From PLI S Course Handbook s4

From PLI’s Course Handbook

Preparation of Annual Disclosure Documents 2009

#18393

17

Interlude for Regulation FD

Marc H. Folladori

Mayer Brown LLP

Copyright © 2008

All Rights Reserved

The author wishes to acknowledge gratefully the assistance of Mark Deal, a summer associate with Mayer Brown LLP, in the preparation of this article.

Biographical Information

Program Title: Preparation of Annual Disclosure
Documents 2009

Name: Marc H. Folladori

Position or Title: Partner

Firm: Mayer Brown LLP
Address: 700 Louisiana Street, Suite 3400,
Houston, Texas 77002
Phone: (713) 238-3000; Fax: (713) 238-4696
E-Mail:

Primary Areas of Practice: Corporate / Securities

Law School: Southern Methodist University Dedman School of Law

Work History:
Mayer Brown LLP (2006 - Present)
Fulbright & Jaworski L.L.P. (2001 - 2006)
Haynes and Boone, L.L.P. (1974 - 2001)

Membership in Associations, Committees, etc.:
American Bar Association
State Bar of Texas
Texas Business Law Foundation
Texas Bar Foundation
Houston Bar Foundation

Introduction 1

Regulation FD Basics 2

Regulation FD And Corporate Websites 4

Enforcement Actions under Regulation FD 8

Motorola: Can you give private guidance as to what is “significant?” 9

Raytheon: Should you manage expectations? 10

Secure Computing: Did you say it intentionally or inadvertently? 11

Schering-Plough: Should you speak in a monotone? 12

Flowserve: Can you privately affirm prior public disclosures? 13

Senetek PLC: Should you comment on or correct drafts of analysts’ reports? 14

Electronic Data Systems, Inc.: Can you privately disclose settlements of derivative instruments since the settlements do not directly affect the company’s earnings? 15

Siebel Systems, Inc.: What is material, non-public information in the context of Regulation FD? 17

Office Depot: Can you privately disclose a general outlook of weak sales? 20

Conclusion 22

INTERLUDE FOR REGULATION FD[(]

By Marc H. Folladori
October 2008

Introduction

The Securities and Exchange Commission adopted Regulation FD in August 2000. Since then, the SEC has issued releases disclosing the settlement of seven enforcement actions and one Section21(a) investigation report regarding alleged violations of Regulation FD.[1] In August 2005, in SEC v. Siebel Systems, Inc., et al., 384 F. Supp. 2d 694 (S.D.N.Y. 2005), the first and, to date, only reported litigated case involving Regulation FD, a U.S. District Court judge refused to find a violation under Regulation FD, and dismissed the civil enforcement action that the SEC had filed against the defendants in 2004.

At PLI’s 37th Annual Institute on Securities Regulation in November 2005, the SEC’s Director of the Division of Corporation Finance stated that the Commission would continue to bring appropriate Regulation FD cases, despite the result in the Siebel case. Other SEC staffers said that there were a number of Regulation FD cases then under investigation, but noted that every investigation probably would not result in an enforcement action.

In the three years since the Siebel case ruling, there has been a veritable lull in announcements and releases from the SEC regarding Regulation FD enforcement actions. In the past three years, the SEC has announced only one settlement of an enforcement action. This general hiatus in reported enforcement actions appears unusual when compared to the number of Regulation FD enforcement announcements and releases issued by the SEC in the previous three years. Between November 2002 and September 2005, there were an average of three Regulation FD enforcement releases per year. Does this slowdown mean that the SEC is re-evaluating its tactics? Or does it have more to do with the mostly positive stock market results experienced between 2003 and 2007? This article examines the Regulation FD enforcement actions concluded since 2002, and closes with some reflections on the Siebel case and suggestions for Regulation FD compliance.

