What You Can Say: The State of Play

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The presentation addresses the current application of two important securities regulations impacting companies communications with shareholders, securities professionals, and the public. Regulation FD has received significant attention from the SEC in recent years, and the discussion will cover the current understanding of the rules on disclosure of material non-public information as well as best practices for protecting your company.Shannon VanVleet Patterson is an associate in the Securities and Corporate Governance practice group in the Richmond office of Troutman Sanders LLP.

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  • 1. What You Can Say: The State of Play Presented by Shannon V. Patterson Troutman Sanders LLP NIRI Richmond Chapter September 16, 2011
  • 2. Regulation FD
    • Reg FD adopted in 2000
    • Several early enforcement actions (2002-2005)
      • Adjusting analysts earnings expectations
      • Selective disclosure of significant new contract
      • Disclosure at an investor conference
      • Guidance through language, tone, emphasis and demeanor
      • Reaffirming earnings guidance
    • Fairly quiet until August 2009
  • 3. Regulation FD
    • What is Regulation FD?
      • Prohibits selective disclosure of material non-public information
      • Any intentional disclosure of material non-public information must be preceded or accompanied by a public disclosure by:
        • Form 8-K
        • Press release or
        • Webcast
      • Any non-intentional disclosures must be promptly disclosed to the public (within 24 hours)
  • 4. Regulation FD
    • Applies to disclosures BY :
      • the issuer
      • senior officials and directors
      • officers, employees and agents of the issuer who regularly communicate with securities professionals and shareholders
    • Applies to disclosures TO :
      • securities professionals
      • any shareholder where it is reasonably foreseeable that such shareholder would trade on the basis of the information disclosed
  • 5. Regulation FD
    • Does not apply when communicating:
      • to employees
      • to persons who owe a duty of trust or confidence (attorneys, investment bankers, accountants)
      • to persons who expressly agree to maintain the information in confidence (suppliers, customers)
      • in connection with certain registered securities offerings
    • Dodd-Frank Act required the SEC to remove a prior exemption for ratings agencies effective October 4, 2010
  • 6. Regulation FD
    • Disclosure is intentional if a person making the disclosure knows or is reckless in not knowing that the information is both material and non-public
    • Information is non-public unless:
      • it has been disseminated in a manner calculated to make it available to investors generally, and
      • public investors have had a reasonable period of time to react to the information
  • 7. Regulation FD
    • To be material, there must be a substantial likelihood that a fact would have been viewed by a reasonable investor as having significantly altered the total mix of information available
      • The SEC has said that companies will not be second-guessed on close materiality judgments
      • In the case of a selective disclosure attributable to a mistaken determination of materiality, liability will arise only if no reasonable person under the circumstances would have made the same mistake
  • 8. Regulation FD
    • No bright-line materiality standard, but typical material information includes:
      • earnings information
      • mergers, acquisitions, tender offers, joint ventures or changes in assets
      • new products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of major contract)
      • changes in control or in management
      • developments regarding significant lawsuits
  • 9. Regulation FD
    • No bright-line materiality standard, but typical material information includes (cont.):
      • change in auditors or notification that a company may no longer rely on an auditors audit report
      • events regarding a companys securities
        • defaults on senior securities
        • calls of securities for redemption
        • repurchase plans
        • stock splits or changes in dividends
        • changes to the rights of security holders
        • public or private sales of additional securities
      • bankruptcy or receivership
  • 10. Recent Developments
    • August 2009 : SEC issued guidance
    • September 2009 : SEC v. Black
    • March 2010 : SEC v. Presstek
    • October 2010 : SEC v. Office Depot
  • 11. Recent Guidance
    • First SEC guidance issued August 2009 (and updated June 2010)
    • http://sec.gov/divisions/corpfin/guidance/regfd-interp.htm
    • Confirmation of previous forecast
      • Selective confirmation is permitted, provided additional material information is not included
      • Timing of confirmation is important (end of period confirmation or confirmation following lapse of time or significant event could be viewed as indicating actual performance)
  • 12. Recent Guidance
    • Confirmation of previous forecast (cont.)
      • Company stating that it has not changed or that it is still comfortable with prior guidance is the same as providing a direct confirmation of the prior guidance even a reference to the prior guidance may imply confirmation of that guidance
      • If a company does not wish to confirm the prior guidance, use no comment
      • A company could make clear when referring to prior guidance that the guidance was provided as an estimate as of the date it was given, and that it is not being updated at the time of the subsequent statement
  • 13. Recent Guidance
    • Reviewing draft analyst reports
      • Companies may review or comment on draft analyst reports, provided no material, non-public information is revealed
      • Inconsequential data may not be material, even if a skilled analyst can discern material information from it
    • Unauthorized Disclosures
      • Selective disclosures of material non-public information by persons not authorized to speak to enumerated persons are not covered by Reg FD
    • Directors
      • Directors authorized to speak on behalf of company may speak privately with shareholders but caution is needed not to disclose material non-public information
  • 14. Recent Guidance
    • Use of confidentiality agreements
      • Material, non-public information may be provided to analysts and investors if they enter into confidentiality agreements
    • Disclosure to employees
      • Companies may provide material, non-public information to employees, as they are subject to duties of trust and confidence and are bound by insider trading policies
    • Intentional selective disclosure
