First of two parts
Corporate communicators and IR managers are facing a new world - thanks to a new federal rule, they will have to change the way they handle investor and analyst communications.
The Securities and Exchange Commission announced last week it is implementing a new rule to try to end the practice of "selective disclosure," where financial analysts receive
notice of corporate news before the public. The new rule, called Regulation FD (for "fair disclosure"), goes into effect Oct. 23, according to Amy Starr, with the SEC's Division
of Corporation Finance.
At its most basic, FD requires that any intentional release of "material information" - that is, news that a reasonable shareholder would consider important - must be released
simultaneously to all interested parties. If it's released unintentionally, whether via a slip of the tongue or a sentence in a letter, a company must provide the information
universally as soon as practicable, but within 24 hours. In other words, if a company tells one person, it must tell everyone.
There are nuances, exceptions and unanswered questions about FD, but the purpose is evident: To level the playing field for institutional and individual investors.
To Panic, or Not to Panic?
Lawyers and IR firms alike are being inundated with calls about the ramifications of FD. "I've never gotten so many calls on an issue before," says Boris Feldman, a partner in
the Palo Alto law firm of Wilson Sonsini Goodrich & Rosati.
"I think what you're seeing right now is a little bit of panic," agrees Donald E. Eagon Jr., VP of global communications and IR at Diebold, Inc., and a board member of the
National Investor Relations Institute. "There are some companies that are being a little bit [overly] cautious, in my opinion."
FD does not represent a truly new policy, rather a codification of best practices and a conclusion by the SEC that selective disclosure borders on insider trading. Most of the
professionals contacted by PR NEWS see the regulation as reinforcement for procedures companies should already be following.
Next Steps
Eagon suggests the very first thing IR professionals do is get a copy of the
regulation (it can be found at http://www.sec.gov),
make some quiet time to read and understand it, then discuss it with the corporate
counsel. "It really forces us to sit back and look at everything that we do
and see if there are things we should tighten up," he says.
Maureen Wolff-Reid, president of Sharon Merrill Associates, an IR firm in Boston, says fair disclosure starts with an internal policy. "We make sure [our clients] all have a
disclosure policy in place - what kinds of things we're going to talk about, what's material information," she says. One part of the policy is clearly identifying who the
corporate spokesmen will be, then holding a training session on their roles and responsibilities.
Feldman says some of the companies he's spoken to plan to have chaperones in place, to review releases and sit in on conversations, "perhaps the CFO or IR person, so people
don't inadvertently screw up."
Another proposed step is to impose a "quiet period" of between two weeks and a month, similar to those applied to IPOs, before releasing quarterly information. As part of this,
companies should send out a press release in advance of the quarterly numbers being released, announcing the day and time the figures will be available, and providing information
on teleconferences and/or Webcasts that are open to the public. Wolff-Reid suggests taking it a step further and, if possible, putting a release schedule for the next 12 months on
the company's Web site.
The Internet will undoubtedly aid companies in following FD's requirements. Corporate Web sites will become even more important sources of information, as companies post
notices of upcoming announcements and broadcasts, although people who don't use computers will be at a competitive disadvantage. Wolff-Reid also recommends putting investor
presentations on the Web, perhaps as frequently as once a quarter. "It is a cost, especially for some of the smaller companies," she notes. "It can be $2,500 or more to do."
The SEC regulation addresses projections of future earnings made by companies as part of their quarterly financial releases. One decision companies will have to make is, if
their prospects change during the quarter, whether or not to issue a statement revising the estimates. If the disclaimer is made that these are only projections, "you have a legal
right to wait until the end of the quarter," Feldman observes, but "the Street will never forgive you if you don't... There's no more soft landing, no more 'walking the Street
down.'"
Diebold's Eagon sees a professional opportunity for investor communications in FD. "You need to be looking at IR and communications as a unit. For us [this] makes the job a
little easier."
(Starr, 202/942-2900; Feldman, 650/493-9300; Eagon, 330/490-3770; Wolff-Reid,
617/542-5300)
Stay Tuned
Regulation FD has major ramifications for communications with external stakeholder groups -- particularly analysts -- through venues such as quarterly earnings projections and
industry conferences. Part Two of this story will address these and other related issues in two weeks.
Regarding the Requirements...
Ted Pincus, chairman of the Financial Relations Board/BSMG, shares a memo he's distributed to his firm's staff and clients on observing the requirements of Regulation FD:
1. Don't overreact. Information reduces risk; maintaining a strong, consistent
dialogue will always be key to attracting and keeping investor support.
2. FD does change the threshold of materiality. Public companies must think
through what events are truly material and plan their disclosure more precisely.
3. Start issuing quarterly position papers, including reassessments of long-term
vision and short-term outlook, to update all investors with new material information.
4. If material events are moving quickly, consider a monthly teleconference
with analysts, with the media and the public allowed to listen in. Precede it
with a press release summarizing the new information.
5. Start giving preview interviews, using a worldwide news service to broadcast
them, to reach investors simultaneously. This allows management to discuss current
developments more freely with buy-side or sell-side investors, with less chance
of running afoul of FD.
6. Plan ahead for unexpected questions. Hold monthly planning sessions on investor
communications and make a contingency plan that includes specific answers to
hypothetical questions on current issues.