Regulation FD Basics

The rules under Regulation FD provide that when an issuer or one acting on its behalf discloses material, non-public information to certain specified individuals or entities (i.e., market or investment professionals such as securities analysts and broker/dealers, or shareholders where it is reasonably foreseeable that they will trade on the basis of that information), then the issuer must make public disclosure of that information. The private disclosure of material, non-public information to these specified persons is commonly known as “selective” disclosure.

If the selective disclosure of material, non-public information made to these specified persons is intentional, then public disclosure of that information must be made simultaneously – at the same time the selective disclosure is made. If the selective disclosure is non-intentional, then the public disclosure must be made “promptly.” “Promptly” under Regulation FD means as soon as reasonably practicable, but the public disclosure must be made before the later of 24 hours or the commencement of the next trading day on the New York Stock Exchange, following the time that a senior official of the issuer learns that there has been a non-intentional disclosure of information by or on behalf of the issuer, which the senior official knows, or is reckless in not knowing, is both material and nonpublic.

Regulation FD can be satisfied by making public disclosures through a variety of means, whether by furnishing or filing a Current Report on Form 8-K with the SEC or by any other method (or any combination of methods) designed to provide broad, non-exclusionary distribution of the information to the public (such as a press release issued through a widely-distributed news release service). Other satisfactory means include announcements by press release of a future conference call or webcast to be conducted by management; such conference call or webcast, when conducted, must be in a medium that the public can access and listen to in person, by telephone or over the internet. During 2008, the SEC issued interpretive guidance regarding how to meet conditions for RegulationFD-compliant disclosures on an issuer’s website. See “– Regulation FD and Corporate Websites” below.

Regulation FD contains a number of exemptions from its coverage. Disclosures made to the media are exempt from the operation of Regulation FD, although the mere presence of the media at a meeting does not automatically make the disclosure public in nature. (Whether a meeting is truly “public” depends in part on when, what and how widely the media reports the meeting.) In addition, Regulation FD does not cover ordinary-course-of-business-type communications, such as statements made to customers or suppliers of the issuer in the conduct of their business. Also exempt from the coverage of Regulation FD are disclosures made to those who owe a duty of trust or confidence to the issuer, disclosures to a person who agrees to keep the information disclosed to him or her confidential, most disclosures made to a credit ratings agency, and disclosures made in connection with most registered offerings. The Securities Offering Reform Rules adopted in December 2005 amended Regulation FD to clarify the exemption’s reach in connection with the new prospectus alternatives available for registered securities offerings under the Securities Act of 1933.

Regulation FD violations by themselves do not give rise to Rule 10b-5 liability or private causes of action, but are subject to SEC enforcement actions.

Regulation FD And Corporate Websites

During 2008, the SEC’s Advisory Committee on Improvements to Financial Reporting recommended that the SEC consider an update to its 2000 interpretive guidance for disclosures on corporate websites (“Use of Electronic Media,” SEC Release No. 33-7856 (April 28, 2000)), addressing whether companies can meet their obligations under Regulation FD by posting information on their corporate websites and blogs.[2] In August 2008, the SEC issued such an update: “Commission Guidance on the Use of Company Websites,” SEC Release No.34-58288 (Aug.1, 2008).

As noted above, in order to satisfy the “public disclosure” requirement of Regulation FD, the information must be broadly disseminated and distributed in a non-exclusionary way to the public. There has been considerable doubt since Regulation FD’s adoption as to whether information made available solely through an issuer’s website could be deemed sufficiently “public” for purposes of Regulation FD. The August 2008 interpretive release (the “2008 Release”) recognized the dramatic increase since 2000 in the use of company websites and noted that investors increasingly view them as key sources of information about a company.

The 2008 Release – a principles-based release, for sure – offers guidance for issuers seeking to determine whether their website information is “public” in nature, by endorsing a three-prong test which asks:

·  Whether the issuer’s website is a “recognized channel of distribution”;

·  Whether the information has been posted on the website in a manner that makes it available to the securities marketplace in general; and

·  Whether there has been a reasonable waiting period for investors to react to the information.

