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Regulation Fair Disclosure (Reg FD): What Investors Need to Know

Regulation Fair Disclosure (Reg FD) is a rule issued by the U.S. Securities and Exchange Commission (SEC) in 2000 to promote fair and equal access to material non-public information for all investors. Before Reg FD, there were concerns that companies were selectively disclosing important information to certain investors or analysts before sharing it with the general public. This created an unfair playing field where some market participants had an informational advantage.

The key provisions of Reg FD are:

  • Public Disclosure Required: Public companies must disclose material non-public information to all investors at the same time. They cannot selectively disclose it to certain parties like analysts, brokers, investment advisors or investment firms before broadly disseminating it to the public.

  • Intentional vs. Unintentional Disclosures: The regulation covers both intentional and unintentional selective disclosures of material non-public information. Even if disclosed inadvertently, companies have a "duty to correct or update" previous disclosure once they realize it occurred.

  • Defined as "Material": Information is considered material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. This is a principles-based definition without bright lines.

  • Allowed Private Disclosures: There are exemptions that allow private disclosures to temporarily keep information confidential in certain circumstances like negotiating a merger or when bound by confidentiality agreements.

Examples of Reg FD Violations:

  • Early Revenue/Earnings Disclosure: If a company executive privately tells an analyst the company will miss its revenue target for the quarter before announcing it publicly, that would violate Reg FD.

  • Merger Discussions: Disclosing to a favored investor that a company is engaged in confidential merger negotiations before it is publicly announced.

  • Clinical Trial Results: A biotech company leaking news about positive clinical trial results for a new drug candidate to an investor before publicly releasing the information.

Consequences of Violating Reg FD:

Reg FD violations can lead to SEC enforcement actions, fines, lawsuits and loss of investor confidence. Companies must have established disclosure policies and investor relations procedures to ensure compliance.

Reg FD's Impact on Investor Relations

Regulation FD had a significant impact on how public companies conduct investor relations and external communications. Here are some of the key effects:

  • Quarterly "Guidance" Practices Changed: Prior to Reg FD, it was common for companies to privately "walk down" earnings estimates for analysts. Reg FD prohibited this selective disclosure, leading many companies to stop providing quarterly earnings guidance altogether to avoid potential violations.

  • Webcasting of Meetings/Calls: To comply with the simultaneous disclosure requirement, companies widely adopted practices like webcasting analyst meetings, investor conferences and earnings calls so all investors could access the information at the same time.

  • Limits on One-on-One Meetings: Companies became more cautious about holding one-on-one meetings with analysts and investors where material non-public information could be inadvertently disclosed. Many now use disclosure "codes" or scripts for such meetings.

  • Quiet Periods Expanded: Many companies extended their "quiet periods" before earnings releases to reduce risks around selective disclosure of material information as the reporting period drew to a close.

  • Increased Use of Regulation FD Furnishing: Companies make more frequent use of SEC Form 8-K for "furnishing" updates and information to comply with Reg FD's public disclosure mandate rather than "filing" which can create liability.

Rise of Disclosure Committees

To manage Reg FD compliance, many companies formed internal disclosure committees to review materiality of information and ensure proper controls around non-public disclosures. The investor relations function grew in importance as a regulated gatekeeper of material disclosures, leading to more companies hiring dedicated investor relations officers (IROs).

While compliance brought challenges, Reg FD is credited with improving transparency and leveling the informational playing field for all investors in the public markets. Companies had to evolve their disclosure practices and investor communications under this new regulatory regime.

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