Last week, we wrote about Regulation FD, now in its 13th year of implementation, and offered Part One of a quiz designed to test how well you understand the regulation. Here, we offer a slightly more challenging Part Two of the quiz. We hope you will find this helpful as you think about real life Reg FD situations. Since the following answers should not be construed as legal advice, we also urge you to talk with your legal counsel before deciding what practices are best for your company and its particular disclosure situations.
Reg FD Quiz, Part Two- Violation or Not?
1. CEO is aware that your company will likely miss quarter consensus estimates, but this hasn’t been disclosed. CEO looks downtrodden in 1×1 meeting, and talks about what a tough macro environment it has been for the industry. A week later, your company announces lower than expected revenues. Stock trades down sharply on higher than normal volume.
Did the CEO violate Reg FD? (YES) The CEO selectively disclosed material, non-public information through non-verbal cues. Hindsight is perfect; hold a poker face or don’t talk.
2. At a webcasted analyst day, management outlines its new product pipeline, how the products compare to existing technologies and treatments and the timeline for product launches. Two weeks later, in a 1×1 meeting with an investor who missed the analyst meeting, management answers questions about how some of the new products differ from competition.
Does this violate Reg FD? (NO) As long as management sticks to those details that were previously disclosed at the analyst day, so that no material, non-public information is disclosed selectively.
3. After reducing guidance publicly in previous weeks, CEO answers questions in 1×1 meetings, reaffirming guidance.
Does this violate Reg FD? (MAYBE) If your company’s disclosure policy states that “all earnings guidance is effective at the date given and is not updated until the company’s public announcements of updated guidance” then the reaffirmation was material information, especially since the company’s trend had been to lower guidance and policy expressly forbade verbal reaffirmation. If your company’s disclosure policy is silent on mid-quarter reaffirmation than this may not be a violation of Reg FD.
4. The CEO commented on an earnings call that the market was soft, and would be through the end of the year. Two weeks later, at a non-webcast conference, he was asked about the market and the CEO responded that the market was returning to normal, and he was optimistic.
Was this a violation of Reg FD? (YES) Comments were material and made selectively; comments were material because they contrasted with previous public statements. Stick to the script – do not embellish at the last minute. File an 8-K for last minute changes to investor presentation. Pre-announce and webcast the presentation, even if the conference host will not.
When Westwicke Partners conducts Reg FD training, we engage in actual scenarios to help our clients get more comfortable with this SEC regulation (our training includes people who measure body language, to prevent unintended, “unspoken” disclosure). While our training sessions are extremely helpful for clients who have gone through them, we always urge all clients to talk with their legal counsel before deciding what practices are best for their companies and in particular disclosure situations.