The Sounds of Silence

Today starts life under the SEC's Reg. FD. Here's one lawyer's advice on how not to get nabbed.


Welcome to D-Day, or maybe Reg. FD Day would be more appropriate. But for those financial execs that haven’t boned up on it, Donald Meiers, a partner with the Washington law firm Holland & Knight, is ready for you.

Meiers, you see, used to be an attorney- advisor for the Securities and Exchange Commission’s Division of Corporation Finance, and last Friday he gave a press briefing on some of the pitfalls of the new regulation.

Meiers said that Reg. FD can be seen from at least two points of view. One is that the hubbub surrounding it may be Much Ado About Nothing. Those firms that, for example, are already in the habit of fully disclosing all material events in their regulatory filings and scrupulously obeying the letter of the law on insider trading are unlikely to run afoul of the ruling.

That said, firms shouldn’t take the rule lightly. In fact, Meiers said in his discussions with current SEC staff members, he’s been made aware of a widespread conviction to demonstrate the seriousness with which the agency views the ruling, and that there will be no grace period. Starting today, it’s a brave new world.

Part of this motivation comes from the likelihood that Commission chair Arthur Levitt is nearing the end of his term as the Clinton Administration enters its final months. Levitt is said to view Reg. FD as a crucial part of his legacy.

In response to a reporter’s question, Meiers also said that the agency won’t hesitate to make an example of a company that runs afoul of the rule. The agency could prosecute a big company as a signal that it won’t play favorites, or it could go after a small cap firm to demonstrate that no guilty party will fall through the cracks. But the enforcement staff is clearly determined to send a message to corporate America.

“Let’s face it, the SEC has limited resources,” Meiers said. “The best example would be a Fortune 500 company.”

In fact, during the weeks leading up to the ruling’s implementation, its pending adoption has already been cited by market participants as the cause for some of the recent volatility in the markets. Intel’s stock plunged in September after the company warned that its third and fourth quarter earnings would fall short of forecasts, and more than one fund manager blamed the harsh reaction to the warning of Reg. FD, clamping down on the flow of confidential information from companies to the markets.

The conventional wisdom argued that had Reg. FD not been looming over the markets, the news of the shortfall might have been leaked to key shareholders and analysts and softened the blow. While it may be impossible to prove or disprove that argument, in the weeks since then, as other firms have also warned the Street about disappointments, their share prices have reacted wildly.

According to Mike Clulow, an analyst with UBS Warburg, about a third of the companies he follows had already implemented to “practice what life will be like under FD.”

That said, Clulow feels Reg. FD is a healthy change in that the rule will force analysts to do more homework and rely less on management guidance for their earnings forecasts. That’s a good thing, for it could lead to original research.

According to Meiers, Hewlett-Packard is among the first wave of firms to spell out its Reg. FD policy, and a spokesman confirmed that the company had sent a letter out to the professional investment community spelling out the policy. Ironically, for a communiqué that covers full disclosure, the statement was not made available to members of the press and was not immediately displayed on the investor relations section of the company’s Web site.

Despite this clamp down by the company’s public relations staff, some copies of the letter had been leaked to members of the press.

As to what should management at publicly traded companies do now, Meiers said first and foremost, don’t panic. No company should feel obligated to bend over backwards to write a 20- page Reg. FD manual. In fact, such a step could give SEC regulators ammunition to use against executives who inadvertently run afoul of one of the policies in their handbook. The less said the better.

Just how much less will be said? Well, it’s entirely likely that chief financial officers will be spending more time with their employers’ legal staffs.

Meiers said companies will probably want the general counsel or a member of her team sitting in on meetings between chief executives or CFOs and securities analysts or institutional shareholders.

Now isn’t that what everybody wants? More time with our lawyers.

Click here to read the Securities and Exchange Commission’s interpretation on Reg. FD

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