To answer the question of whether the website is a “recognized channel of distribution,” the 2008 Release counsels the issuer to review (i) the extent to which investors and the market use its website and (ii) the steps that the issuer has taken to alert the market to its website and its disclosure practices. The more that investors are directed to and access an issuer’s website for relevant information, the better the likelihood that the issuer can meet this test.

With regards to the second prong of the test, the guidance in the 2008 Release provides a list of factors that the issuer can apply in evaluating the manner in which its information is posted on its website and the ready accessibility of that information to investors and the markets on a timely basis. These factors include:

·  the extent to which the website is publicized by the issuer (for example, has the issuer advised the media or newswires about the availability of its information on its website);

·  the awareness of the investing public that the issuer posts important information on its website;

·  the patterns or practices that the issuer employs with regards to posting that information;

·  the website’s design in terms of leading investors to relevant information;

·  whether the information is routinely picked up by the market and reported on by the media, and

·  probably the most important factor, the size and the market following of the particular issuer.

Issuers with a smaller market following will likely need to take strong affirmative steps to publicize this availability on their websites, so that investors and others will know that relevant information is regularly posted on the issuer’s website and they should refer to the issuer website for current information. Also relevant are the following related questions:

·  What methods has the issuer used to make its website and the information more accessible, such as using “push” technology (i.e., prearranged updating of developments, events or other selected information on a computer user's interface) or releases through other distribution channels?

·  Is the issuer’s website up to date and accurate?

·  Does the issuer use other methods in addition to its website postings to disseminate the relevant information, and are these other methods the predominant methods the issuer uses to disseminate this information?

·  What is the nature of the information (e.g., descriptions of products for potential customers compared to the issuer’s financial information)?

As to whether a reasonable waiting period has passed in order for the market to have had sufficient time to react to the information, the 2008 Release suggests reviewing many of the same factors as are relevant to determining whether the channel of distribution is sufficient, including the issuer’s size and market following and the complexity and nature of the information in question. The guidance indicates that the type and complexity of the information posted and any additional steps taken by the issuer (such as press releases) to disseminate the more important information will all have an effect on the determination of the appropriate waiting period.

The 2008 Release also addresses the question of whether an issuer can post information on its website as a means to satisfy the “simultaneous” or “prompt” public disclosure requirements of Regulation FD when there has been selective disclosure of material, non-public information to one likely to trade on that information. Importantly, the release indicates that technology and the use of the internet has evolved such that, for some issuers in certain circumstances, posting information on a website, in and of itself, may be sufficient curative public disclosure for purposes of Regulation FD. However, in order for an issuer to be able to comfortably rely on a website posting as its exclusive method of such public disclosure, the issuer would have to answer in the affirmative that posting on its websites provides “broad, non-exclusionary distribution of the information to the public.”

In considering these questions, the SEC notes in the release that an issuer should consider the same factors discussed above in determining the sufficiency of the channels of distribution and the information’s ready availability to the securities markets. In other words, once a selective disclosure of material, non-public information is made, an issuer will need to feel secure in its determination that its website is capable of meeting the “simultaneous” or “prompt” public disclosure requirements of Regulation FD.

The 2008 Release confirms that antifraud provisions of the federal securities laws apply to the statements made on the internet just as they would apply to any other statement of the issuer. The release provides guidance regarding the following types of information or content that might carry securities law liability:

·  previously posted statements or materials on the website

·  hyperlinked third-party information;

·  summary or “overview” information; and

·  blogs or electronic shareholder forums.

The 2008 Release also confirms that issuers maintaining previously posted statements or materials on their websites are not deemed to be reissuing or republishing those statements or materials for purposes of the federal securities laws solely because the statements or materials remain accessible to the public. However, in order to ensure that investors understand that certain statements or materials posted on their websites are historical in nature, the previously posted statements or materials should be separately identified as being historical in nature (including, for example, by dating them), and located in a separate section of the issuer’s website containing previously posted statements or materials.