      • Follow-up release of information does not cure a Reg FD violation
    • Immediate disclosure
      • Once the issuer has made disclosure through an EDGAR filing, the issuer may immediately publicly disclose the information
    • Press presence not enough
      • The presence of press at a non-public meeting does not render the meeting public for Reg FD purposes
  • 15. Corporate Websites
    • 2008 interpretive guidance on the use of a company website to disclose material non-public information to investors
    • The guidance focused on
      • whether website disclosure is a satisfactory method for public disclosure and
      • when information posted on a company website is considered public so that subsequent disclosure of the information will not violate Reg FD
  • 16. Corporate Websites
    • For information to be public:
      • must be disseminated by means of a recognized channel of distribution
      • such posting disseminates the information in a manner that makes it available to the securities marketplace in general and
      • investors must be afforded a reasonable waiting period to react to the information
    • Use of companys website to satisfy Reg FD, if
      • the website is a recognized channel of distribution and
      • the information is posted and accessible
  • 17. Corporate Websites
    • How to make your website a recognized channel of distribution a place an investor would go to for material information:
      • Remind investors in your press releases and periodic reports that you post important information about the company on your website
      • Post important information on your website - more than posting your Exchange Act filings
      • Present investor information in an easily identifiable manner (e.g., have an Investor Information tab on the home page)
      • Organize information so investors know when new content has been added to a section
      • Use push technologies such as RSS feeds
  • 18. Corporate Websites Best Practices
    • What is a reasonable waiting period to react to the website information?
      • No clear guidance; suggests a seasoning concept so investors have enough time to digest the information after its release before it is considered public
      • Length of waiting period should be at least as conservative as the companys current policy on public dissemination of information in press releases
      • Due to uncertainty, companies likely will continue to prefer Form 8-Ks and press releases
      • Companies should consider a phase-in period for using corporate websites to disseminate material information
  • 19. Recent Enforcement Actions
    • Selective emails on changes in earnings guidance
    • In SEC v. Black (Sept. 24, 2009), the SEC brought an action against the former CFO of American Commercial Lines, Inc.
      • The CFO sent an email on a weekend to certain analysts (additional color) stating that the companys earnings were actually closer to half of what the company previously had disclosed in its guidance
      • The CFO failed to have the companys outside counsel review his email correspondence prior to sending it to analysts after he was advised to do so by the CEO
      • The SEC brought the action against the CFO individually and did not bring an enforcement action against the company
  • 20. Recent Enforcement Actions
    • SEC decided not to bring an enforcement action against the company in Black :
      • Company cultivated an environment of compliance
      • CFO acted independently and outside of the companys control systems, which had been implemented to prevent such violations
      • Company promptly made public disclosure of the information on a Form 8-K
      • Company promptly reported the CFOs conduct to the SEC and cooperated with the SEC
      • Company took remedial measures, including the adoption of additional controls, to prevent recurrences
  • 21. Recent Enforcement Actions
    • One-on-one telephone call with investment adviser
    • In SEC v. Presstek (Mar. 9, 2010), the SEC brought an action against Presstek, Inc. and its former CEO
    • Investment adviser called 2 days before end of 3Q to ask about results and CEO signaled results were disappointing
    • CEO tried to be vague (summer not as vibrant, overall performance was a mixed picture) but investment adviser got the message and immediately sold its funds entire investment in the company
    • Stock price dropped significantly but company did not disclose negative information to anyone else until it issued a press release with revised forecast the next day
  • 22. Recent Enforcement Actions
    • Company paid $400,000 civil penalty
    • SEC took note of remedial actions:
      • The company revised its corporate communications policy and corporate governance principles
      • The company replaced its management team
      • The company appointed new independent board members
  • 23. Recent Enforcement Actions
    • Implied earnings disclosures
    • In SEC v. Office Depot (Oct. 21, 2010), the SEC settled charges with Office Depot and its CEO and former CFO related to one-on-one telephone calls to analysts that Office Depot would not meet analysts quarterly earnings estimates
    • No direct statements that the company would not meet expectations
    • CFO prepared talking points for investor relations officials to signal the message by referring to recent public statements of comparable companies about the impact of the slowing economy on their earnings and by reminding the analysts of Office Depot's prior cautionary public statements
    • Analysts promptly lowered their estimates for the period in response to the calls
  • 24. Recent Enforcement Actions
    • Some analysts expressed concern that this information was not being publicly disclosed in a company press release
    • Stock price began dropping significantly on increased volume
    • The company filed a Form 8-K with revised information 6 days after commencing the calls
    • The company paid $1 million and each executive paid $50,000 in civil penalties
  • 25. Recent Enforcement Actions
      • Mistakes made by Office Depot, its CEO and its former CFO:
        • Communicating privately with analysts concerning earnings
          • high degree of risk under Reg FD when an officer engages in a private discussion with an analyst seeking guidance about earnings estimates
          • true whether the information about earnings is communicated expressly or through indirect guidance, the meaning of which is apparent though implied
        • Statements were made at the end of a quarter
          • may convey information about how the issuer actually performed
          • inference a reasonable investor may draw from such a confirmation may d...

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