After Regulation FD: Talking to Your Constituents

Will the new SEC regulation on fair disclosure change the way companies announce material information to the marketplace?

  • NEW SEC REGULATION FD CAN HAVE a significant impact on the way information about public companies is disseminated. The rule intends to abolish selective disclosure practices and level the playing field for investors. Since regulation FD increases public companies’ financial communication responsibilities, CPAs will be affected by it.
  • CORPORATE OFFICERS NEED TO PLAN their companies’ communication flow before going public to avoid possible problems. Part of the planning process involves appointing members of the corporate staff to handle news media and shareholder inquiries if these teams aren’t in place.
  • THE SEC HAS EXPLICITLY STATED REGULATION FD DOES not create a private right of action under the antifraud provisions of federal securities laws. The SEC can bring an enforcement action against corporate violators and will do so where the selective disclosure was reckless or intentional.
  • IT WILL BE INCREASINGLY IMPORTANT under regulation FD for companies to review communications, such as press releases and speeches, before they are released to avoid disclosure of material nonpublic information. If a corporate spokesperson makes impromptu remarks, companies must review his or her statements immediately for possible disclosure violations, and have a contingency disclosure plan ready in case someone inadvertently violates regulation FD.
  • COMPANIES SHOULD DISCUSS THEIR CURRENT communications methods with securities counsel to determine if the methods might violate regulation FD’s provisions. It is the intention of the new rule to change the way companies operate with market professionals if they have been making potentially unfair disclosures.
ED McCARTHY is a freelance writer in Warwick, Rhode Island, who specializes in finance and technology. His e-mail address is .

n August the SEC issued new regulation FD, which will redefine how companies and their senior executives interact with analysts and the public in disclosing material information. The regulation (Fair Disclosure, one of three new rules set forth in SEC release “Selective Disclosure and Insider Trading” nos. 33-7881 and 34-43154) took effect in October despite pleas from several industry groups to delay its implementation. Coming to terms with regulation FD and how it will affect a company’s relationship with its analysts has become a priority for CFOs and corporate spokespeople. Because this regulation affects how companies communicate with market professionals and the investing public, it is important for CPAs to know the rule’s components and implications.

SEC Model for Public Disclosure Methods

The public disclosure requirements of the SEC’s regulation FD give companies flexibility in determining how to comply. The SEC release, “Selective Disclosure and Insider Trading,” (nos. 33-7881 and 34-43154; ) points out there is no “one-size-fits-all” disclosure standard. Besides filing information on Form 8-K, acceptable methods of public disclosure include

Issuing a press release through news or wire services.

If announced results will be discussed in a conference call, giving investors adequate notice of the call by press release and/or Web site posting, listing the date and time of the call and how to access the call.

Holding an open conference call, permitting investors to listen by telephone or through Internet Webcasting.


One of the reasons behind the SEC’s adoption of regulation FD was the cozy relationship that some analysts shared with corporate management in order to deliver accurate earnings forecasts. The SEC was aware of the cat-and-mouse games that some corporate executives played with analysts as the latter looked at a company’s performance based on earnings reports. The commission expressed concern that investors were at a disadvantage if they lacked direct access to analysts’ conference calls and corporate officers.

With regulation FD, the commission is attempting to level the informational playing field by barring companies from releasing market-sensitive information to Wall Street insiders before announcing the news to the general public. Basically, corporations whose senior executives provide market-moving information to a few professionals must make the news public at the same time for intentional disclosures, or promptly for unintentional disclosures. The regulation is designed to address the problem of selective disclosure made to those who might buy or sell the stock based on the information or advise others to do so. (See “Highlights,” JofA, Oct.00, page 8 and the SEC Web site, . )

Will regulation FD really address the risks of leaks? W. David Malone, CFA with FinArc, LLC, an investment management firm in Newton, Massachusetts, thinks not. In his view the high-risk areas of leaks do not spring from company discussions of earnings with their analysts but rather involve insider trading violations which are addressed by other federal securities laws. He believes that “increased scrutiny of what companies can or cannot communicate will decrease the amount of information provided to the public and analysts alike. Security prices will be driven lower because of higher volatility of expected earnings as the question and answer sessions in conference calls will be abbreviated and provide less insight of future expectations. Over the next year company communication will be worse than before regulation FD, as this regulation effectively handcuffs public companies in disseminating future earnings information to the public and to analysts. Nothing will be disclosed (by corporate executives) unless the lawyers review it.”


