Companies May Avoid Regulation FD Enforcement Proceedings

Regulation FD generally requires public companies to publicly disclose material nonpublic information that has been selectively disclosed to members of the investment community. The SEC indicated in a recent litigation release that a company may avoid an SEC enforcement proceeding for a Regulation FD violation by a key employee, even when the SEC commences a proceeding against the employee responsible for the violation. See SEC Files Settled Regulation FD Charges Against Former Chief Financial Officer, Litigation Release No. 21222 (Sept. 24, 2009), available at www.Nv.sec.gov/litigation/litreleases/2009/lr21222.htm.

Details of the Release

According to the release, key factors for the SEC in deciding whether to name the company in its complaint include whether the company: 1) has a culture of compliance, including Regulation FD controls and procedures and training sessions with counsel; 2) promptly reports the leaked information to the public on an S-K report; 3) promptly reports the Regulation FD violation itself to the SEC; and 4) reviews its procedures after the violation has occurred and revises them as necessary. The release should serve as a reminder for companies to review their Regulation FD procedures to increase the likelihood that a Regulation FD violation by an officer or employee will not result in an enforcement proceeding against the company.

Background

On Sept. 24, 2009, the SEC brought an action for violations of Regulation FD and Section 13(a) of the Securities Exchange Act of 1934 against the former CFO of American Commercial Lines, Inc., who acted as the company's designated investment relations officer. The complaint, SEC v. Black, No. 09-CV-0128 (S.D. Ind. filed Sept. 24, 2009), alleged that the officer selectively disclosed information regarding changes in the company's previously disclosed earnings guidance without contemporaneously making the information available to the public.

In particular, less than one week after the company issued a press release indicating that its second-quarter results would be “similar” to its first-quarter results, which included earnings per share of 20 cents, the CFO sent an e-mail to certain analysts stating that second-quarter earnings per share “will likely be in the neighborhood of about a dime below that of the first quarter,” which effectively reduced by half the company's second-quarter guidance. Id., para. 20.

The officer did not ask the company's outside counsel to review the e-mail even though the CEO told him to do so, and he did not show the e-mail to anyone else at the company prior to sending it to the analysts. On the first trading day after the e-mail was sent, the company's stock price dropped by 9.7% in unusually high trading volume, indicating that the e-mail conveyed material nonpublic information.

Reaction by the SEC

The SEC named the officer individually as a defendant in the action and fined him $25,000, but determined not to bring an enforcement action against the company. According to the release, the SEC considered the following factors in reaching this determination:

• Prior to the date of the selective disclosure, the company “cultivated an environment of compliance,” which included training from counsel regarding the requirements of Regulation FD and implementing controls to prevent violations of Regulation FD. See Litigation Release No. 21222.
• The officer acted independently of the company and outside the control systems that had been implemented to prevent Regulation FD violations.
• The company promptly made public disclosure of the information on an 8-K report the day that the improper conduct was discovered.
• The company reported the officer's conduct to the SEC on the day after it was discovered and provided “extraordinary cooperation” with the SEC's investigation. Id.
• The company took remedial measures to address the improper conduct, including the adoption of additional controls to prevent recurrences.

Conclusion

The SEC's articulation of its reasoning in proceeding against the officer but not the company provides a useful checklist of considerations for companies both before and after possible Regulation FD violations arise. In particular, the SEC's decision confirms the importance for public companies of reviewing their Regulation FD policies and practices to ensure that they demonstrate an “environment of compliance” regarding Regulation FD. Id.

James J. Junewicz is a corporate-securities partner in Winston & Strawn's New York and Chicago offices.

Regulation FD generally requires public companies to publicly disclose material nonpublic information that has been selectively disclosed to members of the investment community. The SEC indicated in a recent litigation release that a company may avoid an SEC enforcement proceeding for a Regulation FD violation by a key employee, even when the SEC commences a proceeding against the employee responsible for the violation. See SEC Files Settled Regulation FD Charges Against Former Chief Financial Officer, Litigation Release No. 21222 (Sept. 24, 2009), available at www.Nv.sec.gov/litigation/litreleases/2009/lr21222.htm.

Details of the Release

According to the release, key factors for the SEC in deciding whether to name the company in its complaint include whether the company: 1) has a culture of compliance, including Regulation FD controls and procedures and training sessions with counsel; 2) promptly reports the leaked information to the public on an S-K report; 3) promptly reports the Regulation FD violation itself to the SEC; and 4) reviews its procedures after the violation has occurred and revises them as necessary. The release should serve as a reminder for companies to review their Regulation FD procedures to increase the likelihood that a Regulation FD violation by an officer or employee will not result in an enforcement proceeding against the company.

Background

On Sept. 24, 2009, the SEC brought an action for violations of Regulation FD and Section 13(a) of the Securities Exchange Act of 1934 against the former CFO of American Commercial Lines, Inc., who acted as the company's designated investment relations officer. The complaint, SEC v. Black, No. 09-CV-0128 (S.D. Ind. filed Sept. 24, 2009), alleged that the officer selectively disclosed information regarding changes in the company's previously disclosed earnings guidance without contemporaneously making the information available to the public.

In particular, less than one week after the company issued a press release indicating that its second-quarter results would be “similar” to its first-quarter results, which included earnings per share of 20 cents, the CFO sent an e-mail to certain analysts stating that second-quarter earnings per share “will likely be in the neighborhood of about a dime below that of the first quarter,” which effectively reduced by half the company's second-quarter guidance. Id., para. 20.

The officer did not ask the company's outside counsel to review the e-mail even though the CEO told him to do so, and he did not show the e-mail to anyone else at the company prior to sending it to the analysts. On the first trading day after the e-mail was sent, the company's stock price dropped by 9.7% in unusually high trading volume, indicating that the e-mail conveyed material nonpublic information.

Reaction by the SEC

The SEC named the officer individually as a defendant in the action and fined him $25,000, but determined not to bring an enforcement action against the company. According to the release, the SEC considered the following factors in reaching this determination:

• Prior to the date of the selective disclosure, the company “cultivated an environment of compliance,” which included training from counsel regarding the requirements of Regulation FD and implementing controls to prevent violations of Regulation FD. See Litigation Release No. 21222.
• The officer acted independently of the company and outside the control systems that had been implemented to prevent Regulation FD violations.
• The company promptly made public disclosure of the information on an 8-K report the day that the improper conduct was discovered.
• The company reported the officer's conduct to the SEC on the day after it was discovered and provided “extraordinary cooperation” with the SEC's investigation. Id.
• The company took remedial measures to address the improper conduct, including the adoption of additional controls to prevent recurrences.

Conclusion

The SEC's articulation of its reasoning in proceeding against the officer but not the company provides a useful checklist of considerations for companies both before and after possible Regulation FD violations arise. In particular, the SEC's decision confirms the importance for public companies of reviewing their Regulation FD policies and practices to ensure that they demonstrate an “environment of compliance” regarding Regulation FD. Id.

James J. Junewicz is a corporate-securities partner in Winston & Strawn's New York and Chicago offices.