TL;DR: Regulation Fair Disclosure is back. After hibernating during the Trump Administration, Reg FD is likely to be a focus of attention from the Biden-era SEC. Last week’s Reg FD enforcement action against AT&T is just the first shot.
On March 5, 2021, the US Securities and Exchange Commission filed an action to enforce Reg FD against AT&T, Inc. and three of AT&T’s Investor Relations executives. The SEC’s decision to bring a rare Reg FD case against AT&T — investigated during the Trump administration but filed in the early days of President Biden’s term — strongly suggest that Reg FD is back in focus at the SEC’s Division of Enforcement. Accordingly, US issuers may want to consider reviewing their Reg FD compliance policies and refreshing their trainings in order to safeguard against exposure to Reg FD risk. Similarly, the SEC’s decision to file charges against the IR executives is in line with the Obama-era focus on holding executives individually accountable for corporate misconduct. These developments are consistent with the trend (which we’ve discussed before) towards more aggressive enforcement activity under the leadership of SEC Commissioner Allison Herren Lee, President Biden’s appointee for Acting Chair of the SEC. These trends are likely to continue if pro-enforcement Gary Gensler, President Biden’s nominee for SEC Chair, is confirmed by the US Senate. What’s more, this policy — keeping insiders and Wall Street on a level playing field with the public — will likely find traction with some of the key leaders of the current Democratic-majority Senate, especially Senator Elizabeth Warren of Massachusetts.
Reg FD requires that when US-based public companies [1] selectively disclose material nonpublic information to certain shareholders or other market actors they must also disclose that information publicly. The public disclosure must be made simultaneously, for “intentional” selective disclosures, or “promptly,” for “non-intentional” ones. Reg FD is supposed to prevent public companies from giving Wall Street a wink and a nudge about important upcoming developments. A 2003 Reg FD enforcement action against Schering-Plough Corporation represented the high-water mark of Reg FD enforcement: no new information was disclosed, but the SEC nevertheless held that the company and its chief executive had violated Reg FD “through a combination of spoken language, tone, emphasis, and demeanor.” In the roughly 20 years since Reg FD took effect, companies have generally adapted very well to it by (for example) ensuring that calls with research analysts or major shareholders relay only non-material information (or information that has already been publicly disclosed). These adaptations are reflected in recent history: there were no Reg FD enforcement actions between 2013 and 2019, and the Trump-era SEC brought only one Reg FD case.
The SEC has had a mixed track record in litigating Reg FD enforcement cases, rather than just pushing the companies to settle. Most notably, the SEC lost the first Reg FD case to be contested in federal court. In that case, the SEC parsed the statements of a CFO to institutional investors very closely — arguing (in the court’s description) that a statement made in the present tense was “factually different” than a previously-disclosed statement made in the future tense. See SEC v. Siebel Systems, Inc., 384 F.Supp.2d 694, 704 (S.D.N.Y. 2005). The case ended with the court granting the company’s motion to dismiss and an admonishment that the SEC’s approach “places an unreasonable burden on a company’s management and spokespersons to become linguistic experts, or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company’s public statements.” Id. Although Reg FD enforcement continued after this important loss, enforcement has been extremely sporadic — as noted above, the AT&T case is only the second since 2013, and the 2013 case, in turn, was the first one brought since 2011.
Last week’s action against AT&T is based on allegations that the IR executives selectively disclosed material nonpublic information during “private, one-on-one phone calls with approximately 20 sell-side analyst firms covering AT&T” in 2016. The alleged material nonpublic information included details about the lower-than-expected rate at which AT&T’s customers were upgrading their smartphones, which had an impact on AT&T’s expectations for its revenue in Q1 2016. The SEC’s complaint alleges that the defendants shared this information with sell-side analysts to induce the analysts to reduce the analysts’ quarterly revenue estimates — in the hopes that, if the calls were successful, AT&T would not miss consensus earnings estimates for the third consecutive quarter. The complaint describes an elaborate scheme to assign each analyst firm to a specific IR executive, so that AT&T (in the words of an email quoted in the complaint) could “nip 1Q in the bud, otherwise we will be in the same spot we’ve been the last few quarters, i.e. missing revenue.” According to the complaint, AT&T’s chief financial officer (who allegedly instructed the IR team to “work[] the analysts that still have equipment revenue too high”) emailed the IR Director to say, “[w]e may just beat revenue consensus. The IR Director is said to have replied, “I think we will 😊.”
Notwithstanding the emoji-strewn emails, AT&T has already fired back at the SEC, issuing a press release asserting that “after spending four years investigating this matter, the SEC does not cite a single witness involved in any of these analyst calls who believes that material nonpublic information was conveyed to them,” and that the alleged “material nonpublic information” merely reflected well-known sector-wide trends. The SEC clearly sees it otherwise — so now, AT&T will have to make its case in New York federal court.
We have a few suggestions for companies and corporate executives if you don’t want to follow AT&T to the right side of the “vs”:
- This is a good time to review your Reg FD policies and procedures. Do you have written policies and procedures governing public disclosure and Regulation FD? Are they consistent with industry practice? Do your IR team and executive teams actually follow them?
- Have your disclosure policies and procedures been updated recently to cover social media disclosure – such as disclosures on Twitter, LinkedIn, Reddit, Facebook, Pinterest and other sites?
- Do you provide guidance? Do your main competitors provide guidance? Is it quarterly or annual? Which metrics will you provide guidance for; what is your practice regarding updates to or corrections of previously delivered guidance; and have you thought through pre-announcement processes if the quarter is coming in light?
- Who are your authorized spokespersons for Reg FD purposes? Should the list be updated or revised based on changes in management?
- Do you use non-disclosure agreements to embargo information under Reg FD and, if so, how has that worked out?
- It may be prudent to brush up on Reg FD training generally for employees and have an in-depth discussion with your authorized spokespersons.
- And one final piece of advice – distribute the actual AT&T case around to management and your authorized spokespersons. It is short and simple, and no law firm memo can make its point as well.
[1] Foreign private issuers are not subject to Reg FD. See 17 C.F.R. § 243.101(b).
