Regulation FD Violations: Selective Disclosure Enforcement.

While the substantive federal securities laws prohibit selective disclosure of material nonpublic information, the SEC’s enforcement of these laws is more focused, as a result of Regulation FD. This regulation, which imposes its own requirements on “covered issuers,” also provides the SEC with specific enforcement authority that it can exercise in addition to seeking relief for violations of the substantive securities laws.

What is “Selective Disclosure”?

Under Rule 100 of Regulation FD, selective disclosure occurs when a covered issuer discloses material nonpublic information to an investor that is “not widely known” to the general public. Rule 100 establishes two classes of selective disclosures. Those that are intentional (or made by persons who are reckless as to the information’s materiality or nonpublic status) must be corrected by simultaneous public disclosure. Those that are nonintentional must be corrected by prompt public disclosure. When an issuer’s violation of Rule 100 also constitutes a violation of the federal securities laws, the SEC can pursue remedies under both Rule 100 and the federal securities laws.

What are the Remedies for Regulation FD Violations?

When the SEC establishes a violation of Rule 100, it can seek the same remedies that are available for violations of the federal securities laws, including injunctive relief, cease-and-desist orders, and civil penalties.

When was Regulation FD Adopted?

Regulation FD was adopted in August 2000, and it became effective on October 23, 2000. Rules 100 through 103 of Regulation FD are currently located in 17 C.F.R. Part 243.

When does Regulation FD apply to investor communications?

Which Issuers are Covered under Regulation FD?

With certain narrow exceptions, the “covered issuers” subject to Regulation FD are those that file registration statements, annual reports, or other reports with the SEC under Section 13(a) or 15(d) of the Securities Exchange Act of 1934. This is true of all issuers whose securities are traded on nationally listed exchanges in the United States, and is most issuers that file information with the SEC under the statutory reporting requirements for “foreign private issuers.”

Who is a “Covered Issuer” (or a “Covered Speaker”)?

Rule 100 of Regulation FD defines a “covered issuer” as an issuer that: (i) files registration statements, annual reports, and other reports with the SEC under Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (with certain exceptions); or, (ii) files registration statements, annual reports, and other reports with the SEC under the statutory reporting requirements for “foreign private issuers.”

Rule 100 also covers any “person who is acting directly or indirectly on behalf of” a covered issuer. This definition of “covered speaker” encompasses a broad group of individuals, including the issuer’s senior officials, directors, consultants, and all employees who may communicate with investors on a regular basis. It includes even those employees who are not executives or senior officials, yet communicate with investors in a regular capacity (or in a capacity such that it would be reasonably foreseeable that they would disclose material nonpublic information during the course of their communications).

What Counts as an “Investor” and “Recipient”?

Rule 100 applies to disclosures made to “investors” or “persons who would be reasonably likely to trade in the securities of the issuer.” While the rule does not further define these terms, the SEC’s Release 33-7754 explicitly identifies five categories of investors and recipients as including “broker-dealers, investment advisers, institutional investment managers, and investment companies, as well as any employee who is not an executive officer of the issuer or the person who is acting directly or indirectly on behalf of the issuer.”

While “investor” is broadly defined, it is subject to certain restrictions. For example, Rule 100 does not apply to the issuance of material nonpublic information “to any person who owes a duty of trust or confidence to the issuer, or to a person who agrees to maintain confidentiality of the information provided.” This is particularly true of individuals who work for the issuer, but who are required to maintain confidentiality of the information provided (e.g., due to confidentiality provisions in the issuer’s employee handbook). An express confidentiality agreement between the covered issuer and the recipient can also remove the recipient from Regulation FD’s coverage.

What Counts as “Materiality”?

A covered issuer’s obligation to disclose a particular piece of information is contingent on the information being “material.” For purposes of Regulation FD, information is material if it is “of such importance that it would be substantial to consider, when making an investment decision, in light of the other information publicly available.” In other words, materiality is measured based on whether the information “is likely to have a substantial effect on investors’ decision to purchase or sell the issuer’s securities.”

Regulation FD does not establish a fixed numerical threshold for materiality, and it does not provide guidance as to what types of information should be considered material and what information should not. Instead, it defers to the principle articulated by the U.S. Supreme Court in Basic Inc. v. Levinson.

How quickly must a company correct selective disclosure?