It will be interesting to see if predictions of “chilling the information flow” become a consequence of the regulation, or if the controversial rule actually scores a victory for the small investor. So what are regulation FD’s implications for analyst conference calls? At this stage companies are wary of discussing the new rule and are in a period of adjustment as they try to sort out the best approach to take.

Learn the facts. CPA Vernon Brannon, CFO of HLM Design, Inc. in Charlotte, North Carolina, a company that provides architectural, engineering and planning services, says the first step is to learn how to handle regulation FD’s requirements. Company employees received training about the regulation from attorneys from the SEC and private practice on the regulation’s practical applications. “We have always had tight controls on what gets communicated. That will serve us well. We will have a written plan that will dictate the procedures that will be initiated, if necessary. We have hired no special consultants to deal with regulation FD; we don’t foresee hiring any additional personnel, and other than the cost of training, and potentially issuing additional press releases, we don’t anticipate having a major expenditure as a result of this new regulation,” notes Brannon. As for whether regulation FD has affected the rules in dealing with analysts, he says, “We will not give any information to analysts that is not historical.”

No change. At Pfizer Inc., a global pharmaceutical manufacturer headquartered in New York City, regulation FD will not have much impact. Margaret M. Foran, vice-president, corporate governance, says, “For Pfizer, regulation FD has not been earth-shattering. We’ve always had a robust earnings press release that provided a forecast, and that was given to the public. Along with that release we had a Q&A that provided investors with detailed specific information. Also, we’ve Webcast our analyst conference calls for a while, so we’re in pretty good shape for FD.” Foran adds, “For other companies, the impact of FD will result in ‘more companies putting out more public information so they won’t be selectively-disclosing.’”

Pfizer shareholders are made aware of conference calls and Webcasts through press releases, the company Web site and media newswires. Pfizer’s CEO, the president and chief operating officer, the CFO and the vice-chairman are always present during analyst calls.

Consult attorneys. Nancy Pierce, treasurer of Carrier Access Corp. in Boulder, Colorado, is watching to see how other companies handle compliance with the regulation and sees practical problems in its implementation. “In the past, you allowed analysts to participate in your general conference calls,” she says. “You would talk about the successes of the past quarter, technology directions for the company, the drivers that helped you achieve your results and any trends that might affect your financial performance in the upcoming quarter. Regulation FD now requires that the general conference call be open to the public. Does this require immediate, live audience access? How do you get the information to millions of investors? And who is going to absorb the cost?” These are new questions for some individuals who work with corporate disclosures; the answers will come over time as they become familiar with the new regulation. It is safe to say, though, that a company’s successful compliance will require the shared efforts of CFOs and CEOs along with legal departments or outside counsel and public and investor relations departments.

Because regulation FD is new, attorneys are just beginning to advise their publicly traded clients on its practical implementation. What will trigger SEC scrutiny is how the earnings reports are released to security analysts since the commission wants to prevent analysts from getting the inside track ahead of the rest of the market. Jayne Donegan, a securities attorney and partner with Brown, Rudnick, Freed & Gesmer in Providence, Rhode Island, suggests businesses take the following steps:

Designate one person (or a very small number of people) to communicate with analysts and institutional investors.

Establish a procedure for reviewing all communications to determine if they contain material nonpublic information. Someone in the company’s investor relations department who has both a historic and current understanding of what has already been publicly disclosed about the company should review written communications to analysts and institutional investors before they are issued, and oral communications after they are made, to detect any disclosures of material nonpublic information. The company can then comply with the rule and disclose the information to the investing public immediately according to an established procedure.

Consult with your attorney if you believe you have unintentionally made a selective disclosure.


