As we head into the busy holiday season, it’s a good time for your annual reminder about Reg FD (i.e., the SEC’s Fair Disclosure Act). Take it from your friends at Audacia Strategies: You don’t want an offhand comment to your niece’s boyfriend over pumpkin pie to lead to a six-month cleanup for the legal team at your firm. Read on to understand smart preventive measures you can take.
Reg FD: Potential Liabilities
If you’re reading this article and you work for or with a publicly traded company, you’re probably already aware of Reg FD, but you may not be aware of all the potential liabilities that could result from violations of the rule. Here are some basic points to keep in mind:
- Regulation FD is a fair disclosure rule, not an anti-fraud rule. This means that only conduct that is intentional or reckless can be considered a violation.
- Both companies and individual personnel can be held responsible and be subject to SEC enforcement actions.
- Such enforcement actions can include injunctions, fines, and obligations to disclose the violation.
For more information about Reg FD and the SEC’s enforcement of the law, check out this list of frequently asked questions. But always remember that nothing you read online, including this article, is a substitute for qualified legal counsel.
To avoid liabilities resulting from an executive or other individual acting on behalf of your firm, there are some preventive measures you can take.
1. Understand the Federal Rules and Regulations.
Simply speaking, Reg FD prohibits companies from selectively disclosing material information to analysts, institutional investors, and others without at the same time making the information widely available to the public. This rule reflects the idea that all investors should have fair and equal access to information that could influence their investment choices.
For example, when the story broke in September about the cybersecurity breach at Equifax, there was a question about whether senior executives had unfairly traded away shares in the company because of insider information. The executives have since been exonerated. A special committee found that the executives pre-cleared their trades making them without prior knowledge of the security breach announcement.
It is important for executives and all employees to be aware of Reg FD as well how it applies to your industry, your company, and their specific positions within your organization. Even if employees are required to go through HR training around SEC rules and regulations, they may not truly understand their responsibilities under the law.
Given the influx of holiday mixers this time of year bringing together a variety of stakeholders (i.e., CEOs and other executives, brokers, analysts, and investors), the risk of a violation increases. Does it make sense to ask Legal to present some do’s and don’t’s during a company-wide meeting coming up? Think of the headaches it could save going into 2018.
2. Review Current Disclosure Policies.
Now is also a good time to review your firm’s current disclosure policy and write a policy if you don’t yet have one. What is your process for disclosing information to analysts, institutional investors, other shareholders, and the public?
Evaluate that policy in light of Reg FD. Are there any gaps? Do you see any potential issues? Does this assessment suggest any obvious changes?
Once you have identified any potential issues, prepare and start following a comprehensive disclosure policy. Make sure to emphasize the severity and potential consequences of Regulation FD violations. This policy should be made internally available to senior officials, investor relations personnel, and anyone else responsible for speaking with analysts or investors.
3. Make the Written Policy Publicly Available on Your Website.
Reg FD requires that companies make material disclosures available to the public. When the SEC first enacted the law, they had a more narrow view of what qualified as “public disclosure.” However, in 2008, the SEC stated that putting information on a company website could satisfy Reg FD under certain circumstances. We encourage you or your legal team to check into whether your firm falls under these circumstances.
But regardless of whether your firm uses a website to make public material disclosures, your company’s own disclosure policies ought to appear on your website. Transparency increases credibility with investors and other stakeholders. Making your policies available demonstrates an institutional commitment to keeping all interactions on the “up-and-up.”
4. Better Safe Than Sorry.
As for what counts as “material nonpublic information,” there is some disagreement among industry experts. But our advice when it comes to the SEC is always err on the side of caution. If you are tempted to talk about potentially material company gossip during the corporate dinner party, maybe find some juicy celebrity gossip to discuss instead.
If you want to really play it safe, take a “chaperone” with you whenever speaking to an analyst. This should be someone familiar with making determinations about materiality, who can listen for any unintentional disclosures that might trigger the need to prepare a Regulation FD disclosure and serve as a witness (for example, your Investor Relations Officer). Private meetings with analysts or institutional investors are particularly risky.
5. When in Doubt, Contact Finance and Legal.
If all else fails and you or someone on your team ends up disclosing something questionable, the next best action you can take is to talk to someone in finance and legal. The law itself is complex, so it’s wise to go over all possible violations with a lawyer specializing in SEC regulations.
Still, in many cases, the fix is simply to make the information in question publicly available within 24 hours or before the next opening of the market. Where you can get into more trouble is when someone tries to cover up a leak of information and it isn’t discovered until too late. This makes it especially important to ensure that your employees know the next best action to take if they happen to slip.
Now that you know the top 5 things you can do to prevent a Reg FD crisis at your next holiday party or Friendsgiving, you are free to enjoy the season! Want to know more about Regulation FD and how to speak your investors’ language? Schedule a consultation, contact us at firstname.lastname@example.org, or call us at 202-521-7917. We love to trade secrets over a mug of peppermint tea.
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