Regulation FD

Summary

Fair Disclosure prohibits selective disclosure of
material non-public information by issuers

Final release summary

Generally requires simultaneous public disclosure
whenever material nonpublic information is disclosed

By an issuer or any person acting on behalf of an issuer
To any person outside the issuer

In practice material nonpublic information means any information the release of which will spike trading volume

SEC continues to bring enforcement actions against executives for violations of Regulation FD
Sometimes over seemingly innocuous statements
made to analysts or institutional investors
But which resulted in spiked trading volume
without any publicly announced development
Presents risk that anything "off script" in a private meeting with analysts or investors can give rise to a Reg FD violation

Public disclosure can be made by

Use of Form 8-K, or
By alternative methods reasonably designed to provide broad, non-exclusionary distribution of the information to the public
Made simultaneously, in the case of an intentional disclosure
Promptly, in the case of a non-intentional disclosure

Webcast disclosure

A webcast can be used to satisfy Reg FD in lieu of
an 8-K filing
However, many disclosures -- such as earnings releases -- are subject to specific Form 8-K filing requirements
See Form 8-K

Adopted as a disclosure rule,
rather than as an anti-fraud rule

In light of Dirks v SEC and other "tipping cases"
Which require a violation of fiduciary duty for personal gain as an element
Thus, no private right of action over an FD violation
See Rule 102

Developments

SEC Chairman joins blog debate about Regulation FD

Sun Microsystem CEO's blog site

SDNY dismisses SEC's charges against Siebel

See SEC v Siebel Systems below

Securities Offering Reform 2005

Regulation FD was amended to revise exclusion for issuer communications made in connection with
a registered offering

Part of broad sweeping changes to SEC rules on how
registered offerings can be brought to market
Securities Offering Reform

Final release commentary

Proposal release commentary

Changes to FD Rule 100(b)(2)(iv)

Regulation FD Quick Finder

Rule 100(a) -- General Rule

Prohibits selective disclosure of
material non-public information by issuers
Generally requires simultaneous public disclosure
whenever material nonpublic information is disclosed
- By an issuer or any person acting on behalf
  of an issuer
- To any person outside the issuer
Final release summary

Rule 100(b)(1) -- Persons outside the issuer

Broker or dealer
Investment adviser
Institutional investment manager
Investment company
Holder of the issuer's securities
Persons associated with the foregoing

Rule 100(b)(2) -- Exceptions

Regulation FD doesn't apply to specified persons

Persons who owe a duty

Attorney
Investment banker
Accountant

Persons subject to a confidentiality agreement
Rating agencies

Doesn't apply in context of a registered securities offering

But does apply to specified shelf offerings
But does apply to unregistered offerings
Note: changes made by SEC's Securities Offering Reform

Rule 101 -- Definitions

101(a) Intentional
101(b) Issuer
101(c) Person acting on behalf of an issuer
101(d) Promptly
101(e) Public disclosure
101(f) Senior official
101(g) Securities offering
- Underwritten offerings
- Non-underwritten offerings

Rule 102 -- No Effect on Antifraud Liability

No private right of action
Final release commentary

Rule 103 -- No Effect on 1934 Act Reporting Status

FD public disclosure requirement doesn't affect
eligibility for

Form S-2
Form S-3
Form S-8
Rule 144(c)

Final release commentary

SEC Releases

Final Release 33-7881 2000

Proposal Release 33-7787 1999
Comment letters

Issues

What's material nonpublic information

Definition left to existing interpretations
Final release commentary
In practice, enforcement actions define it as any information the release of which will spike trading volume

Required timing of public disclosure

Depends on whether disclosure is intentional or not
Final release commentary
Prompt public disclosure required after non-intentional disclosure
Final release commentary

How to make required public disclosure

Use Form 8-K, or
Use an alternative method reasonably designed to provide broad, non-exclusionary distribution of the information to the public
Made simultaneously, in the case of an intentional disclosure
Promptly, in the case of a non-intentional disclosure

Webcast disclosure

A webcast can be used to satisfy Reg FD in lieu of an
8-K filing
However, many disclosures -- such as earnings releases -- are subject to specific Form 8-K filing requirements
See Form 8-K

