On September 24, the SEC announced in Litigation Release No. 21222 that it had settled enforcement proceedings against a public company CFO charged with selectively disclosing earnings guidance to analysts in violation of Regulation FD, or “Fair Disclosure.” This action is noteworthy as the first Regulation FD enforcement action in which the SEC chose not to institute an action against the company whose employee was charged with the violation. The action indicates than an employer may escape Regulation FD liability for conduct by its executives if the company actively administers its compliance program and takes prompt corrective action if its disclosure controls are violated. The SEC’s release can be found at http://www.sec.gov/litigation/litreleases/2009/lr21222.htm. The enforcement action follows on the heels of the publication of SEC staff guidance, discussed below, on compliance with Regulation FD.
Regulation FD prohibits the selective disclosure of material nonpublic information to investment professionals and shareholders. To promote its purposes, Regulation FD requires (1) simultaneous communication to the public of “intentional” disclosures of material nonpublic information made to a covered recipient and (2) “prompt” communication to the public of “non-intentional” disclosures of such information after a senior official discovers the disclosure and realizes (or should realize) that the information was material and nonpublic. The methods of public disclosure must be “reasonably designed to provide broad, non-exclusionary distribution” of the information to the public. The methods may include disclosure in a Form 8-K report or other SEC filing, or through another method or combination of methods, such as a widely disseminated press release coupled with a conference call that is adequately publicized in advance and open to the public.
Since the adoption of Regulation FD in 2000, the SEC has brought a handful of enforcement actions under the regulation. In an additional case, the SEC issued a report of an investigation of Motorola, Inc., but did not bring any charges against the company because the disclosure had been approved by the company’s counsel. We discussed some of the enforcement actions and the Motorola report in SEC Updates we issued on December 3, 2002, July 28, 2004 and April 26, 2005.
Regulation FD Violation
The executive charged in this latest proceeding served as the CFO of American Commercial Lines, Inc. (ACL), a marine transportation and manufacturing company listed on the NASDAQ stock market.
The SEC’s complaint in this case, which can be found at http://www.sec.gov/litigation/complaints/2009/comp21222.pdf, presents the CFO’s violation against the backdrop of a series of earnings forecasts issued by ACL and meetings by the CEO and CFO with analysts who covered the company.
In an investor conference call held in February 2007, ACL forecast that its full-year earnings per share for 2007 would be in the range of $1.75 to $1.95. By May 2007, however, the CFO and others within ACL’s management realized that the company’s earnings for the year likely would be significantly below its publicly announced guidance. In assessing the company’s performance through May 2007, management also anticipated that ACL would fall far short of analysts’ expectations that the company would report earnings per share of $0.34 for the second quarter. As a result, at the direction of its CEO and CFO, ACL decided to issue a press release providing both revised annual earnings guidance for 2007 and a general forecast of results for the second quarter.
On June 11, 2007, ACL issued a press release revising its annual earnings guidance for 2007 to project annual earnings per share in the range of $1.45 to $1.65. In providing general earnings guidance for the second quarter, the press release stated that the company expected the “2007 second quarter results to look similar to the first quarter.” (emphasis added). ACL had reported earnings per share of $0.20 for the 2007 first quarter.
After ACL issued the press release, the company’s CEO and CFO traveled together for several days on a previously scheduled trip to meet with analysts who covered the company. In the meetings, the two executives responded to questions about the revised earnings guidance. Upon the conclusion of the trip, the CFO proposed sending an e-mail to all of the analysts summarizing the information discussed in their meetings, because the executives had not met with all of the analysts as a single group. ACL’s CEO concurred with the proposal, and directed the CFO to provide a draft of the e-mail to outside counsel for review before releasing it.
Before the CFO completed the e-mail, he received an updated internal analysis indicating that ACL’s second quarter earnings per share could be as low as $0.13, which would be significantly below ACL’s projections for the quarter announced in the June 11 press release. Instead of transmitting the planned e-mail, the CFO sent an e-mail, entitled “ACL Guidance Revision Notes,” from his home over a weekend solely to the eight sell-side analysts who covered the company. The CFO’s e-mail stated that he wanted to provide “some additional color” regarding the earnings guidance announced in the June 11 press release, and explained that the company expected that its “EPS for the second quarter will likely be in the neighborhood of about a dime below that of the first quarter.” (emphasis added). The effect of this communication was to revise downward by 50% (from $0.20 to $0.10) the prior EPS guidance for the 2007 second quarter. The CFO did not show the e-mail to anyone else at ACL, or to the company’s outside counsel, before sending it to the analysts.
