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Comments of Patrick G. Quick

June 10, 2010

invited response to

Confusion about Reg FD Application to "Governance" Information


For a report of this and other comments, see

June 10, 2010 Forum Report:

Comments on Reg FD Application, Resolving One of Questions


Mr. Quick, whose views had been reported in the article that stimulated the Forum's current attention to applications of SEC Regulation FD, is a securities law partner of  Foley & Lardner.



Comments of

Patrick G. Quick

June 10, 2010

Reg. FD applies to material nonpublic information of any type, with no exclusion for information related to governance or compensation matters.  This is the operative language of Reg. FD:  "Whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to any person described in paragraph (b)(1) of this section, the issuer shall make public disclosure of that information . . ."  Under this language, for Reg. FD to require an issuer to make public disclosure of information, the information must be both “material” and not already public.

A key question is whether nonpublic information that a company might discuss in a dialogue with shareholders is "material" in a particular instance.  The reference to materiality in this context draws in information as to which there is a substantial likelihood that a reasonable shareholder would consider it important in making a decision to buy or sell securities.  What is material depends, among other things, on the facts and circumstances and on what would impact investors' purchase and sale decisions.  Unfortunately, there is not much (if anything) that is black or white when it comes to determining materiality, and companies must regularly make difficult judgment calls about whether particular pieces of information are material.

I would not want to minimize the significance to investors of information about governance or compensation.  Further, Reg. FD does not have an exception for information on these subjects.  But, I believe that, under many circumstances, it would be easier for directors or management to have an open dialogue about governance issues (e.g., maintaining or eliminating a staggered board, separating the positions of chairman and CEO, mandatory retirement for directors, majority voting terms, director independence) or compensation issues (e.g., identity of peer group, terms of severance arrangements) without violating Reg. FD.  I say this because I believe there is a smaller chance of saying something on these subjects in a dialogue with shareholders that is both material and not already public than is the case for other types of information, such as key operations issues.  As to compensation, one of the reasons this is true is that CD&A and other disclosure requirements result in a public disclosure on compensation matters at a level of detail that makes it difficult to say something that is material that is not already disclosed.

For illustrative purposes, here are four examples of possible topics that a company might discuss with shareholders:

(A) Whether the company should divest one or more divisions or businesses

(B) Whether the company currently expects to meet its guidance for the year

(C) Whether the company should revise its change in control severance agreements to eliminate parachute tax gross ups

(D) Whether the company should separate the positions of Chair and CEO

My view is that a company could conclude that, under the circumstances, discussions with shareholders regarding (C) and (D) are not likely to involve material nonpublic information while discussions with shareholders regarding (A) and (B) are likely to involve material nonpublic information.  If a company reaches that conclusion, it might try to steer dialogue with shareholders to subjects (C) and (D) to avoid a violation of Reg. FD.




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