January 20, 2010

KEEPING CURRENT: Are your Regulation FD compliance procedures sufficient?

Michael R. Littenberg

During late September, the Securities and Exchange Commission settled a civil action relating to a violation of Regulation FD, which prohibits selective disclosure by public companies of material nonpublic information. Regulation FD actions are fairly infrequent, this being the first since 2007, and one of only a handful since Regulation FD was adopted in 2000. The moral of this particular tale is that thoughtful Regulation FD compliance policies and procedures can help to mitigate the consequences of a violation, which in this case avoided making a bad week even worse.

In this particular action, Christopher Black, at the time the chief financial officer of American Commercial Lines, Inc. (ACL), an operator of barges and tow boats, was alleged to have intentionally selectively disclosed a revised earnings forecast to a limited group of analysts. As the CFO, Black was one of ACL's two designated investor relations contacts. In that role, he put together ACL's investor relations policy, which included a section on Regulation FD, and, on at least two occasions, received training from ACL's counsel that included material addressing Regulation FD.

ACL's policy was to offer forward-looking guidance only once each year during its February investor conference call. During its February 2007 call, ACL projected full-year earnings per share of between $1.75 and $1.95. However, by May 2007, ACL management concluded that 2007 earnings would be significantly below previous publicly announced guidance. Second quarter 2007 earnings also were expected to fall far short of analyst expectations. Like many companies facing a similar set of circumstances, ACL decided to put out revised full-year guidance and a forecast for the second quarter.

And now we get to the beginning of Black's bad week.

On June 11, 2007, ACL put out a press release projecting annual EPS of between $1.45 and $1.65 and indicated that second quarter 2007 earnings would look "similar to the first quarter," during which EPS was $0.20.

Over the next few days, Black and the CEO went on a previously scheduled trip to meet with analysts who covered ACL. Among other things, they answered questions concerning the guidance contained in the June 11th press release. Upon returning from the trip, Black proposed sending an e-mail to all of the analysts summarizing the information discussed in the various meetings, since Black and the CEO had not been able to meet with all of the analysts as a single group. ACL's CEO agreed. He asked Black to send the e-mail by the close of business on Friday, June 15th, after first providing a draft to outside counsel to review. However, Black was unable to finish the e-mail by then and sent a draft to his personal e-mail address so that he could finish it over the weekend.

And then things started to go off the skids . . .

At some point before leaving work that Friday, Black received an updated internal analysis indicating that second quarter EPS could be as low as $0.13, which was significantly below the projection contained in the press release from earlier that week. On Saturday, Black sent an e-mail from his home account to the eight sell-side side analysts who covered ACL indicating that ACL expected "EPS for the second quarter will likely be in the neighborhood of about a dime below that of the first quarter," or approximately $0.10 per share. Before sending out the e-mail, Black did not circulate it internally within ACL or to outside counsel.

When trading opened on Monday, ACL's stock dropped significantly, by 9.7 percent, on heavy volume that represented almost a threefold increase in average trading volume up to that point in June.

ACL's CEO learned of Black's e-mail that Monday morning and ACL put out a Form 8-K disclosing the contents of his e-mail at the end of the trading day.

The SEC concluded that Black understood the requirements of Regulation FD and was aware that Regulation FD covered his communications with analysts and investors, that the earnings guidance information was material, and that the analysts had no duty to keep the information confidential. As part of the settlement, Black agreed to pay a fine of $25,000.

More importantly, from the company side, the action underscores the importance of having in place effective Regulation FD compliance policies and procedures. In this instance, the SEC declined to institute enforcement proceedings against the company—which is atypical when there is a Regulation FD violation—because it had "cultivated an environment of compliance" and took remedial measures to address the Regulation FD violation.

The compliance measures highlighted by the SEC included the following:

  • A written investor relations policy that included a section addressing the requirements of Regulation FD.

  • Periodic Regulation FD compliance training by counsel.

  • The existence of an earnings guidance policy.

  • Review by counsel of proposed written communications to analysts.

  • Prompt corrective disclosure upon learning of the Regulation FD violation and self-reporting of the violation to the SEC.

  • Adoption of remedial measures to address the violation and to prevent it from recurring.

Public companies of course need to tailor their Regulation FD compliance procedures to their own particular circumstances. However, all public companies should use this most recent action as a catalyst for evaluating the sufficiency of their Regulation FD compliance procedures and whether those procedures are followed in day-to-day practice. This action also underscores the importance of having in place, in advance, a crisis management plan that enables the company to quickly address both intentional and nonintentional Regulation FD violations.

Michael R. Littenberg

Partner, Schulte Roth & Zabel LLP

Littenberg is a partner in the New York office of Schulte Roth & Zabel LLP, where he specializes in representing public companies in transactional and ongoing compliance matters. He can be reached at michael.littenberg@srz.com or through LinkedIn.