The analysts receiving the e-mail promptly issued reports containing the revised guidance. The spreading news of the amended quarterly forecast triggered a significant drop in ACL’s stock price. On Monday, June 18, the first trading day after the CFO’s e-mail, ACL’s stock price dropped 9.7% on unusually heavy trading volume. Upon learning of the e-mail on Monday morning, the company prepared and filed later that day a Form 8-K disclosing the contents of the CFO’s communication. The next day, ACL reported the selective disclosure to the SEC.
SEC Enforcement Action
The SEC staff’s investigation concluded that the CFO’s disclosure was intentional under Regulation FD, and that the CFO had violated Regulation FD by disclosing the revised quarterly earnings guidance to a limited number of analysts without simultaneously disclosing the information to the public. In its complaint, the SEC highlighted that the CFO had served as one of ACL’s investor relations contacts, had developed ACL’s investor relations policy, which included a section addressing the requirements of Regulation FD, and had acted in his capacity as the company’s designated investor relations contact in sending the offending e-mail. The CFO settled the SEC charges by consenting to a $25,000 civil penalty and a cease and desist order enjoining him from committing future violations of Regulation FD and Section 13(a) of the Exchange Act. By the time of the settlement, the CFO no longer was employed by ACL.
The SEC staff did not recommend any enforcement action against ACL. This marks the first Regulation FD proceeding in which the SEC did not charge the employer of the executive who was alleged to have committed a violation. In its litigation release, the SEC said that it considered the following factors in deciding not to name ACL as a defendant in the enforcement action:
- Internal Compliance: Before the disclosure by its CFO, ACL had “cultivated an environment of compliance” by training its employees regarding the requirements of Regulation FD and by adopting policies that implemented controls to prevent violations. The CFO himself on two occasions had received training from ACL’s counsel which included material addressing Regulation FD.
- Independent Action by Executive: The CFO alone was responsible for the selective disclosure, and in making the disclosure acted outside the control systems established by ACL.
- Prompt Public Disclosure: ACL moved quickly to disclose publicly the contents of the selective communication by filing a Form 8-K on the same day on which it discovered the CFO’s e-mail.
- Self-Reporting and Full Cooperation: ACL self-reported the selective disclosure to the SEC staff the day after discovering it, and subsequently provided “extraordinary cooperation” with the staff's investigation.
- Remedial Measures: ACL took remedial measures to address the improper conduct, including the adoption of additional controls to prevent such conduct in the future.
The ACL action underscores the importance of actively administering Regulation FD compliance programs, not only to prevent improper disclosures, but also to provide a basis for the company to avoid charges for violations by its executives acting outside the corporate control systems. Companies should revisit the frequency with which they train their directors and employees in the requirements of Regulation FD, and consider repeating that training at least annually. Executives, even experienced professionals, who are hired between regular training sessions should receive training as part of their orientation. An investor relations policy that defines clearly the types of information considered material by the company should reduce guesswork by executives in communicating with market professionals and shareholders. If a violation does occur, prompt corrective action by the company is imperative. A company should consider in advance the process it will follow in responding to a possible violation. ACL was able to act quickly upon discovery of its CFO’s e-mail and to file within hours thereafter a Form 8-K reporting the contents of the selective disclosure. Although such a corrective disclosure will not constitute a simultaneous public communication of the information that will “cure” an improper intentional disclosure, it may help to demonstrate to the SEC the company’s commitment to ensuring a level playing field in disclosing information to shareholders and other market participants.
Hogan & Hartson acted as counsel to ACL in this matter.
Recent SEC Staff Guidance on Compliance With Regulation FD
In reviewing their Regulation FD compliance policies, companies should consider the “Compliance and Disclosure Interpretations” (C&DIs) under Regulation FD published by the staff in August 2009 and located at www.sec.gov/divisions/corpfin/guidance/regfd-interp.htm. Although the new guidance largely restates prior staff statements, it provides a convenient checklist of some of the major areas of compliance concern. Of these, the staff highlighted the following:
- Confirming Earnings Forecasts and Guidance: A company may selectively confirm a publicly disclosed earnings estimate if in doing so the company does not directly or indirectly convey material nonpublic information. In evaluating the materiality of a proposed confirmation, the company must consider whether, by confirming the earnings forecast, it would be conveying material information “above and beyond the original forecast.” One factor that might affect the materiality determination is the amount of time that has elapsed between the original public forecast (or the last public confirmation of the forecast) and the proposed private confirmation. In the staff’s view, the longer this period, the greater the chance that a confirmation might convey information about the company’s actual, rather than expected, performance.
