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Comments on Reg FD Application, Resolving One of Questions

SEC prohibition of disclosure only when selective

Focusing on whether “governance” is material to investor decisions

More questions for professionals

Thanks to those of you who have responded to Monday’s invitation of comments on the application of SEC Regulation FD (Fair Disclosure) to information about corporate "governance" matters.

Based on these initial responses, we should be able to consider one of the issues resolved and refine the focus of our attention regarding the other.

SEC prohibition of disclosure only when selective

As several of you noticed, the SEC has posted a very direct “No” to the question of whether FD prohibits directors’ private communications with investors. Dated as of June 4, 2010 in its “Compliance and Disclosure Interpretations,” the post explains that disclosure is prohibited only if it is selective:[*]

Question 101.11

Question: Does Regulation FD prohibit directors from speaking privately with a shareholder or groups of shareholders?

Answer: No. Regulation FD prohibits a company or a person acting on its behalf — such as directors, executive officers and investor relations personnel — from selectively disclosing material, non-public information to a shareholder under circumstances in which it is reasonably foreseeable that the shareholder will purchase or sell the company's securities on the basis of that information. If a company's directors are authorized to speak on behalf of the company and plan on speaking privately with a shareholder or group of shareholders, then the company should consider implementing policies and procedures intended to help avoid Regulation FD violations, such as pre-clearing discussion topics with the shareholder or having company counsel participate in the meeting. In addition, because Regulation FD does not apply to disclosures made to a person who expressly agrees to maintain the disclosed information in confidence, a private communication between an independent director and a shareholder would not present Regulation FD issues if the shareholder provided such an express agreement. [June 4, 2010]

Broc Romanek, the editor of who will be conducting a webcast in September on practices for electronic shareholder meetings, pointed us to his blog posting of this welcomed SEC clarification of what he called a continuing “slew of misinformation” about FD. Those of you who have shared his frustration will appreciate the value of the SEC’s authoritative statement to encourage rather than restrict open communications.

Focusing on whether “governance” is material to investor decisions

The question of whether FD applies to “governance” information is much more complicated, and stimulated more responses. There seems to be common ground regarding the need to determine whether information would be considered “material” regardless of its classification as a governance issue, but there are clearly different views concerning the challenges of making that determination – or simply avoiding the need to do so.

A leading corporate legal and governance officer offered an unofficial, personal view of how a company should decide what information is subject to FD, assuring us in further comments that the evidence of “thousands of private company-analyst meetings and related communications each year” suggests that “most folks decide that they are up to that task:”

A characterization or not as “governance” information is the wrong way to look at FD. FD was put in place to aid in preventing insider trading, and the specific context involved is the private meeting between analysts and management where material nonpublic information may be disclosed. If “governance” or any other information is material nonpublic information, then it is subject to the FD restrictions.

Patrick Quick, the Foley & Lardner securities law partner whose views had been reported in the article that stimulated our current attention to FD, provided this summary of the SEC “material” standard as part of a more extensive explanation of his views:

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.

…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.

[For the full text as submitted by the author, see June 10, 2010 Comments of Patrick G. Quick.]

Several of you observed that most of the attention to defining what is “material” has taken place in the context of legal proceedings. Most of those, naturally, have been based on financial reporting issues. We were fortunate to get an explanation of that perspective from Lynn Turner, who was the chief accountant of the SEC at the time of its adoption of Regulation FD and was responsible for the 1999 Staff Accounting Bulletin 99 that defined SEC views of materiality for financial reporting:

The SEC has long looked to the court cases on how it defines materiality….

I have clipped the following from Staff Accounting Bulletin No. 99 (see attached) which addresses materiality in the context of financial statements.  …The SEC would look to these cases to determine if something was material - is there “...a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  If so, if it is a fact on governance, would the reasonable investors have considered it material?

[For the full text as submitted by the author, including his excerpted section of SAB 99, see June 7, 2010 Comments of Lynn E. Turner.]

More questions for professionals

For those of you with professional responsibilities to advise corporate managers or investors in their communications practices, informal discussions with Forum participants have raised additional questions that you may want to consider.

Comments on these questions will be welcomed, relating either to FD applications or to broader investor communication issues:

1.        If the SEC requires reporting of information about a subject such as compensation, should it be assumed that any additional information providing investors with a better understanding of that subject would be considered material?

2.        If proper fiduciary management of fund assets requires incurring costs for staff or outsourced review of information relevant to voting decisions, would that information have to be considered material?

3.       If information could be expected to influence voting decisions, can it be assumed that the potential influence of votes in itself might be a basis for purchasing or selling a company’s securities, and that information relating to that influence would therefore be considered material?

Your comments will of course be welcomed on any other issues concerning the E-Meetings program objectives to support more effective investor communications.

GL – June 10, 2010


Gary Lutin

Chairman, The Shareholder Forum

c/o Lutin & Company

575 Madison Avenue, 10th Floor

New York, New York 10022

Tel: 212-605-0335



[*] Note, though, that this explanation raises additional questions about the conditions under which selective disclosure may be prohibited. For example, it is unclear whether the SEC staff would consider selective disclosure of material, non-public information prohibited if the disclosure were made to representatives of a fund that holds indexed investments, since such a fund would not be reasonably expected to purchase or sell any securities based on the disclosed information.




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