On September 6, 2013, the U.S. Securities and Exchange Commission (SEC) charged the former head of investor relations for First Solar, Inc. (First Solar) with violating SEC Regulation FD -- Fair Disclosure -- by selectively disclosing important company information to analysts and institutional investors prior to public disclosure of the information. In a settled administrative enforcement proceeding, Lawrence D. Polizzotto, First Solar’s former vice president of investor relations, without admitting or denying findings made by the SEC, agreed to a cease-and-desist order, and to pay a civil money penalty of $50,000 (In re Lawrence D. Polizzotto, SEC Admin. Proc. File No. 3-15458). The SEC found that a day before public disclosure of information concerning the failure of the company to obtain a significant loan guarantee from the U.S. Department of Energy that the company and industry analysts had anticipated, Polizzotto selectively disclosed, and caused a subordinate to selectively disclose, the information in one-on-one telephone conversations and messages with analysts and institutional investors, knowing that an intended news release concerning the development had not been finalized, and that the company had made no disclosure.
SEC Regulation FD, adopted under the federal Securities Exchange Act of 1934, requires that whenever an issuer of securities, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to certain categories of persons outside the issuer, the issuer must either simultaneously or promptly, depending upon the intentional or inadvertent nature of the selective disclosure, publicly disclose the information. In this action brought against Polizzotto individually, the SEC alleged that he caused First Solar to violate Regulation FD.
Although not part of the Order against Polizzotto individually, in a news release announcing the action, the SEC explained its determination not to bring an enforcement action against First Solar because of the company’s cooperation with the investigation, among several other factors. Upon learning of Polizzotto’s selective disclosure, the company had in fact acted quickly with a news release prior to the market opening the next morning. The company followed up by self-reporting the violation of Regulation FD to the SEC.
Targeting Polizzotto individually, the SEC underscored the fundamental objective of Regulation FD that all investors, regardless of their size or relationship with the company, are entitled to the same information at the same time. Polizzotto, said the SEC, "offered previously undisclosed information to select analysts and institutional investors and left the rest of First Solar’s investors in the dark." The Regulation FD violation involved here occurred in circumstances in which Polizzotto and others in the company responsible for public disclosure were discussing how and when the company should disclose the loss of the key loan guarantee, and with an eye to avoiding the creation of "huge concern in the investment community." It also occurred in spite of what the SEC characterized as an environment of Regulation FD compliance that had been cultivated in the company.
Regulation FD -- Fair Disclosure
SEC Regulation FD was adopted in October 2000 to address an increasing concern about the selective disclosure of important nonpublic information, such as advance warnings of earnings results, to securities analysts or selected institutional investors, or both, before making full disclosure of the same information to the general public. Where this had happened, those who were privy to the information beforehand were able to make a profit or avoid a loss at the expense of other market participants who were kept in the dark. The issue, quite simply, was a level playing field in securities markets. Although akin to "tipping" material nonpublic information in the context of insider trading prohibitions, which can be severely punished under antifraud provisions of the federal securities laws, selective disclosure targeted by Regulation FD was aimed primarily at the threat to the integrity of markets. A large part of that was the potential for corporate management to treat material information as a commodity to be used to gain or maintain favor with particular analysts or investors. In the absence of a prohibition, said the SEC, analysts might have felt pressured to report favorably about a company, or otherwise slant their analysis in order to have continued access to selectively disclosed information. These and other concerns outweighed concerns that regulating the process would have a chilling effect on the disclosure of information by companies.
The requirement of Regulation FD is straightforward, although its application is somewhat complicated by the scope of communications addressed. Regulation FD does not apply to all communications outside the issuer. Rather, it covers only communications to securities market professionals, and to any holder of the issuer’s securities under circumstances in which it is reasonably foreseeable that the security holder will trade on the basis of the information. The covered market professionals are:
- broker-dealers and their associated persons;
- investment advisers, including certain institutional investment managers and their associated persons; and
- investment companies, hedge funds, and their affiliated persons. The SEC has made clear that this includes sell-side analysts, many buy-side analysts, large institutional investment managers, and other market professionals who may be likely to trade on the basis of selectively disclosed information.
The scope of Regulation FD is also limited to the extent that only certain types of issuer personnel are covered. For purposes of the Regulation, a person acting on behalf of an issuer means senior officials and those persons, like Lawrence Polizzotto in the current action, who regularly communicate with securities market professionals or investors. The regulation also imposes different requirements depending on whether a selective disclosure is intentional or unintentional, and in either case prescribes the manner in which public disclosure must be made.
