Regulation Fair Disclosure – Frequently Asked Questions (FAQ)
Since its inception in August 2000, Regulation Fair Disclosure (FD) has been an object of great speculation and debate. More recently, the Securities and Exchange (SEC) Commission has issued a number of updates on the topic and there have also been a number of significant actions taken by notable stakeholders in the private sector that have expanded the framework for how companies meet Reg FD. These developments have culminated in an acceleration of public interest and discourse on this topic. The issues at hand impact a significant portion of our clients and we would like to take this opportunity to address some of the questions that have arisen in regards to Regulation Fair Disclosure.
1. What is Regulation FD?
On August 10, 2000, the SEC finalized new regulations that sought to limit the practice of selective disclosure. Regulation FD was one of several amendments put in place to address selective disclosure.
According to Regulation FD, when an “issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), it must make public disclosure of that information.”
The SEC recommended the following methods to satisfy public disclosure in Rule 101(e):
- Filing or furnishing a Form 8-K;
- Or by another method or combination of methods reasonably designed to effect, broad, non-exclusionary distribution of information to the public.
2. What types of information can be considered “material”?
There is not an exhaustive definition for what constitutes material from non-material information however the SEC does provide the following examples of information or events that should be carefully considered: (1) earnings information; (2) mergers, acquisitions, tender offers, joint ventures, or changes in assets; (3) new products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of a contract); (4) changes in control or in management; (5) change in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report; (6) events regarding the issuer’s securities — e.g., defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, public or private sales of additional securities; and (7) bankruptcies or receiverships.
3. Do publicly traded companies have to issue material announcements over newswires like PR Newswire and Business Wire?
No. The SEC has never stated that it is obligatory for organizations to use a newswire service to satisfy Regulation FD. The SEC does however refer to press releases distributed through a news service as being an “acceptable” vehicle for satisfying FD. Rule 101(e) defines the type of “public disclosure” that will satisfy the requirements of Regulation FD. The SEC intentionally defined Rule 101(e) in somewhat broad terms to provide a certain degree of flexibility on the part of the company in determining how they would satisfy public disclosure requirements. According to the SEC, “the regulation does not require use of a particular method, or establish a ‘one size fits all,’ standard for disclosure.” Rather, the onus is on the issuer to determine the methods appropriate for their organization to satisfy public disclosure.
4. Can publicly traded companies simply issue material announcements on their Web site?
Possibly. In the 2000 ruling, the SEC addressed the use of corporate Web sites as a disclosure method by stating that “it would not by itself by considered a sufficient method of public disclosure,” although they did note that as technology and consumption patterns evolve, “some issuers, whose websites are widely followed by the investment community, could use such a method.” In 2008, the SEC issued an interpretive release that was intended to provide guidance on the use of “company web sites under the Exchange Act and the antifraud provisions of the federal securities laws.” At this point in time, the SEC explained that evolving communications trends had created a situation where in some cases a company’s own Web site could be used as a “stand-alone method of providing information to investors independent of EDGAR.”
The key to determining the viability of the method is in the determination of whether or not a corporate Web site could be deemed, “public.” In determining whether or not a corporate Web site is public, an organization should consider the following:
- Whether the Web site is a recognized channel of distribution.
- Whether posting of information on a company Web site disseminates the information broadly.
- Whether there has been a reasonable waiting period for the market to react to the posted information.
Based on these considerations, the SEC concluded that they “now believe that technology has evolved and the use of the Internet has grown such that, for some companies in certain circumstances, posting of the information on the company’s Web site, in and of itself, may be a sufficient method of public disclosure under Rule 101(e) of Regulation FD.”
5. What does this all mean for publicly traded companies?
When it comes to meeting fair disclosure, there is no “one size fits all” approach. The SEC intentionally left their guidance broad to help companies pick a methodology that would best suit their own communications approach.
Many who have been tracking the discussion are familiar with the trailblazing actions of Sun Microsystems, Inc. More recently, Google has transitioned to using a wire service to issue an earnings advisory in which they direct people to their own Web site, where the full version of their earnings announcement resides. For the last two years, we (Vocus) have been using our own news distribution service, PRWeb, to issue our own material announcements. For more information on new methods companies are using to satisfy Regulation FD, we highly recommend reading IR Web Report.
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