Investor Relations and Selective Disclosure Under SEC Regulation FD

by Boris Feldman*



FD is designed to create a level playing field for all investors, large and small. The SEC does not want companies to disclose significant information to the market through the conduit of securities analysts. Developments or expectations that arguably are material must be communicated to all investors transparently and simultaneously. In particular, if your company’s practice is to provide analysts with guidance as to expected future results, under FD you will need to provide that guidance more directly to all investors.


No. A company remains free (as before FD) to decline to predict future results.


FD doesn’t define materiality. Instead, it refers to a common guideline under the federal securities laws: "information is material if ‘there is a substantial likelihood that a reasonable shareholder would consider it important’ in making an investment decision, or if it would have ‘significantly altered the "total mix" of information made available.’" Presumably, guidance as to future results normally would be considered material. Certainly a disclosure that a company expects to miss Street targets for a quarter by an appreciable amount would be material. If you find yourself asking whether a particular piece of information is material, you should probably check with your securities counsel for her view. Remember, materiality is often assessed with the benefit of knowing in hindsight how the market reacted.


Yes. The SEC narrowed FD from the proposed version to exclude communications with the press, with ratings agencies, and with customers. You should make sure that appropriate non-disclosure agreements are in place before disclosing potentially material information to persons who might trade on it. Be careful about using the press exception: telling a reporter something material might not get you in trouble with the SEC, but could cause problems with analysts who resent learning about the development while reading the paper over breakfast.


The simplest model is to put your guidance in a press release (presumably, in an earnings release after the end of a quarter). You can then discuss that guidance on the conference call or in one-on-one discussions with analysts, so long as you don’t get into material information that goes beyond the published guidance. Companies should aim to put more of the information in the release and provide less detail in the follow-up.

Alternatively, you can provide the guidance on a conference call, provided that the call has been announced in advance and is readily accessible. For example, the press release preceding the call should include details on how to listen in (either over a conference-call line or by Webcast). Reg. FD deems disclosures made on an open, announced call to be equivalent to a press release.


Reg. FD also provides that companies can use a third disclosure channel: disclosing the information on a Form 8-K filed with the SEC. In general, companies should decline this invitation. 8-K filings implicate potential liabilities that do not apply to press releases. (You may be able to avoid those potential liabilities by "furnishing" the information on an 8-K, rather than "filing" it on an 8-K). Moreover, analysts may view disclosure via 8-K, rather than through a release on the wire, as an attempt to bury information.


Not yet. The SEC is not prepared to say that a Web site posting is as effective a means of dissemination as a release on the wire or an SEC filing. As investors become more used to checking a company’s Web site for investor information, the SEC’s views could evolve. In my opinion, a company may be able to discharge its FD obligations by promptly posting a transcript of a conference call (including Q&A) on its Web site, so long as the company has disclosed that it will do so in the press release that preceded the call. (Note that, if the company does this, it should provide a direct HTML link to the cautionary disclosures that had merely been referred to in the oral presentation.)


FD does not amend the Safe Harbor in any way, but FD does enhance the importance of complying with the Safe Harbor requirements. Given that guidance will be more transparent than in the past, companies may be more exposed to shareholder lawsuits if they miss the quarter. A company that properly invokes the Safe Harbor when issuing the guidance will have substantial protection against such suits.


In recent years, companies increasingly have begun to open up their calls to the public (through open conference calls, Webcasting, and posting of transcripts). This trend will accelerate in light of FD, because such open access will insulate information provided on the calls from claims of selective disclosure. You do not have to let investors participate in the calls; listen-only mode is fine.


Yes, and no. Reviewing a draft report to correct factual errors about your company is probably fine under FD. Commenting on the analyst’s financial model and projections poses a risk of revealing information that goes beyond what you’ve disclosed to the market and that might be material. The safer course is to decline to comment at all on the analyst’s prospective models.


Yes. At its heart, FD prohibits a company from adjusting expectations, by a material amount, via conversations with analysts. If you want to reset Street expectations, you will need to do so through a press release or open conference call.

FD does not explicitly address the flip-side of the coin: may you provide comfort to analysts that the company is on track to reach Street expectations? Analytically, telling an analyst (or investor) that "we’re on track" – especially late in the quarter – is arguably as material as saying "we’ll miss." The logical corollary of FD is that a company should not provide interim progress reports to analysts during a quarter, unless the company makes those updates public. In the commentary accompanying FD, the SEC appears to adopt that viewpoint: "If the issuer official communicates selectively to the analyst nonpublic information that the company's anticipated earnings will be higher than, lower than, or even the same as what analysts have been forecasting, the issuer likely will have violated Regulation FD."


Most companies already avoid disclosing anything material at analyst or investor conferences (absent a prior press release containing the information). Circumspection will be even more important under Reg FD. In particular, at Q&A or breakout sessions, you should be extra careful not to provide updates as to how the business is performing that quarter, unless you’ve disseminated that update publicly and broadly.


If you comply with the letter and spirit of FD, then the quiet period may become an anachronism. Quiet periods arose because updates on the quarter to analysts posed a greater risk of selective disclosure later in the quarter, when management had a better sense of where the final numbers would end up. In my view, FD discourages interim updates as to quarterly progress at any time during the quarter (unless published).


If you make a disclosure that you don’t think is material, but the market reaction suggests otherwise, you are required to issue a release containing the disclosure within 24 hours.


The SEC explicitly stated that FD does not create a private right of action: that is, class action plaintiffs’ lawyers can’t sue you for violating FD. The SEC can commence an enforcement proceeding against you (either administratively or in federal court) for engaging in selective disclosure. The selective disclosure must have been reckless or intentional to justify relief. The SEC will be looking for egregious examples to bring as test cases.


October 23, 2000.


The text is available on-line.



*Copyright 2000. Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, in Palo Alto. This article reflects his views, not his firm’s. For a related article by him, see Selective Disclosure, Analyst Guidance, and the Duty to Update:
Building a Safer Safe Harbor.
Revised 8/21/00.