Watch Your Mouth

As Reg FD enters its fourth year, enforcements so far offer hints on how to communicate.

When Regulation Fair Disclosure took effect in October 2000, finance executives felt some trepidation that their own words might eventually hang them. As a company’s main spokesperson on matters financial, after all, a CFO is in the precarious position of routinely answering analysts’ and shareholders’ questions—especially about earnings prospects.

The initial wariness has eased a bit. Reg FD’s effort to standardize the flow of corporate information to all interested parties has resulted in only five completed federal investigations of violations so far. Four became public in November 2002, and the latest, involving pharmaceuticals giant Schering-Plough Corp., emerged this past September (see “Recapping a Reg,” at the end of this article). There’s also been just one high-profile CFO casualty: Raytheon Co.’s Franklyn Caine resigned in December 2002, a few weeks after the Securities and Exchange Commission named him in a selective-disclosure action.

But the SEC is still watching. “We’ve got a number of active investigations in the pipeline,” SEC enforcement director Stephen Cutler recently told a group of lawyers at Georgetown University. And Boris Feldman, a securities lawyer with Wilson Sonsini Goodrich & Rosati in Palo Alto, California, says the SEC’s regional bureaus are busy “reviewing Reg FD violations” and questioning CFOs about unexplained stock movements.

Still, the enforcement actions taken to date—which Gordon McCoun, senior managing director of New York­based investor-relations firm Financial Dynamics, says target the “most visible and the most obvious transgressions”—are instructive. Feldman, in fact, finds them “quite interesting from an anthropological perspective,” and likens the SEC to Talmudic scholars who “have set markers out there.” And in response, companies continue to reshape their communication strategies, says McCoun.

In fact, says Robert Profusek, a partner at the New York office of law firm Jones Day, taken together, the SEC’s actions have put companies on notice that they can no longer make selective disclosure errors—a conclusion especially obvious after the recent sanction against Schering-Plough. “It’s very clear that the incidents [investigated] so far were mistakes, not intentional bad behavior,” he explains. But under today’s more mature Reg FD, he says, the SEC has zero tolerance for any “accidental” missteps.

Between the Lines

There’s no question that companies are now taking a more uniform approach to dealing with the external flow of material information. “Reg FD codified what would be fair and balanced disclosure,” says R. Kevin Matz, a senior vice president at $4.5 billion Emcor Group Inc., and a spokesman for the Norwalk, Connecticut, company. Moreover, the rule “has achieved its main objective&it has leveled the playing field,” says Chuck Hill, director of research at First Call. “It’s forcing analysts to get back to the basics of analysis.”

For companies, the new procedures are now almost habit, says Matz. An April survey by the National Investor Relations Institute found that of the 92 percent of companies that conduct earnings conference calls, all use Webcasts or teleconferencing. And in June, NIRI found that one-on-ones and small group meetings with analysts and investors seem to be as popular as ever—an indication that companies are comfortable staying within the confines of the rule.

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