• SEC Suffers Setback in Regulation FD Enforcement
  • September 21, 2005 | Authors: E. Marlee Mitchell; J. Chase Cole; W. Kenneth Marlow; Brendan A. Thompson
  • Law Firm: Waller Lansden Dortch & Davis, LLP - Nashville Office
  • The SEC suffered its first major setback in Regulation FD enforcement efforts when its suit against Siebel Systems, Inc. and two corporate officers was dismissed on September 1 by the United States District Court for the Southern District of New York.

    Regulation FD was adopted in August 2000 to prevent public companies from selectively disclosing material, nonpublic information to analysts and investors without a simultaneous general announcement of such information to the public. Since then, the SEC has aggressively enforced the rule through a number of high-profile enforcement actions. Several of these enforcement actions, including one brought against Siebel and later settled in 2002, were highlighted in our previous bulletin "Recent Developments in the Enforcement of Regulation FD." When a second enforcement action was brought against Siebel in 2003 alleging violations of Regulation FD, the company chose to challenge the SEC's action in federal court on the grounds that the statements made at those meetings were neither material nor nonpublic.

    In its second enforcement action, the SEC alleged that Siebel's CFO made statements at two private meetings with institutional investors on April 30, 2003 to the effect that Siebel's business activity levels were "good" or "better," that "there were some $5 million deals" in the company's sales pipeline and that the pipeline was "building" or "growing." The SEC alleged that these statements materially contrasted less optimistic public statements previously made by Siebel's CEO during two conference calls and an investor conference linking the company's performance to an "apocalyptic economic environment."

    In rendering a decision in favor of Siebel, the court found that the substance of each of the statements made by the company's CFO on April 30, 2005 had already been disclosed in the prior public statements made by its CEO and therefore did not contain "material, nonpublic information" in violation of Regulation FD. The court noted that Regulation FD "was never intended to be utilized in the manner attempted by the SEC under these circumstances" and that the SEC's approach of scrutinizing every particular word used in the statement, including the tense of verbs and the general syntax of each sentence, was not supported by the text of Regulation FD or its proposing and adopting releases. In the words of the court, "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." In short, Judge George B. Daniels believed that "fair accuracy, not perfection" should be the appropriate standard in analyzing the public statements of companies.

    In the opinion of the court, overly aggressive application of Regulation FD does not encourage companies to provide "full and complete disclosure of facts reasonably deemed relevant to investment decisionmaking." Instead, such action would diminish the flow of information from companies to the public. According to the court, this overly aggressive application of Regulation FD will have the precise chilling effect that the SEC cautioned against when it adopted the regulation.

    The court also was not persuaded by the SEC's argument that the purchase of stock by analysts following the April 30 meeting conclusively established that such information was material. The court concluded that the actions taken by the analysts, while relevant, do not change the nature or content of the statements. According to the court, Regulation FD does not prohibit those acting on behalf of a company from providing "mere positive or negative characterizations, or their optimistic or pessimistic subjective general impressions . . . drawn from material information available to the public."

    Although the Siebel decision is helpful to public companies in determining how its disclosure practices should comply with Regulation FD, companies should not expect the SEC to reduce its aggressive enforcement efforts under the rule. Public companies should continue to make simultaneous public disclosure, through press releases, webcasts, and in some cases, on Form 8-Ks, of any potentially material information provided to the financial industry or to a select group of investors. Likewise, any meetings with analysts should be simultaneously webcast, and the webcast should be publicized in advance through a press release.