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More often than not, when a company becomes public for the first time, it is ill-equipped to handle all of the nuances of the Securities and Exchange Commissions disclosure requirements. Corporate officials have become so engrossed in the process of going public and all of its Blue-Sky requirements that little time is spent by management to create a cohesive policy on determining what is material and what is not material in public announcements. This become exceptionally significant, as a small misstep in this arena can lead to a large lawsuit or even a criminal indictment with regard to management’s responsibility to disclose, what, when and how much.

There has never been a perfect press release, or for that matter a perfect non-press release. However, with that being said, stockholders are entitled to know what is transpiring in “their” company (since they are also now “owners” of the company). The process of going from a situation where corporate officers did not owe allegiance to anyone but themselves (and maybe a few “angel” investors) to a condition requiring “full and fair disclosure” can be likened to the birthing process or the war in Iraq: filed with “shock and awe.”  Suddenly, their baby has to become transparent.

As our nation’s economic health improves and our marketplace becomes more user friendly; more of our clients and friends will have to deal with the critically important issues that are contained in the following article by Gretchen Cowen, a principal in the law firm of Weintraub Dillon, P.C. The Weintraub firm is a recognized expert on the subject of Regulation FD and disclosure rules in general, and this article is a roadmap for understanding where the regulatory stop signs, animal crossings and bumps are located.

We believe this article to be most excellent and timely piece that we have read on what is indeed a very tough, convoluted and unsettled subject. Should you have any further questions in this regard, please call Ms. Cowen directly at (858) 259-2529.

This is a very classy boutique law firm, and we wouldn’t go across the street in this arena without at least consulting them as to their thoughts on such matters.


By Gretchen Cowen

Weintraub Dillon PC

Regulation FD was adopted on October 23, 2000, in response to SEC concerns regarding selective disclosure of nonpublic information to a particular set of persons outside of the issuer, including broker-dealers and their associated persons, such as: analysts; investment advisors, institutional investment managers and their associated persons; and registered investment companies, unregistered private investment companies, including hedge funds and some venture capital funds, and their affiliated persons.  In addition, the regulation prohibits sales to some individual investors (the SEC was concerned about the dissemination of material, nonpublic information to institutional investors).  The regulation is designed to level the playing field by requiring material information to be given to all investors simultaneously, rather than a select few who could then take advantage of the early information.


There are a few exceptions to this prohibition stated in the regulation.  These exceptions include the following:


      communications with persons owing a duty of trust or confidence, such as the issuer's accountants or attorneys or an investment banker;

      communications with persons who have agreed to keep the information confidential;

      communications made in connection with most offerings registered under the Securities Act of 1933; and

      communications with entities whose primary business is the issuance of credit ratings, provided that the information is disclosed solely for the purpose of developing a credit rating and the entity's ratings are publicly available.

The Rule

The basic rule under Regulation FD provides that, when an issuer or someone acting on the issuer's behalf selectively discloses material, nonpublic information to individual investors and market professionals where it is reasonably foreseeable that those persons will trade on the basis of the information, then the issuer must make public disclosure of the information.  This public disclosure must be made simultaneously with the release of information to the selected individuals if the disclosure of material, nonpublic information is intentional, and promptly after release of the information to the selected individuals if disclosure was unintentional.

The standard for determining whether the disclosure was intentional is whether the company had actual knowledge or was reckless in not knowing that the information was material, nonpublic information. How promptly is "promptly? That's within 24 hours or by commencement of the next day's trading on the NYSE. The disclosure must be turned around very quickly, but there are steps you can take to ensure compliance. We will discuss that in further detail later in this memorandum.


There are several other questions built into the rule. First, what is material? The SEC did not include a test for materiality in the regulation, but did cite the common law test in its adopting release. The test for materiality, as adopted by the Supreme Court in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1876), is whether "there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision or that it "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." The SEC also cited, with approval, the SEC's Staff Accounting Bulletin No. 99 ("SAB 99"), which requires companies to consider both qualitative and quantitative factors in assessing the materiality of information.

