Securities Law Blog

As companies prepare for their upcoming annual meetings of stockholders, it is imperative that those officers and directors who will be speaking or answering questions at the meeting understand the selective disclosure implications of Regulation FD.  Adopted in August 2000 in order to promote full and fair disclosure of information by public companies, Regulation FD prohibits companies from selectively disclosing material nonpublic information to analysts, institutional investors and certain other enumerated individuals without concurrently making widespread public disclosure.  Information is considered material if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision, or if the facts would have been viewed by the reasonable investor as having significantly altered the ‘total  mix’ of information made available.

In preparing for the annual meeting, companies should review their annual meeting scripts and other presentation materials with their compliance personnel and counsel to confirm that no material information is included that has not been previously disclosed, and if any such information is to be included, that it is publicly disseminated prior to or simultaneously with the meeting in compliance with Regulation FD.  While companies typically draft scripts for their officers and directors who will be presenting at the annual meeting, shareholders and other attendees expect to be able to ask questions of management at the annual meeting.  These Q&A sessions can often be the most challenging time of the meeting for management because it is the most unpredictable.  While management can take steps to control the procedures that will govern the Q&A portion of the meeting and can prepare responses for certain anticipated topics, it is impossible to predict everything that may be asked during the annual meeting.

Through training and careful planning, companies can avoid running afoul of Regulation FD.  However, in the event of a disclosure of material nonpublic information during the annual meeting, a company is required to publicly disclose such information through an Exchange Act filing (such as a current report on Form 8-K) or through any method reasonably designed to effect broad, non-exclusionary distribution of the information such as press releases.  Although the SEC has issued guidance that makes clear that companies can use their own websites or social media outlets like Facebook or Twitter to announce information in compliance with Regulation FD so long as investors have been alerted about which websites or social media will be used to disseminate such information, we would caution against relying on exclusively on such options and instead consider using these as a supplement to other, more established forms of investor communication.

The timing of the public disclosure will depend on whether the selective disclosure was intentional or unintentional.  In the event of an intentional disclosure, issuers must make a simultaneous public disclosure.  Disclosure is deemed intentional when the individual making the disclosure knows, or is reckless in not knowing, that the information being communicated is both material and nonpublic.  In the event of an unintentional selective disclosure, issuers must promptly make a public disclosure.  Prompt disclosure under Regulation FD is defined as the later of 24 hours or the commencement of the next day's trading on the New York Stock Exchange (regardless of whether the issuer’s stock is traded on the New York Stock Exchange), after a senior official learns of the disclosure and knows, or is reckless in not knowing, that the information disclosed was material and nonpublic.

It is important to note that even if a company’s annual meeting is open to the public, the pubic disclosure mandate of Regulation FD will typically not be satisfied if material nonpublic information is disclosed at such meeting.  The SEC has advised in its Compliance and Disclosure Interpretations that a meeting that is open to the public but not otherwise webcast or broadcast by any electronic means is not a method of disclosure reasonably designed to provide broad, non-exclusionary distribution of the information to the public.  The SEC has further stated that the mere presence of the press at an otherwise non-public meeting does not render the meeting public for purposes of Regulation FD.

The SEC has been increasingly active in pursuing Regulation FD violations.  Regulation FD can result in an SEC enforcement action, including injunctions and fines.  In addition, individual personnel of the issuer who were responsible for the violation may also be subject to enforcement action.  

Accordingly, it is imperative that companies maintain disclosure controls and procedures as a safeguard against selective disclosure of material, nonpublic information.  The SEC has indicated that implementation and adherence to an appropriate external communications policy may be relevant in determining whether selective disclosure was intentional and may be among the factors considered by the SEC in determining a company’s liability for its employees’ conduct.  An effective Regulation FD policy combined with continuous training should enable a company to reduce the likelihood of inadvertent disclosure and enable officers and directors to know when and how to say no to requests for information that is not ready to be publicly disclosed.