SELECTIVE DISCLOSURE CHANGES IN EFFECT OCT. 23
Byline: Vicki M. Young
NEW YORK — Beginning one week from today, whispering sales numbers in someone’s ear could be riskier than sweet nothings.
The Securities and Exchange Commission’s new regulation governing selective disclosure is expected to go into effect Oct. 23, and earnings and same-store sales guidance, if shared with one analyst or investor, will need to be shared with all.
The regulation addresses sloppy communications between executives of public companies and Wall Street analysts and investors. Its purpose is to level the playing field by requiring that intentional disclosure of material, nonpublic information be simultaneously disseminated to the general public as opposed to a select few. The regulation does not cover communications by executives with the press or rating agencies, nor day-to-day business communications with customers and suppliers.
A violation of the regulation could subject the company to an SEC enforcement proceeding, such as either an administrative action seeking a cease-and-desist order or a civil action seeking an injunction and/or monetary damages. In addition, the SEC could also bring an enforcement action against the individual responsible for the violation.
The new regulation is expected to stop the leakage of information that could move a stock’s price without the general investing public being invited to the party. That was the case in October 1999 when a shareholder lawsuit filed in Manhattan federal court alleged that an Abercrombie & Fitch executive disclosed sales trend information to one analyst but not to others.
Michael Young, litigation partner at Willkie Farr & Gallagher, said the new guidelines “may turn out to be the catalyst for an extraordinary change in financial reporting. The effect of the new regulation is to shut down private, material communications with analysts, which largely had been the major vehicle for companies to disseminate news to the public. With [those] communications now impeded by the regulation, companies are actively trying to find new ways to make known things that the public ought to know.”
Bruce Kraus, a Willkie Farr partner in the corporate practice group, pointed out, “What the SEC doesn’t want is to shut the information flow between companies and analysts. I think what you’re going to see is that the Web will become a more important vehicle through which to reach out to the investment community.” However, he noted, just a passive posting of information on a company Web site without telling the public that it’s there is not sufficient public disclosure.
Ken Kopelman, a securities law expert with the law firm Kramer Levin Naftalis & Frankel, noted, “The widespread practice of confirming analyst earnings estimates or models privately is going by the wayside. We’ve already seen this trend start to take shape with the opening up of conference calls — which used to be private affairs on an invitation-only basis — to the public and to the press. You can expect a significant increase in the number of public company press releases, as well as Webcast conference calls where companies will talk directly to the entire investing public on a real-time basis.”
Indeed, at the Robertson Stephens Consumer Conference last week, some of the presenting companies agreed to a live Webcast of the conference session, with replay options for a set time period.
James T. MacGregor, managing partner at The Abernathy MacGregor Group Inc., an investor relations firm, noted that the new regulation doesn’t mean that executives of public companies are automatically out of the guidance business. He explained that what companies have to do is make a management decision about what kind of guidance to give, while making sure that they are fully aware of the consequences of that decision.
MacGregor said that, under the new rules, companies generally have four options with respect to public disclosure: disclose earnings numbers; give a broad range with four or five key elements that can help investors judge for themselves what the earnings ballpark should be; provide no numbers but give descriptions about company performance, or do nothing at all.
Toeing the fine line between what’s new information and what’s already in the public domain may prove to be a daunting task. Kraus cautioned, “Many people seem to think that if you’ve already confirmed analysts’ reports, you can do it later again. Guess what? It’s new news — not old news — because now you have a whole new month of information under your belt.”
Elizabeth Kitslaar, an attorney in the Chicago office of the Jones, Day, Reavis & Pogue law firm, wrote in the firm’s September 2000 Technology Commentaries issue, “Companies may not provide interim progress reports to analysts during a quarter — even to confirm that they are on track to meet estimates — unless they are willing to make such updates public.” She also wrote that companies might want to adopt an analyst “blackout” policy at the end of each reporting period and until financial results are publicly disclosed to minimize the risk of selective disclosure.
Kitslaar told WWD, “In addition to prohibiting interim progress reports on earnings, the regulation also prohibits issuers from ‘steering’ or ‘walking’ the Street up or down in their earnings projections.” She explained that even a simple suggestion of what to consider in making an estimate — if not shared with all — could raise some eyebrows.
Another stumbling block may be what is considered material information. “The SEC has not defined what is ‘material,”‘ said Kopelman. “There is broad agreement that if the stock moves on the information, it is material. So in one-on-ones with analysts, you can continue to talk about fashion trends and the like, but when you start to talk in private about earnings trends, you’re on very thin ice. The problem is that the new rule forces company spokespersons to make their determination as to materiality on the fly, yet their decisions will be viewed with 20/20 hindsight.”
Some financial professionals pointed out that the regulation does provide for an after-the-fact cure for material disclosures by giving companies 24 hours to publicly disclose the information that has caused the move in stock price.
Think again, advised Kraus. “I think one of the most widespread misconceptions is being able to cure mistakes. That is a much narrower exception than people believe it is. It is not curable if you say something to someone that you shouldn’t have said, unless you thought what you said was in the public domain. The SEC gives issuers the benefit of the doubt as to the judgment of materiality, [but] I can’t imagine a set of facts that fall into that category.”