The SEC softened the blow a little by stating that "[a]t the same time, an issuer is not prohibited from disclosing a non-material piece of information to an analyst, even if, unbeknownst to the issuer, that piece helps the analyst complete a 'mosaic' of information that, taken together, is material. Similarly, since materiality is an objective test keyed to the reasonable investor, Regulation FD will not be implicated where an issuer discloses immaterial information whose significance is discerned by the analyst. Analysts can provide a valuable service in sifting through and extracting information that would not be significant to the ordinary investor to reach material conclusions. We do not intend, by Regulation FD, to discourage this sort of activity. The focus of Regulation FD is on whether the issuer discloses material nonpublic information, not on whether an analyst, through some combination of persistence, knowledge, and insight, regards as material information whose significance is not apparent to the reasonable investor."

Although this statement may give issuers some modicum of comfort, prior to making a determination as to what is or is not material for purposes of disclosure to any analyst, you should be advised that you run the risk that the nonpublic disclosure could later be found to have been material to the "reasonable investor." At that point, it is too late to make the correction.

To aid companies in making this determination, the adopting release listed several categories of information which the SEC recommended for review to determine materiality. The following list is not exclusive:

      earnings information (although the SEC indicated that it did not intend to imply that any of the items on the list were per se material, earnings guidance will almost always be considered material and selective disclosure of this type of information was the primary impetus for the regulation).

      mergers, acquisitions, tender offers, joint ventures or changes in assets.

      changes in control or management.

      new products or discoveries, or developments regarding customers or suppliers.

      changes in auditors or notification that the issuer may not rely on the auditor's report.

      events regarding the issuer's securities, including, but not limited to defaults on senior securities, calls of securities for redemption, repurchase plans, changes in the rights of security holders, public or private sales of additional securities, stock splits or changes in dividends, or bankruptcy or receiverships.

Nonpublic Information

Although the regulation also does not provide a definition of "nonpublic, "the adopting release again turns to case law, citing Texas Gulf Sulphur, 401 F.2d 833, 854 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969) in stating that "[i]nformation is nonpublic if it has not been disseminated in a manner making it available to investors generally." Disclosure must be "reasonably designed to effect broad, non-exclusionary distribution of the information to the public." Although the SEC indicated that filing of a Form 8-K will constitute proper disclosure for this purpose, and the form was amended to allow for disclosure solely for Regulation FD purposes, there are times when filing on a Form 8-K is inadvisable and it can certainly be more expensive.

Form 8-K allows for alternative means of disclosure under Items 5 and 9. Item 9 was added following adoption of the regulation in order to allow issuer's to disclose information without making it subject to Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934. Filing information under Item 5 will allow incorporation of the information by reference into the issuer's registration statements on Forms S-3 and S-8, subjecting the issuer to possible liability under Section 11, and will subject the information to liability for misleading statements under Section 18. Information "furnished" under Item 9 will not be considered to be "filed" for liability purposes. However, information included under either Item is still subject to the antifraud provisions of Section 10b-5. You should consult your legal counsel prior to determining whether to supply Regulation FD disclosure on Form 8-K and to determine which method of Form 8-K disclosure is right for you.

In addition, if you are governed by a self-regulating organization, please remember that organizations such as the NYSE and NASDAQ require companies to issue press releases to announce material developments.  As a result, even if you are using Form 8-K to satisfy the SEC, you may still need to put out a press release to satisfy your SRO.

Alternative and less formal means of disclosure may also be used either singly or in conjunction with Form 8-K. Information provided in a press release that is widely circulated may be sufficient to meet the standard above. However, if you know that your press releases are not routinely  carried by major business wire services, it may not be sufficient to make public disclosure solely by submitting a press release to one of these wire services.  Before relying solely on a press release, you should ensure that your press releases are routinely carried by such services as Dow Jones, Bloomberg, Business Wire, PR Newswire or Reuters.  If they aren't, you should consider using other or additional methods of dissemination. This may include a combination of a press release or distribution of information to local media and filing or furnishing information on Form 8-K, posting the information on your website, or using a service that distributes the press release to a variety of media outlets and/or retains the press release. As an example, the adopting release sets forth a three-prong approach to disclosure using the following, combined forms of media:

