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I’ve been keeping an eye out for law firm memos explaining to me what’s particularly significant about the SEC’s settlement with AT&T over alleged Reg FD violations – other than the fact that it involved the largest financial penalty ever assessed in an FD enforcement action. It’s been a week since the settlement was announced, but I still haven’t seen anything along those lines. I can’t say I’m surprised. After all, from the outset, the SEC’s allegations appeared to involve textbook examples of the kind of practices that it had long cautioned companies against.

AT&T’s 1st Amendment challenge to Reg FD was probably the most interesting part of the case, but after the SDNY shot that down along with the other arguments the defendants submitted in their motion for summary judgment, so you can see why the company was interested in settling the case. On the other hand, the SEC had something to lose if a trial went forward as well. That’s because the Court found that a jury could reasonably find for either side when it came to the issue of whether the defendants acted with scienter. 

Reg FD requires companies to simultaneously make public disclosure of any MNPI that is intentionally selectively disclosed and defines the term “intentional” to include recklessness. The Court’s discussion of the scienter issue begins on p.120 of its opinion, and among the various things it pointed to in concluding that a jury might reasonably find that the defendants didn’t act recklessly was the complete absence of any inkling among AT&T personnel and the analysts who received the selective disclosure that those communications risked violating Reg FD.

What are the key takeaways from the AT&T enforcement action? This MoFo memo on the SDNY’s decision suggests the following:

Policies and procedures alone may not be enough: At AT&T, the relevant policies, procedures, and training expressly prohibited the disclosures at issue. Nevertheless, the IR defendants and executives involved apparently understood that their actions did not violate Reg FD. Companies should consider whether changes or updates are warranted in their compliance programs to help mitigate the risk of unintended Reg FD violations. Such changes could include additional targeted trainings for those employees who communicate directly with analysts.

Timing: One way that companies can reduce the risk of possible Reg FD violations is to impose a “quiet period” late in the quarter during which company employees to whom Reg FD applies are prohibited from speaking with investors and analysts.

Utilize scripts: Where IR professionals speak with analysts, they should consider using scripts to guide their conversations. Such scripts can be reviewed by counsel and senior leadership to help ensure compliance with Reg FD.

To this list, I’d add one more item. I think the Court’s comments that nobody involved had any idea that there was a Reg FD issue in their communications are important. The Court said that went to scienter, but it’s also relevant to materiality, because it indicates that none of the sophisticated market professionals involved thought they were dealing with MNPI. I think the lesson is that materiality is always a judgment call, and one that the SEC is very willing to second guess when it comes to selective disclosure. That might just be the most important thing to keep in mind when it comes to Reg FD.

– John Jenkins