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Ignorance is No Excuse: The Importance of Reg FD Training

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You may remember that Martha Stewart spent time in prison.

She served five months behind bars and another five months of house confinement at her 153-acre estate in New York, wearing an electronic monitoring bracelet, for selling 4,000 shares of ImClone Systems before news of the FDA’s rejection of one of ImClone’s cancer drugs was made public.

ImClone’s former CEO, Samuel Waskal, a friend of Stewart’s who presumably gave her the stock tip, served a seven-year prison term after pleading guilty to orchestrating stock trades, as well as to other corporate misdeeds.

How much insider trading is going on in U.S. stock markets based on material, non-public information? At least four times more than regulators actually catch and prosecute, according to research from the University of Technology Sydney. 

Could Reg FD training have helped either of them avoid prison sentences? 

We’d certainly like to think so. For Waskal, of course, he definitely knew better as CEO of a publicly traded company. Stewart may have never heard of Reg FD, but she should have known better as well, based on plain old common sense.

Whether you’re working at a public company for the first time, or you’re a seasoned pro, being aware of Reg FD (Regulation Fair Disclosure) and how to avoid missteps is vitally important. Many companies provide periodic formal Reg FD refresher training even for public company veterans. Not only does such training help prevent employees from disclosure pitfalls, but it also serves as a record that your company takes disclosure seriously.

Starting with the basics, Reg FD became effective more than two decades ago to help the SEC prevent selective disclosure of material, non-public information, remedying the perception of unfairness in communications throughout the investment community. One of the key principles of Reg FD is that information must be broadly distributed, not selectively disseminated. A good rule of thumb is to provide full disclosure to all … all the time.

What constitutes materiality? If there is a substantial likelihood that an investor would consider the subject important in the total mix of information when making an investment decision, and if it is reasonable to expect that the information could have an effect – up or down – on a stock’s price, it’s probably material.

Things to consider include receipt of a big contract, M&A, a stock buy-back program, a director or officer resignation, among many others. Materiality can be somewhat subjective though, so it’s important to communicate with your attorneys if there is any doubt.

There are two simple rules to follow to ensure you’re not running afoul of the SEC (and that you don’t wind up like Martha Stewart):

  • Never buy stock in your company, or encourage others to do so, when you are in possession of material, non-public information.
  • If you ever have questions about whether, and when, you, as an insider, can buy or sell your company’s stock, contact your CEO, CFO or legal counsel.

Keep in mind that while there are remedies for inadvertently disclosing material, non-public information, you should strive never to have to use those remedies. But, just in case, here are the steps to take should someone slip:

  • Let an authorized company spokesperson know as soon as possible, so that that person can work to promptly determine the nature and materiality of the selective disclosure. (Authorized spokespersons are required to determine the cause of the selective disclosure and take appropriate steps to reduce or eliminate the risk of recurrence.)
  • Within 24 hours of the inadvertent disclosure, or at the next opening of market session, a company may issue a press release or file Form 8-K with the SEC containing the material information that was deemed to be selective disclosure.

If it happened to Martha Stewart, is can happen to anyone. “It was horrifying, and no one — no one — should have to go through that kind of indignity, really, except for murderers, and there are a few other categories,” Stewart told Katie Couric during a 2017 interview on the Today Show.

Aside from providing Reg FD training to pre-IPO and newly public companies, along with refresher sessions, PondelWilkinson has been approved by the California Bar Association to provide one-hour Reg FD training sessions to attorneys for CLE credits. While we have to know the ins and outs to be effective trainers, we’d love to hear about your Reg FD experiences.

Laurie Berman, lberman@pondel.com

Mitigating Risk: Who’s in the Room?

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The SEC, rightfully so and perhaps long overdue, is flexing its enforcement muscle with regard to Reg FD and how companies disclose material non-public information.
 
We all know the drill by now and what public companies are supposed to do. Yet sometimes at private meetings with analysts and investors, management inadvertently says something it shouldn’t, and violates Reg FD. If there’s any unusual trading the next day, watch out.
 
While it is perfectly acceptable and even good practice for management to meet with analysts and investors from time to time, one way to mitigate the risk of Reg FD violation is to have an IR professional present at every meeting, or at least at the group meetings.
 
I know what you are thinking…”What a self-serving statement.”  Nevertheless, competent, experienced IR professionals know how to counsel management on what to say. More importantly, they can be right there, ready to intercede, when sensitive questions come up or to prepare a press release should the accidental comment be made that should really be disclosed widely.
 
Recently, the SEC began an investigation into Reg FD violation by generic drug maker Mylan, Inc., following a private meeting it held. I do not know if an IR professional was in the room, and even if there was, there would be no guarantee that harmful comments would not be made. However, at least in theory, if an IR pro was there, the risk of a disclosure violation would have been significantly reduced. And mitigating risk is really what it’s all about. Just ask your D & O insurance broker.
 
Reg FD has been around since the year 2000, and up to now, there have been few cases involving its enforcement.  Word on the Street and from Washington D.C., however, is “Beware.”  With financial reform now underway, things are about to change.

 

—Roger Pondel, rpondel@pondel.com