1.                  Issue a press release distributed through your regular channels that contains the information.

2.                  Hold a conference call with adequate prior public notice by another press release and/or website posting of the time and date of the call and with instructions on how to access the call; and

3.                  Make the conference call open to the public, either by telephone or web-casting.

Aside from a Form 8-K filing, your specific facts and circumstances will dictate the proper method of disclosure under Regulation FD. The release states that, "[a]s a general matter, acceptable methods of public disclosure for purposes of Regulation FD will include press releases distributed through a widely circulated news or wire service, or announcements made through press conferences or conference calls that interested members of the public may attend or listen to either in person, by telephonic transmission, or by other electronic transmission (including use of the Internet)." If you are using a conference or call, the public must be given adequate notice of the conference or call and instructions for access.

The SEC deliberately stated that posting information on your website does not, in and of itself, qualify as a sufficient method of public disclosure, although it may be coupled with other means of disclosure to meet the requirement. The SEC acknowledged that website disclosure is an important component, and indicated that, as technology progresses and as more investors have access to the Internet, some issuers whose websites "are widely followed by the investment community" may be able to meet the standard with website postings. However, as late as December 2002, the SEC reaffirmed its position that website disclosure in and of itself is insufficient under Regulation FD. If you are web-casting, make sure that notice of the web-cast is put out by a more widely disseminated and acceptable method of disclosure under Regulation FD, and not just posted on your website.


The SEC finally took action under Regulation FD in November 2002, when it filed actions against Raytheon Company (Release 46897; 11/25/02), Secure Computing Corporation (Release 46895; 11/25/02), Seibel Systems, Inc. (Release 46896; Lit.  Release 17860; 11/25/02), and Motorola, Inc. (Release 46898; 11/25/02).

Raytheon Company

 The SEC issued a cease and desist order finding that Raytheon had selectively disclosed quarterly and semi-annual earnings guidance information to securities analysts.

According to the order, Raytheon's CFO issued guidance for its 2001 annual earnings per share during a publicly available web-cast, but had not disclosed how it expected the earnings would be distributed quarterly.  Analysts projected much higher earnings for the first quarter than the company had privately projected. In response, the CFO made a series of private telephone calls in an attempt to convince analysts to lower their projections. Following the conversations, each of the analysts reduced their quarterly earnings estimates in amounts ranging from $0.01 to $0.10, resulting in an overall reduction in estimates below or even with the company's own. In addition to lowering estimates, two of the analysts announced the reduction to their firm's sales forces. One firm's sales force sent emails to institutional clients indicating that the company was having problems and indicating that the stock was at risk. The price of Raytheon's B stock fell approximately 6% on that day.

The SEC found that, during those calls, the CFO provided more detailed information to analysts than had been publicly disclosed, including specific guidance about how the company expected the year's income to be distributed in the different quarters. In addition, during the calls the CFO had indicated to analysts that their projections were "high," "aggressive," or "very aggressive." The SEC found that these types of statements also revealed certain non-public, material information.

In determining that the information was "material," the SEC took into consideration the subject matter of the information (i.e., earnings guidance), the CFO's active role in contacting the analysts, their consistent reaction in lowering projections, and the announcement of the reduction to the firms' sales forces. The order indicated that the disclosure involved "substantial likelihood that a reasonable investor would consider the information important in making an investment decision or alter the total mix of available information."

In making its determination that the information given to analysts was "nonpublic" information, the SEC considered the level of detail given in the public disclosure and that given to analysts.  The SEC went on to state that public disclosure in this circumstance was required to be made simultaneously because the information was dispersed to analysts intentionally.

Secure Computing Corporation

The SEC issued an order finding that Secure Computing Corporation and its CEO disclosed material, nonpublic information during a conference call with institutional investors prior to release of the information to the public. According to the order, the company had entered into an OEM agreement with one of the nation's largest computer networking companies in early 2002, but neither company had announced the agreement to the public. The company's CEO conducted a conference call with a portfolio manager in an investment advisory firm, a salesperson at the brokerage firm and the company's investor relations director. The call was not publicly accessible.

