April 19, 2022

Regulation FD: Responding to a Potential Problem

It can happen to any public company – an executive is having a one-on-one with an investor or analyst, and inadvertently discloses a tidbit of information that may be material nonpublic information.  If it is, then Reg FD requires the company to promptly disclose that information to the public.  But what internal procedures should companies follow in determining whether they have a Reg FD issue?  That’s the topic of this Woodruff Sawyer blog, which lays out three steps that a company that finds itself in this situation should take:

1. Avoid making premature conclusions. Many times, potential Regulation FD issues are flagged by non-lawyers that were present at a meeting where the authorized speaker disclosed nonpublic information. In some cases, the issue may be flagged by the authorized speaker. Individuals may naturally jump to conclusions as to the character of disclosure. That should be avoided. Best practice for these individuals is to limit internal discussions and communications—particularly if they are in writing—regarding a potential Regulation FD disclosure issue to the particular facts and leave legal assessments to legal counsel.

2. Immediately contact legal counsel. A materiality determination will generally require, among other things, that counsel consult with other functions/departments within the company to assess whether the authorized speaker has in fact inadvertently disclosed material nonpublic information. This can take time—something the company doesn’t have much of. Remember, a company must publicly disclose material nonpublic information following an unintentional selective disclosure of that information before the later of (a) 24 hours or (b) the beginning of the next day’s trading on the New York Stock Exchange (NYSE). As a result, it is imperative that counsel have as much runway to assess the issue. If public disclosure is determined to be required, counsel will need to help to prepare that disclosure along with other internal stakeholders, which may be management, investor relations and finance.

3. Make certain that relevant internal stakeholders are involved, updated as to developments and made aware of the outcome. Ideally, a company will have already identified the team that should be involved in reviewing Regulation FD related issues before having to put up the Bat-Signal. At a minimum, that team should include in-house counsel, investor relations, and finance.

This third point is critical because if the disclosure results in stock price movements, the company may receive inquiries from analysts, investors, stock exchanges & the SEC. Since no single function will be on the receiving end of all of those inquiries, it’s important to involve all relevant internal stakeholders to ensure there are no information gaps.

After I posted this, a member reached out to us with the following comment, and it’s a good one: “Also, no one should trade until the situation is worked out. Insider trading while material information has been disclosed only selectively, creates additional issues for the traders, putative tipper(s) and the issuer.”

John Jenkins