When the SEC proposed Regulation FD in December 1999 it prompted an enormous response—6,000 comment letters, the overwhelming majority from investors who urged adoption because they were frustrated with the practice of selective disclosure of material information by issuers. While investors clamored for the new rule, other SEC constituents believed the need for the regulation was based on limited anecdotal evidence. In a 1998 study by the National Investors Relations Institute (NIRI) on corporate disclosure practices, issuers acknowledged significant use of selective disclosure. Another NIRI study released in February 2000 found companies had begun to open certain calls to individual investors. These steps were not enough, according to the SEC, to bolster investor confidence in the fairness of the disclosure process. Indeed, some of the remedial efforts that companies undertook before the SEC proposed regulation FD resulted from the glare of public attention created by investor and SEC scrutiny.

The SEC issued regulation FD because it believed selective disclosure diminished investor confidence in market integrity. When SEC Chairman Arthur Levitt, Jr. announced the rule’s approval, he commented, “Regulation FD [will] bring all investors, regardless of the size of their holdings, into the information loop—where they belong. To all of America’s investors, it’s well past time to say, ‘Welcome to the neighborhood.’”

Will passage of the rule change the way companies operate when talking to market professionals? “Yes, that is exactly the intent and purpose of the regulation,” says Stephen Cutler, a deputy director for the SEC’s division of enforcement. Will the rule cause a disruptive shutdown of information as many critics predicted? Cutler thinks not. “In the long run, markets demand information and issuers understand that,” Cutler says. With regulation FD in place, “Telling company officers now to say nothing is not good advice.”

The Analyst’s Role in the
Financial Marketplace

Regulation FD will not completely change all aspects of how companies disseminate information to investment professionals. In many situations it will still be business as usual. For example, to develop a company’s earnings’ forecast, the analyst will continue to extrapolate from past results and examine influential trends in the industry and in the economy.

The analyst must understand your company’s product. That explanation is simple for a winery, according to CFO Callie Konno of Ravenswood Winery, Inc. in Sonoma, California. She can stand before an audience and hold up a bottle of Ravenswood wine. Explaining the company’s business model is more difficult, however. Konno must point out how the need to age wine for eighteen months to two years influences the company’s inventory numbers.

Differentiating a company from its competitors also requires a special effort. “The most important thing for us is to be sure the investment community understands our business because we are in a relatively unknown industry,” says Michael Pecchia, CPA and CFO of Rainbow Rentals, Inc. in Canfield, Ohio. The company, which went public in June 1998, provides customers with home electronics, furniture and appliances on a rent-to-own basis. It’s a unique niche, and Pecchia believed it was critical to retain an investment banker with an analyst who understood Rainbow’s business. “When we picked our investment banker, the most important factor was to pick the best analyst in the group,” Pecchia says. “Our industry is relatively new and there were only two companies in the rental industry that went public before us. Even if they know the business it doesn’t mean they know us. We had to show how we’re different from our competitors.”

How was this accomplished? Pecchia explained, “We found the analyst who was considered the industry expert and hired his firm to take us public. We believed the analyst was the most important person and that has turned out to be true. Usually a particular analyst in certain industries will stand out as being well respected among both his or her peers and the corporate world for knowledge of those industries or sectors. This analyst would likely have the best contacts with fund managers who had previously invested in the companies in our industry and would be able to attract interest in our company as well.”

As CFO of a private company, you’re dealing with the board and generally a few investors,” says Christine Russell of Persistence Software, Inc. “In a public company, you’re dealing not only with a much broader investor base, both retail and institutional, but also with investment bankers, analysts and regulatory bodies. You have a much greater constituency and responsibility to shareholders.” Russell had been through an IPO with a previous employer and looked for analyst expertise when selecting the investment banker for the Persistence Software underwriting. “The analyst’s role is the driving factor in choosing the banker to take you public,” she says. “The sell-side analyst (who works for the investment bankers) preaches the company story to the institutions and convinces them they should become long-term shareholders.”