During the conference call, the CEO disclosed information about the recently completed, but not finalized, agreement. After the call, the company's investor relations director informed the CEO that the information had not yet been made public by leaving him a voice mail. It had been referred to on the company's website, but no specific details had been released. The CEO contacted the managing director of the brokerage firm and requested that the information be kept confidential, but no public disclosure of the agreement was made at that time.

The next morning, trading volume for the company's stock rose significantly, and the company received several calls from investors and analysts indicated that there were rumors about the OEM agreement. On the same day, during another conference call with a portfolio manager of another institution advisory firm, the CEO confirmed the deal with a buyer and told the advisor that the agreement had not yet been publicly announced. Although the initial disclosure had not been intentional, and the company could request confidential treatment from the brokerage firm, the SEC found that the disclosure made in the second conference call was intentional and that the information was required to be publicly disclosed simultaneously with the conference call. A press release containing the information was not released until approximately three hours later. Between the nonpublic disclosure and the company's press release, the stock price rose approximately 7%. It rose an additional 7% following the public announcement.

Siebel Systems, Inc.

In November 2001, the CEO of Siebel Systems, Inc. participated in a technology conference hosted by Goldman Sachs & Co. The SEC found that, during the conference, the CEO disclosed material, non-public information to the attendees of the invitation-only conference, including positive comments about the business which contrasted with negative comments made by him during a public conference call three weeks earlier. Specifically, he stated that the company was "pretty optimistic" because it was experiencing "a return to normal behavior in IT buying patterns" and because "the linearity of the Q4 will be about what we saw in Q4 of the previous two years." The attendees at the conference included broker-dealers, investment advisers and investment companies, including large institutional investors in the company's stock.

The company's investor relations director was aware that the conference was not being web-cast, but had failed to inform the CEO.  Immediately after the disclosures, certain of the attendees purchased the company's stock or communicated the information to others who purchased stock. The company's stock price closed approximately 20% higher than the prior day's close with almost double the trading volume.

In this instance, as opposed to the orders issued against Raytheon Company and Secure Computing Corporation, the SEC coupled its cease and desist order with a $250,000 civil penalty against the company over the dissenting opinions of two of the commissioners. As support for its position, the SEC indicated that the fact that at least some of the attendees of the conference made immediate trades or communicated the information to others was evidence of the materiality of the information. In addition, the SEC found that the company was liable based on the knowledge of the investor relations director, even though the CEO was unaware that the disclosure was not being web-cast, finding that the disclosure was intentional and, therefore, simultaneous public disclosure was required.  The SEC's willingness to piece together the knowledge of the two individuals in order to determine mental state is indicative of its determination to enforce the regulation, and stresses the importance of good internal communication and disclosure controls.

Motorola, Inc.

In February 2001, Motorola, Inc. issued a press release which constituted sufficient public disclosure under Regulation FD. The release indicated that sales and orders were experiencing "significant weakness" and that the company would likely miss its earnings estimates for the quarter and experience an operating loss if the pattern continued.  In response, analysts did lower their estimates. However, in at least ten subsequent calls to analysts, the company's investor relations director indicate that the term "significant" referred to a rate change of 25% or more. The Commission disagreed with legal advice obtained by the Company to the effect that a quantitative definition for a qualitative term was not material information, stating that it was "clearly material" information selectively provided in contradiction to the mandate of Regulation FD.  However, in this instance, the SEC did not issue an order because the company had sought and relied on legal advice before taking any action and because the advice was both sought and given in good faith.

Following its decision in the Motorola, Inc. matter, the SEC cautioned the company and other issuers that a defense of reliance on counsel will turn on the facts and circumstances of the case and will not be available where relevant facts are not disclosed to the attorney or where the advice was not "faithfully given and followed." The SEC provided two examples where it might reject such a defense:

            First, the SEC indicated that the defense would not be acceptable where the counsel simply provides the standard for materiality and asks the company to make a determination as to materiality.

            Second, the SEC indicated that the defense would not be acceptable where the company's officer, despite seeking legal advice, knew or was reckless in not knowing, that analysts or investors did consider the information material.

