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After a long absence of such cases, the Securities and Exchange Commission on Aug. 20 settled a Regulation FD proceeding against a Florida pharmaceutical company for allegedly sharing “material, nonpublic information with sell-side research analysts without also disclosing the same information to the public.”

More specifically, the SEC imposed a $200,000 penalty against the company for two disclosures.

The case appears unremarkable without the context of Reg FD’s two-decade history.

Reg FD was controversial even before its adoption in 2000 and has been heavily criticized ever since, resulting in fairly few recent enforcement actions.

Reg FD creates potential liability for companies based on what the SEC views as differences between what an executive says to a limited audience and what information is already publicly available. Those differences often depend on judgment calls interpreting information, and, accordingly, that unpredictability around enforcement may result in less disclosure over all. The same phenomenon of “selective disclosure” is already regulated through insider trading laws.

Back to the Reg FD Case

After a meeting with the Food and Drug Administration in which the FDA “provided a clear path forward” for approval of the Florida company’s drug, a company executive sent an email to six sell-side analysts saying the FDA meeting was “very positive and productive” and the company would be “waiting on meeting minutes to decide the path forward” despite the fact that the company had not publicly disclosed the substance of the FDA meeting.

The company’s stock price rose the following day.

Two weeks after receiving the minutes from the FDA meeting, and one month after the FDA meeting itself, the company put out a press release and filed an 8-K regarding the meeting. In the press release, the company described the FDA meeting and noted that the meeting had “enabled the company to present new information” to the FDA without disclosing what that new information was.

Half an hour after issuing the press release, the company conducted a call with analysts and emailed to them the medical studies previously provided to the FDA (but not provided to the public).

These selective disclosures — saying that the FDA meeting was “very positive and productive” and distributing medical studies provided to the FDA — to sell-side analysts without making the same disclosures to the public violated Reg FD, according to the SEC.

The SEC proposed Reg FD in response to the perception that public companies were “disclosing important nonpublic information, such as advance warnings of earnings results, to securities analysts or selected institutional investors or both, before making full disclosure of the same information to the general public.”

Despite criticisms by industry groups that the rule was unnecessary and could have a “chilling effect” on public disclosures, the SEC adopted the regulation and proceeded to bring a number of Reg FD enforcement actions for several years until the agency suffered a major setback in 2005 in a landmark federal court ruling, SEC vs. Siebel Systems.

According to the SEC, during a private meeting with institutional investors Siebel’s chief financial officer made positive comments about Siebel’s business that materially differed from negative contemporaneous public statements. The SEC filed a Reg FD complaint in federal district court in New York.

Siebel chose to fight the lawsuit with fairly dramatic results in its favor. The court dismissed the SEC’s complaint outright, finding that the CFO’s statements to analysts were not material, nonpublic information because Siebel’s CEO had already publicly made similar comments.

The court criticized the SEC’s extreme scrutiny of the language used in the statements, noting that “such an 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” which could have “a potential chilling effect which can discourage, rather than encourage, public disclosure of material information.”

Siebel also asked the court to throw out Reg FD entirely as unconstitutional because, in the company’s view, the SEC did not have the authority to adopt the regulation in the first place and it violated First Amendment freedom of speech protections. The court declined to rule one way or the other on Siebel’s constitutional challenges.

The SEC chose not to appeal the Siebel decision because, as one SEC commissioner said in a later speech, “We took off our amateur psychologist hats, put away our microscopes and went home rather than appealing that decision.”

The SEC didn’t bring another Reg FD case for years and has rarely used the regulation in enforcement actions since its loss in Siebel.

The SEC’s August Reg FD case may not signal a return to the commission putting on its “amateur psychologist hats,” but a resurgence of Reg FD cases could resurrect fears of “chilling effects” on public disclosure and a re-examination of the constitutionality of Reg FD.


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