A CFO’s life would be considerably simpler if he or she had to deal with only one analyst. Realistically, however, most companies receive coverage from several sell-side analysts; large businesses may attract dozens. And besides sell-side coverage, there are buy-side institutional investors, such as mutual funds and pension plans, who research stocks for their portfolios. “I didn’t realize just how much time goes into working with the investment community, both the sell-side and the buy-side analysts,” says Jerry Kennelly, CPA and CFO of Inktomi, Inc., in San Mateo, California. “Seventy-five percent of our stock is held by institutions and they are very important to us. I spend about 30% of my time working with investors and analysts. We have two investor relations people on our staff who are dedicated to this function, and it also requires significant time from both our CEO and our vice-president of marketing.”


The corporate officers, market professionals and others who will try to come to terms with this new regulation may find it useful to consider some of the options the SEC left open:

The rule does not apply to all communications with outsiders but only to contacts with securities market professionals and to shareholders who might be expected to trade on the basis of the information.

The rule covers those who are most likely to receive improper disclosures (analysts and institutional investors) but does not cover those who engage in ordinary-course-of-business communications with the issuers. It does not interfere with disclosures to the media or to government agencies, and does not apply to foreign private issuers.

Any violations for failure to disclose under regulation FD do not create new duties for senior corporate officers under the antifraud provisions of federal securities law (Rule 10b-5), nor can plaintiffs rely on regulation FD as a basis for a private action under Rule 10b-5.

The regulation discusses “knowing or reckless” disclosures. The SEC does not want to second guess issuers on close materiality judgments, however, and cannot bring enforcement actions for mistaken materiality determinations that were not reckless.

Companies that do not comply with FD requirements can be subject to fines, but the commission has not yet established specific penalties. When the rule went into effect in October, the SEC posted on its Web site a series of Qs&As related to the implementation of FD (the supplements to the Division of Corporation Finance’s telephone interpretation manual; see ). Topics include confirming a previous forecast, disclosure of road show materials, disclosure of nonpublic information to employees and use of confidentiality agreements.


Regulation FD has not gone over well with some SEC constituencies. The National Investor Relations Institute, the Securities Industry Association and the Association for Investment Management and Research (AIMR) objected to various aspects of the regulation. AIMR awards the chartered financial analyst designation and has over 47,000 regular members worldwide, many of whom work in investment management. According to Patricia Walters, AIMR’s vice-president of advocacy, the organization objects to the fact that regulation FD requires the company providing information to determine what is material, which is a standard that varies among recipients. “If you shift the burden of determining what is material to the giver, rather than the receiver, then everything has the potential to be material,” Walters says. “Under FD, we believe that companies won’t explain even immaterial items because they won’t know if what they say will affect an analyst’s valuation. Our members are already finding that companies just don’t want to talk about anything except in completely public forums.”

AIMR submitted two comment letters to the commission objecting to the regulation when it was proposed, arguing the proposal would negatively affect both the quantity and quality of information available in financial markets by reducing issuer disclosures to sound bites and boilerplate, leaving investors worse off both informationally and economically. In urging the SEC to reconsider the regulation’s effect on corporate behavior, AIMR recommended the creation of a blue ribbon panel that would include analysts, portfolio managers and institutional and retail investors participating in equity, fixed income and derivative markets who would (1) evaluate the current disclosure practices; (2) work to narrow the definition of “materiality”; and (3) establish a body of “best practices” for corporate communications with the investment community and the general public.

There are certainly conflicting views among those dealing with the regulation as to how its implications will play out. Investors hope for a more level playing field in which the natural advantage investment professionals enjoy will be lessened. Corporate management will look at the rule and monitor their compliance with it, as well as what other companies are doing. It remains to be seen whether regulation FD produces unintended consequences.

Regulation to Eliminate
Guidance Games

B oris Feldman, a partner and securities lawyer with Wilson Sonsini Goodrich & Rosati in Palo Alto, California, defends corporate clients who are sued in class action lawsuits. He describes how companies provided guidance to analysts before adoption of regulation FD: The company held a conference call with analysts to discuss the past quarter. An analyst would ask about projections for the next quarter. The company spokesperson replied that they weren’t discussing projections during the call. After the call ended, the analyst called the CFO (or CEO) and they would engage in a circuitous discussion of the next quarter’s projections. From the CFO’s perspective, the goal was to give the analyst guidance without directly answering questions on forecasts. The resulting conversation was an odd ritual with both parties dancing up to, but not crossing, an invisible line.

