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Reg FD: Hit or Miss?

Six years in, the era of enforcing the rule against selective financial disclosure might just be beginning.

It's been six years since democracy reached the investing world at the barrel of Regulation Fair Disclosure.

The controversial rule aimed to eliminate the two-caste system of investors: those privileged with access to tradable information -- and everybody else.

Under Reg FD, whatever a company discloses to one individual must be disclosed to all.

While cynical predictions that FD-phobia would scare executives speechless and chill the free flow of information have not borne out, the rule continues to shape the interactions between the market's key players in new and unexpected ways.

And so far, government regulators haven't been tripping over themselves trying to round up FD violators.


Securities and Exchange Commission

brought all eight of its Regulation FD enforcement actions in the first four years after the rule took effect. Since 2005, however, the SEC hasn't brought a single enforcement action for a violation of the rule.

That enforcement pause happens to coincide with a 2005 case in which a federal judge threw out an SEC lawsuit against

Siebel Systems

(now part of


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) and reprimanded the SEC for enforcing FD in an "overly aggressive manner."

The SEC suit alleged that Siebel's chief financial officer had violated FD by telling attendees at a private dinner that business activity levels were good and that the company had some $5 million deals in the pipeline for its coming quarter.

But the court opined that the CFO's private comments were not materially different than what the company had already talked about publicly, faulting the SEC for scrutinizing the executive's every word, syntax and verb tense in seeking to establish a violation of FD.

An SEC spokesman says the agency has not backed off pursuing Reg FD violators in the wake of the Siebel decision. The lack of recent enforcement actions is simply a reflection of the fact that issuers understand the rule, are aware of their obligations and understand how to comply, says spokesman John Nester.

He also notes that the SEC is very active in prosecuting insider trading cases, which unlike FD, carry a fraud charge, making it a more effective tool in some situations for punishing an individual suspected of having passed on material, nonpublic information.

While FD prohibits company executives from sharing certain types of information on a selective basis, it hasn't stopped executives from talking to privileged investors or securities analysts in private.



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, for instance, hosted a group of financial analysts for a private Q&A with its chief sales and marketing officer at its headquarters in July. Unlike the yearly "analyst day" briefings organized by many companies, attendance at this event was restricted to select analysts, and Intel didn't provide a public Webcast of the event.

An Intel spokesperson said the event was limited because of space reasons, and said there was no nonpublic information or news discussed at the confab.

Attorneys concur that holding meetings outside of public forums is OK, provided the conversation doesn't involve material, nonpublic information.

"The one-on-one calls do still happen," says Steven Bochner, a partner at law firm Wilson Sonsini Goodrich & Rosati.

But he says that the chats and meetings are now tightly scripted -- often involving a preliminary coaching session with attorneys on exactly what will be discussed -- to ensure that nothing runs afoul of FD.

That's not always easy when an executive is aware of the quarter's financial progress, but must navigate through a Q&A session without spilling the beans -- particularly since merely affirming earlier guidance in a private setting could violate FD.

In some cases, says Bochner, the best course is to issue a "pre-emptive" press release in conjunction with the private meeting, updating the company's financial expectations. "You allow the management to go in and talk," he says.

Of course, not all companies issue press releases for every private meeting with a shareholder, and there's really no way to know exactly what's said behind closed doors.

"To the extent that there are still practices in the industry where you have groups of investors or individual investors having regular contact with issuers outside of public forums, you're always going to run the risk of selective disclosure taking place," says Patrick McGurn, executive vice president at proxy firm Institutional Shareholder Services.

But he notes that whatever selective disclosure may go on today is much less than in the days before Reg FD, when many companies regularly rewarded favored analysts with valuable nuggets of information.

In fact, the end of selective disclosure may also be contributing to the trend of companies doing away with offering the Street earnings guidance, reckons McGurn.

"A lot of the currency that used to be traded in selective disclosure was 'Are we going to hit our numbers?' " McGurn says.

That currency is inherently less valuable today, because companies are now barred from doling it out on a selective basis. And that might be leading some companies to rethink whether it's worth the trouble of issuing guidance in the first place.

According to a recent survey by the National Investor Relations Institute, 51% of companies polled provided earnings guidance in 2007 vs. 66% in 2006. Some companies are opting to replace quarterly EPS guidance with longer-term performance metrics, such as annual revenue and cash flow projections, according to NIRI.

Even as market practices evolve though, the bounds of FD are being tested by novel situations, such as this summer's bizarre revelation that

Whole Foods Market


CEO John Mackey had a secret habit of posting comments to online investor discussion boards.

According to media reports, those postings included comments about the company's long-range revenue expectations, prompting the SEC to look into whether they constitute a violation of FD -- something SEC spokesperson Nester wouldn't comment on.

It's been in effect for several years, but the age of Regulation FD may just be getting started.