IR30: A look back to August 2001 – Reg FD hits IR
As Betsy Pisik wrote in 2001, IROs who make small talk with an analyst may end up making big trouble for their firm.
‘In these increasingly litigious days, even the most innocuous statement could be construed as material information,’ she wrote in a cover story for IR Magazine of the same year, entitled Open & Shut: Showdown with Lawyers over Reg FD.
IR Magazine August 2001:
So began the days of Regulation FD (Reg FD), during which time IROs realized that their words, however informally spoken, could constitute insider intel, thus violating ‘fair disclosure’. The measure, introduced by the Securities Exchange Commission (SEC), prohibited public companies from giving away information that had not already been disclosed publicly. As the fault lines of this edict grew harder to name or quantify, so corporate legal counsel became leaders of the blind up the long potholed road to the level playing field beyond.
Firms soon tooled up for the worst, hiring information gatekeepers, educating personnel and accepting that the level playing field on the other side of the steep incline would ironically require each firm to cobble together its own specially tailored policies.
First to fall
Casualties inevitably followed. A 2003 enforcement action against Schering-Plough and its former CEO came as a result of what was described by an investor and an analyst as the CEO’s ‘tone and downbeat demeanor’. The SEC alleged a breach of Reg FD, and the case was swiftly criticized for being based on ‘highly subjective issues’.
‘The SEC is making it very difficult for companies to afford to stay public – and even harder to market their story to the investment community,’ wrote John Kroen for IR Magazine in June, 2005.
The CFO of a prominent mid-cap company interviewed for comment said: ‘If the SEC continues to apply these regulations with a narrow view, it is moving in the direction of prohibiting investor communications, or at least one-on-one meetings with investors.’
In 2009 the SEC charged Christopher Black, CFO of American Commercial Lines, a marine transportation and services firm, with violation of the code. Black was fined $25,000, though the company was spared the same punishment. Former IR Magazine editor Tim Human wrote about the case in a 2010 article, along with that of Office Depot, which was slapped with a $1 mn fine (its CEO and CFO receiving equal fines of $50,000 each in addition). Less than a week after the incident, Office Depot chairman and CEO Steve Odland announced his resignation.
Where are we now?
Fast-forward 16 years to 2017, and Gregg Castano, CEO of Castano Communications Consulting, writes on November 12 of the same year that on reflection, Reg FD began well, providing clear and efficient methods for implementation among adherents.
‘One could file a Form 8K, issue a press release over a ‘widely circulated’ news or wire service – including Dow Jones, Reuters, Bloomberg, Business Wire or PR Newswire (and later others, including Globe Newswire) – or make an announcement in a forum the public has access to in person, by phone or webcast.’ He writes. ‘Easy peasy.’
But 2008 changed all that. The SEC, ‘eager to demonstrate that it knew the difference between the internet and the interstate’, issued what it called ‘interpretive guidance’, which laid out specific conditions under which firms could post compliant non-public information of a material nature to its website.
This augmentation led to what was now called ‘notice and access’, where corporates send out notification of earnings postings on the wire. GE, JPMorgan Chase and Ford Motor were among the first to take this up. As Castano argues: ‘This is a little like asking your wife to make dinner reservations for you and your mistress. Awkward.’
Notice and access, following the law of ‘unintended consequences’ on the road paved with good intentions, has hurt retail investors unable to harness ‘high-speed web-scraping tools’ that institutional players use daily. Instead, they are confronted with the prospect of having to cross-reference multiple corporate sites to arrive at the same information a fair step short of the rest of the herd.
‘Unless you’re the 10-armed Hindu goddess Durga, you don’t stand much chance of executing timely trades before the share prices start moving,’ Castano writes. ‘Just because you can do something doesn’t mean you should. With new SEC chairman Jay Clayton on board, now is the ideal moment to push for rescinding or revising this ill-conceived ‘suggestion’ and restore equilibrium to that once level playing field.