“All the rules that had evolved for dealing with analysts are absurd,” Feldman says. “They evolved because management needed to give guidance or else expectations could get out of control. But companies are afraid if they give the guidance transparently and then they miss the quarter’s numbers they’ll get sued by the plaintiff’s securities bar.”

It is this type of “guidance game” that the SEC hopes regulation FD will eliminate. Feldman agrees that the new regulation will force companies to change their practice of guiding analysts’ expectations, but he sees that as a positive development for those affected by the rule. “We (corporate officers) are going to give guidance up front to the whole market, wrap it in the language of the safe harbor so we can’t get sued if we’re wrong and let everybody know at the same time what we think,” he says. “Then, more important, we’ll get rid of these daily temperature checks during the quarter where the analysts call and ask, ‘What’s up?’ We will provide guidance to the whole world at the beginning of the quarter and not update it until the quarter’s over.”

Feldman is advising his clients to stop dispensing intra-quarter guidance to analysts. He notes that the SEC has specifically stated that even telling analysts you expect the quarter’s results to be on track with projections violates regulation FD. To avoid unintentional selective disclosures, companies should put their guidance for the current quarter in the earnings release for the past quarter. For example, the company could state that “for the quarter just beginning we are targeting revenues of x and EPS of y.” Because many businesses’ earnings are unpredictable, the most conservative approach is the safest. “In many industries, companies just don’t know if they will meet projections until late in the third month of a quarter,” Feldman says. As a result, silence in the interim may be the best answer.

The following questions and answers on regulation FD were reprinted and adapted from :

Q. How will regulation FD change my company’s disclosure practices?

A. Regulation FD is designed to create a level playing field for all investors, large and small. The SEC does not want companies to disclose significant information to the market through securities analysts; developments or expectations that arguably are material must be communicated to all investors transparently and simultaneously. In particular, if your company’s practice is to provide analysts with guidance on expected results, under regulation FD you will need to provide that guidance directly to all investors.

Q. How can we provide guidance in compliance with regulation FD?

A. The simplest model is to put your guidance in a press release (presumably in an earnings release after the end of a quarter). You can then discuss that guidance in a conference call or in one-on-one discussions with analysts, as long as you don’t get into material information that goes beyond what’s been published.

Alternatively, you can provide the information in a conference call if the call has been announced in advance and is readily accessible. For example, the press release preceding the call should include details on how to listen in (either over a conference-call line or by Webcast). Regulation FD deems disclosures made in an open, announced call to be equivalent to a press release.

Q. Can we discharge our disclosure obligations by posting something on our Web site?

A. The SEC is not prepared to say that a Web site posting is as effective a means of dissemination as a release on the news wire or an SEC filing. As investors become more used to checking a company’s Web site for investor information, the SEC’s views could evolve. A company may be able to discharge its regulation FD obligations by promptly posting a transcript of a conference call (including Qs&As) on its Web site, as long as the company had disclosed that it would do so in the press release that preceded the call. (Note: If the company does post on the Web, it should provide a direct link to the cautionary disclosures that had merely been referred to in the oral presentation.

Q. What should we do if we make a mistake?

A. If you make a disclosure that you think is not material, but the market reaction suggests otherwise, you are required to issue a press release containing the disclosure within 24 hours.

Q. What are the consequences of violating regulation FD?

A. The SEC explicitly stated that regulation FD does not create a private right of action; that is, class action plaintiffs’ lawyers can’t sue you for violating it. The SEC can commence an enforcement proceeding against you (either administratively or in federal court) for engaging in selective disclosure. The selective disclosure must have been reckless or intentional to justify relief. The SEC will be looking for egregious examples to bring as test cases.

For More Info

For more news and updates of Regulation FD and how to navigate through the new environment, see the bulletin board on , the Web site for the New York Society of Security Analysts, Inc.

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