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Regulation FD Does Not Cover Private Statements of Available Information

A chief financial officer's statement about million dollar deals in the company's pipeline at a private event for institutional investors did not violate Regulation FD, in the view of a federal district court (SD NY) because the statement was substantially equivalent to earlier public statements by the company's CEO. Regulation FD does not require that corporate officials utter only verbatim statements that were previously publicly made, reasoned the court, so long as the private statement conveys the same material information as the public statement. Although the CFO's private statement was not literally a word for word recitation of the CEO's public disclosure, noted the court, both statements provided the same information. The CFO's statement neither contradicted nor significantly altered the material information available to the public. Since it could not constitute a basis on which to allege a non-public disclosure of material information in violation of Regulation FD, the SEC's enforcement action was dismissed.

Regulation FD governs selective disclosure to specified persons. The basic rule is that, whenever a company or a person acting on its behalf discloses material, nonpublic information to securities market professionals, or to shareholders who may well trade on the basis of the information, the company must make public disclosure of that same information simultaneously, for intentional disclosures, or promptly for non-intentional disclosures. But according to the court, Regulation FD was never intended to be used in the manner that the SEC attempted to use it in these circumstances. The CFO's private statement regarding the existence of five million dollar deals in the company's pipeline for the second quarter was substantively equivalent to the earlier public statement by the CEO who, in giving second quarter guidance, said that the company would see a number of deals over one million dollars and "I suspect we'll see some greater than five."

The SEC contended that the CFO's statement was in the present tense and thus constituted a factually different material statement than that made by the CEO, which was made in the future tense. The SEC also said that that the CEO's use of the word "suspect" indicated that his statement was not a present fact but rather was forward-looking. In the court's view, there is nothing in Regulation FD to support the SEC's heightened scrutiny of every word used in the statement, including the tense of verbs and the general syntax of each sentence. This approach places an unreasonable burden on a company's management and spokespersons to become linguistic experts or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company's public statements.

Adoption of this demanding standard could compel companies to discontinue spontaneous communications so that the context of the intended communication can be examined by a lexicologist to ensure that the proposed statement discloses the exact information in the same form as was publicly disclosed. If Regulation FD is applied in this overly aggressive manner, cautioned the court, its very purpose of providing investors a broad flow of relevant information would be thwarted. The SEC's enforcement of Regulation FD by excessively scrutinizing vague general comments would have a chilling effect that could discourage the public disclosure of material information.

Similarly unavailing was the SEC's claim that the CFO's private statement that the new business pipeline was growing or building was information not previously publicly disclosed. According to the court, the CEO's earlier public statements clearly disclosed a projected increase in second quarter revenues partially based on an analysis of the pipeline. With this information, said the court, a reasonable investor would be aware that the sales pipeline was growing and building. Thus, the private statements added nothing to the total mix of public information. Similarly, the CFO's private statement that the company's business activity levels were good or better added nothing to the public information mix, since the company had previously reported that it anticipated a future increase in corporate performance.

The court also rejected the SEC's contention that the CFO's statements constituted new information because they were not conditioned on the performance of the economy; and thus contrasted with prior company statements that its business would improve in the second quarter only if the economy improved. It would indeed be an unusual rule, said the court, which would require forecasts to be repeatedly accompanied by a warning that corporate performance might be affected by an improving or worsening economy. Even if the potential effect of the economy was material information, continued the court, the company had disclosed that its performance was linked to the economy's performance.