When is “Prompt Disclosure” Required to be Disclosed?

While nonintentional selective disclosures must be corrected as “promptly as reasonably practicable,” what does this mean in practice? As we explain in our discussion of Rule 101 below, a “reasonable” correction period is limited to the later of 24 hours or the next time trading commences on the New York Stock Exchange.

A covered issuer’s duty to correct a selective disclosure begins when the company (or one of its “senior officials,” as defined by Regulation FD) learns of the disclosure. As SEC Release 33-7754 explains, covered issuers may need to correct a selective disclosure even if a covered speaker makes the disclosure inadvertently.

How Should a Corrective Disclosure be Made in Order to Qualify as a “Public Disclosure”?

Rule 101(e) provides that corrective disclosures can be made pursuant to: (i) the filing of a Form 8-K (or other required exchange filing or document), (ii) the public dissemination of information through news wires, (iii) the filing of a document with the SEC or a similar foreign regulator, or (iv) the broad, non-exclusionary distribution of information through other means.

As we explain below, although Regulation FD requires a covered issuer to “publicly disclose” a nonintentional selective disclosure, this does not necessarily mean that the issuer must file a Form 8-K. While filing a Form 8-K will satisfy the public-disclosure requirement (as we have discussed above), a covered issuer can also satisfy the requirement through other “broad, non-exclusionary” means of dissemination, including widely distributed news releases and open, adequately noticed webcasts.

Does Issuing a News Release Satisfy Regulation FD’s Public-Disclosure Requirement?

Yes, issuing a news release can satisfy Regulation FD’s public-disclosure requirement, provided that the news release is disseminated “in a manner reasonably designed to notify the public.” If a covered issuer issues a news release, the news release can serve as the issuer’s “public disclosure” if the issuer issues the news release through widely distributed news wires or another sufficiently broad means of dissemination. As specified by Regulation FD, a “public disclosure” can be made through any “broad, non-exclusionary distribution,” and widely distributed news releases and webcasts are cited by the SEC as examples of broad, non-exclusionary distributions.

Can a Public Webcast Be a “Public Disclosure” Under Regulation FD?

Yes, a public webcast that allows “unhindered, uninvited and simultaneous access by the general public” can qualify as a “public disclosure” under Regulation FD. For purposes of Regulation FD, a public webcast is a “broad, non-exclusionary distribution” that “is reasonably designed to notify the public.”

The SEC allows the use of open, unhindered, and uninvited webcasts to provide “broad, non-exclusionary distribution” of material non-public information, which will be deemed “publicly disclosed” for the purposes of Rule 101 of Regulation FD. When a covered issuer uses a webcast, the issuer must make reasonable efforts to ensure that the webcast is truly open to all who are interested in watching the webcast. This includes ensuring that the webcast is neither private nor exclusive, and making reasonable efforts to ensure that the public knows when the webcast is taking place.

Does Item 7.01 of Form 8-K Change the Deadlines for Making Public Disclosures?

No, Item 7.01 of Form 8-K does not change the deadlines for making public disclosures under Regulation FD. While Item 7.01 generally only requires a covered issuer to file a Form 8-K within four business days, Regulation FD still imposes a shorter deadline of the “later of 24 hours or the time when trading commences on the next day on which the New York Stock Exchange (NYSE) is open for trading.” In other words, when a covered issuer identifies a selective disclosure that is covered by Regulation FD, it must make a “public disclosure” of the same material nonpublic information promptly (or simultaneously, if the selective disclosure was made on purpose), whether or not it files a Form 8-K under Item 7.01.

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Can Regulation FD trigger insider trading or fraud liability?

Can the Recipients of Selective Disclosure Be Liable for Insider Trading?

Regulation FD governs the issuance of selective disclosures by issuers; it does not govern the trading of the selective disclosures’ recipients. Recipient trading will be regulated by federal securities insider-trading laws, but these laws only apply where a duty of confidentiality exists. Recipient trading that is not conducted in connection with a duty of confidentiality will not trigger insider-trading liability.

Does an Issuer’s Violation of Regulation FD Constitute “Fraud” Under Rule 10b-5?

