Practical Guidance for Responding to a Potential Regulation FD Disclosure Issue

Inadvertently sharing nonpublic information can be a problem—but not always. In this week’s edition of the D&O Notebook corporate securities expert Lenin Lopez helps sort out the issues and provides a roadmap for addressing them. –Priya Huskins

Sometimes it turns out that an authorized speaker for your public company (e.g., CEO, CFO, or head of investor relations) has selectively shared nonpublic information with analysts or investors that he or she thought was public. What is your company’s next step?

You may have noticed that the question didn’t specify if the nonpublic information was material to the company. That was deliberate.

As previously noted in the D&O Notebook, if the nonpublic information is material to the company, you are likely looking at Regulation FD¹ related enforcement actions by the Securities and Exchange Commission. A materiality determination is a multifactored assessment best led by in-house or outside securities counsel. For a good overview of Regulation FD, including aspects of a materiality determination, see this guide from Cooley.

Just as important as the materiality determination is, so too are the steps that a company takes after becoming aware of a potential Regulation FD disclosure issue.

What follows are a few best practices to consider when an authorized speaker may have inadvertently shared nonpublic information with analysts or investors:

1. Avoid making premature conclusions. Many times, potential Regulation FD issues are flagged by non-lawyers that were present at a meeting where the authorized speaker disclosed nonpublic information. In some cases, the issue may be flagged by the authorized speaker. Individuals may naturally jump to conclusions as to the character of disclosure. That should be avoided. Best practice for these individuals is to limit internal discussions and communications—particularly if they are in writing—regarding a potential Regulation FD disclosure issue to the particular facts and leave legal assessments to legal counsel.
2. Immediately contact legal counsel. A materiality determination will generally require, among other things, that counsel consult with other functions/departments within the company to assess whether the authorized speaker has in fact inadvertently disclosed material nonpublic information. This can take time—something the company doesn’t have much of. Remember, a company must publicly disclose material nonpublic information following an unintentional selective disclosure of that information before the later of (a) 24 hours or (b) the beginning of the next day’s trading on the New York Stock Exchange (NYSE). As a result, it is imperative that counsel have as much runway to assess the issue. If public disclosure is determined to be required, counsel will need to help to prepare that disclosure along with other internal stakeholders, which may be management, investor relations and finance.
3. Make certain that relevant internal stakeholders are involved, updated as to developments and made aware of the outcome. Ideally, a company will have already identified the team that should be involved in reviewing Regulation FD related issues before having to put up the Bat-Signal. At a minimum, that team should include in-house counsel, investor relations, and finance. The reason to engage such a broad set of internal functions is that assessing potential Regulation FD issues can take on a life of their own. For instance, when the disclosure at issue results in stock price movements, the company may receive inquiries from analysts, investors, the stock exchange where its shares are traded, and the Securities and Exchange Commission (SEC). No one function will be on the receiving end of those inquiries, which is why information gaps should be avoided. Additionally, care should be taken as to which company representative responds on behalf of the company and what is included in that response. Legal counsel should be involved in helping to prepare those responses.

Parting Thoughts

Working through Regulation FD disclosure issues can be complicated and become a distraction. Regulation FD required disclosures and violations can negatively impact investor confidence in a company’s disclosure controls and potentially result in significant legal exposure.

Companies can take the following steps to help avoid a situation where an authorized speaker inadvertently discloses material nonpublic information:

1. Maintain a strong Regulation FD policy;
2. Identify the team that will review and assess Regulation FD related issues (the Reg FD team);
3. Periodic Regulation FD training for authorized speakers and the Reg FD team;
4. Coordinate anticipated disclosures (e.g., regulatory filings, news releases, investor presentations, media statements, social media postings); and
5. Ensure that in-house counsel has an opportunity to review talking points and/or presentations that authorized speakers intend to use when speaking with analysts and investors.

For a good example of a Regulation FD policy, see here for what Duke Energy has in place. Additionally, for a good discussion around what can happen when the timing of disclosures are not coordinated, see this summary from Kevin LaCroix on the D&O Diary.

Finally, there may be instances where a company may want to disclose certain material nonpublic information at an event or at an investor event that isn’t otherwise accessible to the public. As a reminder, Item 7.01 of SEC Form 8-K is a way for companies to disclose this type of information. For example, the parent company of Ruth’s Chris Steak House, Ruth's Hospitality Group, furnished a Form 8-K to disclose certain material nonpublic information in anticipation of a fireside chat where they planned to disclose that information.