Statements indicating that the issuer has “not changed” or is “still comfortable with” its prior forecast constitute a confirmation of the prior forecast and may trigger a Regulation FD disclosure obligation. A simple “no comment,” however, would not constitute a confirmation. Issuers wishing to refer to a prior forecast, without confirming it, should make it clear that the prior forecast was furnished as of the date it was first given and that the prior forecast is not being updated at the time of the subsequent statement. (C&DI No. 101.01)
- No Duty to Update: Regulation FD itself does not create a “duty to update” information disclosed to the market. (C&DI No. 101.02)
- Commenting on Analysts’ Models: So long as the company does not directly or indirectly convey material nonpublic information to an analyst, it may privately review and comment on an analyst’s model, and in so doing correct publicly disclosed historical facts and share “seemingly inconsequential data” with the analyst, without triggering a disclosure obligation under Regulation FD. (C&DI No. 101.03)
- Obtaining Confidentiality Agreements: A company may selectively disclose material nonpublic information to an analyst (as well as to any other covered recipient) who expressly agrees to maintain the information in confidence until the information is publicly disclosed. (C&DI 101.04) The company is not required to obtain the recipient’s agreement not to trade on the information. (C&DI 101.05) On the other hand, the confidentiality requirement is not satisfied if, instead of expressly agreeing to keep the information confidential, the recipient agrees only not to use the information in violation of the federal securities laws. (C&DI 101.06)
- Disclosing Information in Connection With a Registered Public Offering: Road show materials used in connection with a registered public securities offering are not required to be disclosed under Regulation FD. (C&DI 101.07) A disclosure in a road show conducted in connection with a private (unregistered) offering of shares by a company is subject to Regulation FD, even if the company plans to file later a registration statement covering public resale of the shares by purchasers in the private offering. (C&DI 101.08)
- Disclosing Information to Employees: Regulation FD applies only to disclosures made to “any person outside the issuer.” As a result, a communication of material nonpublic information to a company’s officers and other employees is not subject to the regulation, even if the employees are shareholders. The staff warns, however, that employees may face insider trading liability if they trade or tip. (C&DI 101.09)
- Authorizing Officers to Speak on Behalf of the Company: If an issuer has a policy limiting the senior officers authorized to speak on the company’s behalf to investment professionals and shareholders, disclosures by senior officers not authorized to speak under the policy will not be subject to Regulation FD, although their communications may trigger liability under insider trading laws. (C&DI 101.10)
- Providing Advance Notice of a Conference Call: An issuer wishing to make a public disclosure of material nonpublic information under Regulation FD by means of a conference call must provide public advance notice of the call. Adequate advance notice under Regulation FD must include the date, time, subject matter and call-in information for the conference call “a reasonable period of time” before the conference call. Although notice of several days would be reasonable for a quarterly earnings call held by the company on a regular basis, the notice period may be shorter when unexpected events occur and the information is “critical or time sensitive.” (C&DI 102.01)
- Disclosing Information in an Exchange Act Filing: A company may satisfy Regulation FD’s public disclosure requirement for particular information by disclosing the information in a document publicly filed with or furnished to the SEC via EDGAR, such as a report on Form 8-K or 10-Q or a proxy statement, by the deadlines prescribed in the regulation. Companies must take care to bring the disclosure to the attention of readers of the document, must not “bury” the information, and must not make the disclosure in a piecemeal fashion throughout the filing. (C&DI 102.02) Once the company has confirmed that the filing or the furnished report containing the information has been accepted for filing on EDGAR and is publicly available on EDGAR, it may disclose the same information in a nonpublic meeting. There is no requirement to wait until some additional period of time has elapsed. (C&DI 102.03)
- Identifying an “Intentional” Disclosure: A company’s designated spokesperson who provides information in a nonpublic meeting with analysts makes an “intentional” disclosure requiring simultaneous public disclosure of the information under Regulation FD if the spokesperson knows (or is reckless in not knowing) that the information is both material and nonpublic. The fact that the spokesperson did not plan to disclose the information before entering the meeting would not render the disclosure unintentional. (C&DI 102.04)
- Identifying a “Public” Meeting: Disclosing material nonpublic information at a meeting, such as a shareholder meeting, that is open to the public but not otherwise webcast or broadcast by any electronic means will not satisfy Regulation FD’s requirement that such information be disclosed by a method “reasonably designed to provide broad, non-exclusionary distribution” of the information to the public. (C&DI 102.05) The mere presence of the press at an otherwise nonpublic meeting will not render the meeting public for purposes of Regulation FD. (C&DI 102.06)
The staff concluded its guidance by referring to the SEC’s 2008 interpretive release on Regulation FD (No. 34-58288) for a discussion of the circumstances in which companies may satisfy their public disclosure obligations under Regulation FD by posting information on their corporate web sites. We discussed the guidance provided in this release in the SEC Update we issued on August 29, 2008.