When selective disclosure has been intentionally made -- that is, the issuer either knows or is reckless in not knowing prior to making the disclosure that the information is material and nonpublic -- issuer must make public disclosure of that information simultaneously. On the other hand, for inadvertent selective disclosures, public disclosure need only be made promptly. "Public disclosure" means a news release through a widely disseminated news or wire service, or by any other method reasonably designed to provide broad public access.
Setting the Stage for Reactive Selective Disclosures
Between June and September 2011 analysts wrote numerous reports speculating as to whether First Solar would be able to meet certain deadlines necessary to satisfy conditional commitments for certain Department of Energy loan guarantees. The loan guarantees were important to the company because they would allow it to receive guaranteed low-cost financing from the federal government on three separate projects. Most analysts believed that the company would meet two of three deadlines, but were uncertain regarding the third, and largest, project. However, on September 13, 2011, at an investor conference, First Solar’s CEO publicly expressed confidence that the company would receive all three guarantees.
On September 15, 2011, Polizzotto and other executives of First Solar learned that the Department of Energy had decided not to provide a loan guarantee with respect to the largest project. According the SEC, Polizzotto and one of First Solar’s in-house attorneys discussed how the company should publicly disclose the loss of the guarantee. Late on the evening of September 15, in response to questions regarding the timing and content of a news release, the First Solar in-house attorney advised Polizzotto of Regulation FD restrictions on answering any questions asked by analysts or investors until such time as public disclosure of the information was made. Polizzotto responded that how the Department of Energy announced its decision could create a "huge concern to the investment community." A subsequent development apparently heightened Polizzotto’s concern.
With no public disclosure by First Solar yet made, on September 20, 2011, an announced congressional committee inquiry into the status of Department of Energy guarantees not then closed caused concern within the solar industry. First Solar’s stock price fell 8 percent following that announcement, and analysts began issuing research reports concerning the congressional inquiry. According to the SEC, Polizzotto began receiving numerous calls from analysts and investors.
The Regulation FD Violations
On September 21, 2011, with no news release having been issued regarding the loss of the guarantee, and knowing that it would not be issued by the company until the next morning, Polizzotto drafted "talking points" which he and a subordinate investor relations employee delivered to more than 30 analysts and investors with whom they spoke that day. The talking points, characterized by the SEC as a "high probability/low probability" message, shed a negative light on the project and, according to the SEC "effectively signaled that, contrary to the message that had been delivered by First Solar’s CEO at a conference the prior week, the company no longer believed it would receive the Topaz guarantee." The talking points also contained language characterized by the SEC as significantly reducing the negative effect of the company not receiving the loan guarantee. The SEC further found that Polizzotto directly told at least one analyst and one institutional investor that, "if they wanted to be conservative, they should assume that First Solar would not receive" the loan guarantee. In the wake of all of this, according to the SEC:
In some instances, immediately after speaking with Polizzotto, analysts e-mailed the equity sales teams within their organizations with the message that they expected First Solar to receive two out of three loan guarantees.
On the evening of September 21, First Solar management learned from a news article that Polizzotto may have selectively disclosed the information to certain analysts and investors, Consistent with Regulation FD, the company issued a news release the next morning before the market opening. The company’s stock opened down 6 percent from the previous day’s close.
As Vice President for Investor Relations, and the individual central to the public disclosure process and directly in contact with the analyst community and institutional investors, Polizzotto was aware of Regulation FD restrictions generally, and as discussed above, specifically in the circumstances of this matter. The action brought against him individually by the SEC conveys a strong message that those persons in responsible positions regarding disclosure of company information must understand the scope and objective of Regulation FD in carrying out their functions, which regularly involve direct communications with the analyst and institutional investor communities. Although perhaps explained to some degree as reactive behavior of one individual in unique circumstances, in its news release announcing the Polizzotto action, the SEC noted that before Polizzotto’s selective disclosure, First Solar had cultivated an environment of compliance through the use of a disclosure committee that focused on compliance with Regulation FD. Something nevertheless went wrong.
The broader message of the Polizzotto enforcement action is aimed at companies to revisit Regulation FD compliance policies and procedures and, as appropriate, re-educate responsible employees. Indeed, announcing the Polizzotto enforcement action, the SEC pointed out that concurrent with the investigation, First Solar undertook remedial measures to address the improper conduct, one example being that the company conducted additional Regulation FD training for employees responsible for public disclosure. Also, not only did the company promptly make public disclosure of the selectively disclosed information, it self-reported the violation. There has not been a large number of SEC enforcement actions regarding Regulation FD, but each of them in which significant civil money penalties and cease-and-desist orders have resulted, emphasize remedial and proactive measures implemented by companies to prevent violations of the sort illustrated most recently by the Polizzotto action. That message has, once again, been made clear.