SEC FAQs

SEC Telephone Manual 2000

SEC Enforcement Actions

Summary

SEC has brought several enforcement actions
asserting violations of Reg FD
Four cases were brought in November 2002;
About one settled enforcement a year since
SEC has been imposing personal fines on executives
In each case, there was a spike in trading volume without any publicly announced news
Which suggests that any information that could prompt increased trading will trigger Reg FD requirements
Court dismissed SEC's charges against Siebel 8.31.05

See Developments above

SEC Target	Volume Spike	Trading Price	Year
Flowserve	75%	6%	2005
Siebel II	200%	8%	2004
Schering-Plough	400%	17%	2003
Siebel I	200%	20%	2002
Raytheon	Increased	6%	2002
Secure Computing	200%	16%	2002
Motorola	Increased	15%	2002

Electronic Data Services (EDS) 2007

Involved an illicit payment scheme, inadequate
public disclosures and improper selective disclosures to
securities professionals
C&D order 9.25.07

Also see FCPA

Flowserve Corporation 2005

SEC press release
Litigation release
Complaint
SEC C&D Order
FLS press release
In a private meeting with analysts, close to the end of a reporting period, CEO reaffirmed previously disclosed earnings guidance
Investor relations officer stayed silent
CEO was responding to an analyst who asked about
prior earnings guidance for the year
After an analyst put out a report detailing the meeting
stock was up 6%, on 75% higher volume
FLS filed a Form 8-K the next day
SEC found CEO and IR officer uncooperative and even misleading
CEO and IR officer paid fines of $350,000 and $50,000
SEC Telephone Manual FAQs are on point
So is final release commentary
While FLS CEO many not have thought he was tipping information on actual recent performance, his audience did and traded accordingly
Separately, CEO is resigning

Fried Frank commentary

Siebel Systems Inc 2004

Litigation release
Complaint
Siebel charged with a second violation of FD
Also charged over inadequate disclosure controls
CFO made positive comments at private meetings with institutional investors
Stock surged 8% the next day on 2x normal trading volume
Charges were dismissed by SDNY 8.31.05

See Developments above

Schering-Plough 2003

September 2003

SEC press release
SEC C&D order
SEC litigation release
Company press release
Company and former CEO settle charges over FD violations
Company to pay a $1 million civil penalty
Largest FD penalty to date
Former CEO to pay $50,000 - first personal penalty to date
SEC found that, at private meetings with fund managers and analysts, through a combination of spoken language, tone, emphasis, and demeanor, company's CEO disclosed negative and material, nonpublic information regarding the company's earnings prospects, including that

Analysts' earnings estimates were too high, and that
Company's earnings in 2003 would significantly decline

March 2003

Company press release

Company received "Wells notice" from SEC re: investigation of CEO's private meetings with fund managers and analysts during the three days preceding a release lowering earnings forecast

Stock declined 17% over the course of the three days

Trading volume was 4x normal

October 2002

Company press release

Notes initial inquiry received from the SEC

Siebel Systems Inc 2002

Litigation release

Complaint

C&D Order

After CEO comments at private Goldman Sachs conference,
stock surged 20% the same day on 2x normal trading volume

CEO comments weren't webcast

Company fined $250,000

Raytheon Company 2002

C&D Order

Stock declined 6% the day after CFO called 11 analysts to guide downward their near-term quarterly EPS forecasts

Prior public webcast had given full year EPS guidance without quarterly detail

CFO resigned from company a month after C&D order

Secure Computing 2002

C&D Order

Stock increased 16% on 2x normal trading volume,
between time CEO disclosed significant sales contract
to institutional investors on private calls and
time of press release at end of following day

IR director had mistakenly told CEO that he could discuss contract

Efforts to correct weren't effectual until press release was issued

Motorola Inc 2002

Report of investigation

To guide their EPS forecasts downward,
IR director privately told 15 analysts that prior public disclosure of a "significant" decrease in sales forecast meant "25% or more"

Stock then declined 15% on increased volume

IR director had been told by in-house counsel that providing a quantitative definition of a previously disclosed qualitative term was not material

SEC v Siebel Systems SDNY 2005

Court dismisses SEC's charges against Siebel

SDNY opinion 8.31.05

SEC's enforcement of FD ''places an unreasonable burden on a company's management and spokespersons Fair accuracy, not perfection, is the appropriate standard.''