
- changes in control or in management;
- change in auditors or an auditor's notification that the issuer may no longer rely on the auditor's audit report;
- events regarding the company's securities, such as stock splits, changes in dividends public or private sales of additional securities, or a default on senior securities; or
- bankruptcies or receiverships.
The SEC noted that there may be other items which are material, as determined by the situation.
Making Nonpublic Information Public
Information is nonpublic if it is not available to investors generally. Information can become public by one of the following methods:
- Any method or combination of methods that is "reasonably designed to effect a broad and non-exclusionary distribution of information to the public." Such methods are determined on a case-by-case basis and may include either of the following:
- dissemination of a press release through a widely circulated news or wire service; or
- an announcement at a press conference to which the public is invited.
- Filing of a Form 8-K with the SEC.
Posting the information on the company's website alone is not sufficient to effect public disclosure; however, it may be used in conjunction with other methods. Also, a discussion with a reporter may not be sufficient to effect public disclosure, since the reporter may not publish the story, or the story may not be disseminated broadly enough to effect public disclosure.
Intentional disclosures of material nonpublic information must be made "simultaneously" to the public; that is, it must be disseminated in one of the manners described above, and not selectively. Unintentional disclosures of material nonpublic information must be made promptly after any senior official at the company learns of the unintentional disclosure and knows (or is reckless in not knowing) that the information was both material and nonpublic. "Prompt" disclosure is within 24 hours or before the beginning of the next trading day, whichever is later. If company officials immediately realize that they have unintentionally selectively disclosed material nonpublic information, they may be able to obtain the recipient's agreement not to disclose or trade on the information until the company has publicly disclosed the information. The agreement may be written or verbal, but it must be express.
En Garde Regarding Earnings Guidance
The most significant effect of Regulation FD may be its impact on earnings guidance and related information. The SEC specifically warns against communications with an analyst or a small group of analysts regarding earnings estimates, stating that such discussions involve a "high degree of risk under Regulation FD." Any kind of earnings guidance—even signaling that the company will meet previous estimates—may result in liability under Regulation FD. As SEC Chairman Levitt said, "If, for instance, corporate officers wish to inform Wall Street analysts that the company may not make its upcoming quarterly earnings estimate, this same information must be simultaneously disclosed to the public, through a press release or other comparable avenue." These cautions apply not only to direct guidance on earnings forecasts, but also to indirect guidance.
Similarly, if the company reviews analyst reports, the SEC may regard comments (or confirmation that there are no comments) as material nonpublic information. Review of analyst reports has long been dangerous under the "entanglement" and "adoption" theories of liability. Under Regulation FD, review of analyst reports can also expose a company to the disclosure and liability provisions of Regulation FD as well. The SEC may very well regard comments on an analyst's projections in a draft report as earnings guidance. Depending on the situation, the SEC may view even comments on analyst's models as material nonpublic information.
Other Rings in the Circus
Roadshows and investor conferences are an important part of investor relations. Regulation FD does not prohibit participation in investor conferences and roadshows. Companies, however, must make certain to avoid disclosing material nonpublic information, especially information that could veer into providing earnings guidance, at roadshows or conferences.
For a tip sheet on complying with Regulation FD, contact NAREIT.
Anna Chason is public affairs counsel, corporate and securities issues for NAREIT.