Still, one lesson that can definitely be learned from the Motorola, Inc. decision is that it is good practice to seek legal advice whenever there is an issue of compliance with Regulation FD. Companies have alternative means of disclosure, and varying degrees of risk, and it is important to find a compliance program that is right for you.

Establishing Internal Disclosure Controls

First and foremost, you should establish communication within the company to ensure that the people speaking on your behalf are aware of what has been publicly disclosed, and what it is not okay to discuss. You may do this through any number of controls, but the most effective is to establish a written disclosure policy and adhere to it. In formulating a written disclosure policy, you should consider including the following steps to avoid selective disclosure of material, nonpublic information:

1.      Limit the number of authorized spokespersons for the company. It is also a good idea to designate one of those spokespersons to be present at all conversations with investors and/or analysts. You should avoid allowing persons who are not designated spokesperson to speak to investors and/or analysts. Persons who are designated as spokespersons should receive adequate training with respect to the requirements of Regulation FD.

2.      If you are going to issue earnings guidance, you should do so in a quarterly press release that is publicly disseminated within the meaning of Regulation FD. The SEC has indicated that disclosure of earnings estimates entails a "high degree of risk under Regulation FD."

3.      Script any earnings and analyst conference calls, coordinating preparation with in-house and, possibly, outside counsel. Do not provide updates to previous estimates unless you are making simultaneous public disclosure of the updated information, and do not attempt to speak with analysts in code (i.e., no winking, nodding or indirect guidance).

4.      Establish end-of-quarter black-out periods and do not have non-public conversations with investors or analysts during those periods.

5.      Announce through a widely disseminated press release the schedule for any web-cast or conference calls, including access information.

6.      Anticipate topics of conversation and include the appropriate disclosure in the MD&A and other appropriate sections of your periodic reports. However, remember that the degree of specificity of such disclosure is important, and future communications on topics disclosed in the reports should not provide significantly more specific information than is included in the reports. If you do not feel comfortable disclosing more specific information in your reports, you shouldn't be doing so in a conference call with institutional investors or analysts.

7.      In any non-public meetings with investors or analysts, avoid responding to open-ended questions, and establish the topics of conversation and level of disclosure prior to the meeting. You should determine prior to any meeting whether it is covered by the limitations of Regulation FD and prepare yourself accordingly.

8.      Establish lines of communications between the persons preparing the materials for your investment presentations or road shows with the persons preparing your periodic reports to (1) ensure that information you want to discuss in those presentations is publicly disclosed in advance, and (2) to avoid disclosure of information which has not been so disclosed. Spokespersons speaking at any event which may be attended by securities market professionals should know prior to the event whether it is being made public, and should have a good working knowledge of what information has already been made publicly available. If an event is not being made public, the spokesperson should be instructed to limit his or her presentation to public information. If it is public, you should determine what information you do want to make public and avoid any topic which represents information that has not been made public and which you are not ready to make public.

9.      Establish a team of people to determine whether any unintentional disclosure of material, nonpublic information has taken place and a procedure for making public disclosure within a 24-hour period or by the start of the next trading day. This emergency team needs to have the ability to contact each other on an immediate basis, so it is a good idea to exchange phone numbers, including mobile phone numbers, to enable an emergency response. Whenever material nonpublic information is selectively disclosed, you must take immediate steps to ensure public disclosure of the same information.

10.  Consult in-house and, possibly, outside counsel on questions of materiality of information prior to disclosure.

Most of the items on the foregoing list can be included in your written disclosure policy, and should be considered for inclusion in order to provide some hard-line tests to your spokespersons. The importance of keeping everyone on the same page cannot be over-emphasized.


While the restrictions of Regulation FD may make you want to take a closed-mouth approach to disclosure, it wasn't adopted for that purpose. Keep in mind that the regulation is designed to level the playing field, providing equal disclosure to all investors. So, don't clam up. If you have something to say, just say it to everyone.


For further information, please contact Gretchen Cowen, Esq.  Our main phone number is (858) 259-2529.  Weintraub Dillon, PC, 12520 High Bluff Drive, Suite 260; San Diego, CA  92130   Fax: (858) 259-2868




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