Regulation FD: Coping in the Trenches: CFOs Tell How the SEC's Stricter Disclosure Rules Have Changed the Way They Release Financial Information about Their Companies
No one knew how stringently the SEC would apply regulation FD, which requires public companies to share earnings data and related information equally with all interested parties. But last November the commission instituted its first enforcement actions against a number of companies and, in the process, gave many others a wake-up call. Here's how several CPAs, drawing on their own experiences and those of companies caught violating regulation FD, say you can help keep your clients or your employer--if you work for an SEC registrant--in compliance. (Also, see "After Regulation FD: Talking to Your Constituents," JofA, Feb.01, page 28.) THE SEC FOLLOWS UP This article examines the cases of four companies (referred to below as A, B, C and D) the SEC cited for inequitable disclosure practices. While three were the SEC's first regulation FD enforcement actions, the agency's regional offices have been actively monitoring potential violations. Boris Feldman, a partner and securities litigator in law firm Wilson Sonsini Goodrich & Rosati's Palo Alto, California, office, advises publicly traded companies on regulation FD. He reports the SEC contacted a number of his clients with disclosure-related questions since the regulation became effective. "Several of our clients received calls from, for example, the SEC's San Francisco regional office saying, 'We noticed such and such a comment triggering a stock reaction,'" Feldman says. "'Would you mind bringing the CFO in? We want to talk to her about what happened.'" By making such inquiries, the commission sought to determine whether a sudden movement in the price of a company's stock was precipitated by the actions of a small group of investors to whom the company--intentionally or not--had selectively disclosed nonpublic material information about itself. In instances where this happened, a privileged few had acted on their exclusive knowledge and bought the company's stock before its price rose or sold the stock short before its price fell. In either case the "insiders" profited when the information became public and the stock's price moved in the direction they had anticipated, producing the profits they had expected. When a company releases such information to everyone simultaneously, however, the playing field is level and no one has an advantage. Since that was the SEC's goal in issuing regulation FD, companies actually or seemingly not complying may attract the attention of the commission's enforcement division. So how do you avoid regulation FD violations? Feldman and the CPAs interviewed for this article recommend companies create a compliance program that * Establishes clear disclosure guidelines. * Follows a stringent communications review procedure. * Uses multiple channels to disseminate information. * Ensures the company responds quickly and effectively after nonpublic disclosures. The next four sections of the article explain how to implement these compliance objectives. DECIDE WHAT TO SAY Feldman urges his clients to adopt bright-line rules--precise limits--that provide clear guidance to staff members on what they safely can disclose. Such procedures help prevent errors in judgment that can lead to inadvertent violations during, for instance, an unscripted conference call or presentation. "You don't want to have to weigh different factors when you're on a call with an analyst or a reporter," he says. "Instead, you need red-light and green-light rules," meaning unambiguous instructions that indicate whether releasing information in a given situation is forbidden or permitted under regulation FD. "For example, after you give your outlook in an earnings release or in a conference call, you could make it a standard practice that you don't update it during the quarter unless you find your estimate was so far off that you have to put out another release preannouncing a quarterly miss. …