Reg FD

From first principles, you might imagine that the investor relations department at a big public company would want to give investors as much information as possible. Tell them what earnings will be like next year, break down the drivers of those earnings, explain the risks, whatever seems helpful. And then if the investors have more detailed follow-up questions, you answer them.

Obviously there are limits. For one thing, you would not want to give investors information that could hurt your business; you wouldn’t violate customer confidences or give away competitive information or whatever. For another thing, you want to be helpful but not overwhelming; you might not disclose minute-by-minute revenue numbers because that might annoy investors more than it helps them. But if anyone asks for more detail, sure, give it to them.

Presumably this is not how every investor relations department thinks about things. For various reasons, some companies will have incentives to trick their investors. The main one is that some companies will want to trick their investors into thinking that their stock is worth more than it is, so that the investors will buy it (from the company, from its executives) for a lot of money; this seems bad but sort of understandable. (Some versions of it are fraud; others are, like, motivated reasoning and overconfident executives.)

Other companies just won’t care about being helpful to investors; they will think thoughts along the lines of “we want committed long-term investors who do not obsess over short-term quarterly results, so we will keep our guidance vague to weed out the short-termists. Anyone who cares about next quarter’s earnings is not an investor we want.” (Or: “If we tell our investors everything about what we’re doing this quarter to accomplish our long-term goals, they will pressure us to stop, because they care only about short-term results and won’t believe us about our long-term plans.”) I find this position pretty annoying but it does seem to be popular. 

Still I presume that a lot of big normal companies will have investor relations departments whose basic goal is helping investors understand the company, and whose basic instinct, when an investor calls with a question about the company, is to try to answer it. Similarly, when a Wall Street analyst calls with a question about the company, the company will try to answer it, because the analyst is in the business of writing reports explaining the company that are read by lots of investors, so answering her questions is a good way to help investors understand the company better.

In the US, there are two major legal constraints on this desire:

1. Regulation FD says that you cannot give one investor, or one analyst, “material nonpublic information” that you don’t disclose publicly. The intuition here is that you are not allowed to favor one investor — or one analyst, or one group of investors, or analysts generally — over the general public. Retail investors who own 100 shares and never call investor relations need to get the same information as Wall Street analysts whose job is to cover the company.

2. “ Everything is securities fraud” says that, among other things, the more information you publish, the more likely you are to get sued if some of it turns out to be wrong.

And so companies mostly do not put out weekly public filings saying “here’s how we currently think our quarter is going, here’s our best guess about the quarterly financial results, and here are some of the important drivers that we’re looking at,” because if those things turned out to be wrong or revised someone would complain. And if you call up a company asking them for that information, they might want to tell you, but due to Regulation FD they can’t.

It is a little hard to know what you should do, if you run investor relations at a big normal US public company. The rough answer is something like “disclose all the big important things publicly, being very careful to run them by lawyers and make sure they’re correct or at least appropriately caveated, and then if investors or analysts call you or come into meetings, tell them small things.” There is some category of stuff that is material enough that, if investors ask you about it and you tell them, the investors appreciate it and understand the company better, but that is not so material that you have to disclose it to everyone at the same time. This feels like a somewhat unsatisfying compromise. Some sorts of information will be in a gray area, where you might think it’s okay to tell one investor, but later the US Securities and Exchange Commission decides that you should have told everyone.

But one further consideration here is that meetings between corporate executives and investors or analysts are very very common, while Regulation FD enforcement actions are very very rare. So, uh, not legal advice, but there’s a decent chance that if you tell investors information that you think is in the gray area, you won’t get in trouble for it.

We talked last year about a rare Regulation FD enforcement action against AT&T Inc. Basically AT&T learned that its smartphone sales were worse than it had expected, meaning that its revenue would be worse than the market expected, so its investor relations employees called a bunch of Wall Street analysts to explain the situation so that the analysts could understand the company better. This worked, the analysts updated their estimates, and when the quarter ended AT&T’s revenue was less of a surprise.

In some sense this is just good investor relations. In another sense, I suppose AT&T could have put out a press release saying “hey everyone our smartphone sales are coming in lower than we expected, here’s how you should update your models,” and that would have been better — at least, more equitable — investor relations. But there are risks there too, and in fact AT&T’s chief financial officer spoke at a conference and tried to gesture at that in a vague and heavily lawyered way:

But in more private settings, on calls to analysts, AT&T could be more helpful, and it was.

The SEC sued; AT&T indignantly replied that it did not share any material nonpublic information with the analysts — it was in the gray area, but well on the right side of the line — and this week they settled for a fine of $6.25 million. The SEC says:

It doesn’t really though. It ensures that issuers don’t disclose material information to select analysts, but nothing about it guarantees that they will disclose it to the entire market. They can just keep quiet and have the earnings come as a surprise. I am not sure that that’s better.