Cleary Gottlieb Discusses Communication with Financial Analysts and Related Disclosure Issues

Securities analysts play a key role in securities markets, and publicly held companies as a matter of market practice regularly brief them to help them understand company results and business trends. There have been some unfortunate instances, however, in which analysts have received nonpublic information on which their clients have acted before the information was disclosed to the general public. In the wake of these cases, as well as Enron and the unanticipated and significant decline in the financial position of other public companies, the role of the securities analyst was scrutinized by Congress, the Securities and Exchange Commission (the “SEC”), state regulators and various self-regulatory organizations.  The result was a heightened campaign against selective disclosure, facilitated by the SEC’s adoption of Regulation FD (Fair Disclosure) in 2000. For several years prior to 2009, the SEC brought few cases for violations of Regulation FD, but since September 2009 there has been a marked increase in the number of Regulation FD enforcement actions by the SEC. This increase in enforcement action serves as a reminder that ongoing vigilance in this domain is certainly warranted.

The U.S. rules governing disclosure to analysts by issuers originally emerged from case law construing a basic antifraud rule, Rule 10b-5 under the Securities Exchange Act of 1934 (the “Exchange Act”). As a result, the rules are not straightforward, are at times ambiguous and, in any event, have not been applied, with one known exception, to communications between issuers and analysts. This situation led the SEC to adopt a new disclosure regime, Regulation FD, to prevent material nonpublic information from being given selectively to market professionals (broker-dealers, investment advisers and managers, and investment companies), who could use such information to their own or their clients’ advantage. Regulation FD applies to communications on behalf of the issuer with market professionals and with securityholders who may foreseeably trade on the basis of the disclosed information.

Although Regulation FD does not apply to foreign issuers, they too should avoid selective disclosure of material nonpublic information both as a matter of best practice and to avoid potential liability. Ill-considered disclosure can lead to liability both for the company and for its management personally under Rule 10b-5, raise potential issues regarding correcting or updating information and have adverse market consequences.

Our recent memorandum available here sets out our guidelines for communications between management and securities analysts in light of applicable case law and the SEC’s Regulation FD.