While an issuer’s selective disclosure may raise other issues of liability, Rule 102 of Regulation FD provides that Rule 10b-5 is not necessarily implicated. Rule 102 states that “no issuer or person shall be deemed to have violated any provision of the federal securities laws… solely because of any act, omission or failure to file a report which is required by this part.” In other words, if an issuer selectively discloses material non-public information in a manner that triggers an obligation of prompt disclosure under Regulation FD, the issuer’s selective disclosure is not automatically a “fraudulent” act or omission under Rule 10b-5 of the Exchange Act.

Does Regulation FD Establish a Private Cause of Action for Investors?

No, Regulation FD does not establish a private cause of action for investors. Regulation FD only enables the SEC to pursue civil enforcement action against covered issuers and individuals that violate the regulation’s requirements. When an issuer violates Regulation FD, affected investors will need to file claims under the statutory framework of the Securities Act of 1933 or the Securities Exchange Act of 1934 (including the Exchange Act’s Rule 10b-5).

Does an Issuer Lose Its Public Reporting Status Following a Violation of Regulation FD?

Generally, no. When an issuer’s selective disclosure triggers an obligation to correct the disclosure under Regulation FD, a failure to timely make a corrective disclosure may lead to enforcement action by the SEC, but it will not render the issuer “unregistered” under Section 12 of the Exchange Act (or otherwise affect the issuer’s reporting status under the Exchange Act). Rule 103 of Regulation FD explicitly states: “For purposes of Section 12(d) of the Exchange Act, no issuer shall be deemed to have failed to file any report solely because of any act, omission or failure to file a report which is required by this part.”

What are the Enforcement Remedies for Violations of Regulation FD?

Under Regulation FD, both covered issuers and individuals who selectively disclose material non-public information (and who are responsible for the violation) can face enforcement action by the SEC. As with other Regulation FD violations, enforcement can lead to injunctions, cease-and-desist orders, or civil penalties. If a covered issuer’s selective disclosure is found to be a form of securities fraud under Rule 10b-5, investors could be able to bring private enforcement action against the issuer.

Does an Issuer Need to Establish Intent to Commit Securities Fraud Under Rule 10b-5 to Face Enforcement Action for Selective Disclosure?

No, a covered issuer does not need to establish intent to commit fraud under Rule 10b-5 to face enforcement action for a violation of Regulation FD. While a covered issuer’s selective disclosure could potentially be seen as “fraudulent” conduct in some instances, fraud requires intent (or “scienter”) while a violation of Regulation FD does not. Instead, a violation of Regulation FD occurs when a covered issuer selectively discloses material non-public information to a recipient who does not have a duty of confidentiality and then fails to make an appropriate corrective disclosure.

Does a Violation of Regulation FD Ever Constitute a Rule 10b-5 Violation?

Yes, a violation of Regulation FD can constitute a violation of Rule 10b-5 when the selective disclosure involves deceptive conduct. When a covered issuer’s selective disclosure (and/or subsequent omission of corrective disclosure) is found to be fraudulent, it may be a violation of both Regulation FD and Rule 10b-5.

What Do Major Regulation FD Enforcement Cases Show?

In 2022, AT&T agreed to pay a $6.25 million civil penalty to resolve the SEC’s allegations that AT&T executives selectively disclosed information to institutional investors. According to the SEC’s allegations, AT&T executives had selectively disclosed the issuer’s revenue projections by privately encouraging analysts to reduce their revenue estimates.

In 2024, DraftKings agreed to pay a $200,000 civil penalty to resolve the SEC’s allegations that it selectively disclosed material non-public information to the public via social media. This is one of several social-media-related selective disclosure cases that have been brought to date, and it highlights that issuers’ social-media posts (and posts by issuers’ executives) can be the subject of Rule 101 and Rule 10b-5 liability if they constitute selective disclosures that do not satisfy Rule 101’s public disclosure requirement. In DraftKings’ case, the SEC alleged that the issuer selectively disclosed information that revealed “significant growth” on its app through the social-media accounts of its CEO, who is a covered speaker under Regulation FD. This information was not disseminated to the public more broadly, and DraftKings’ subsequent corrective disclosure did not satisfy Rule 101’s public-disclosure timing requirements.

In SEC v. Office Depot, Inc., the SEC alleged that several of Office Depot’s senior executives selectively disclosed material non-public information during meetings with analysts at various firms. The analysts promptly lowered their earnings estimates after these contacts, and the SEC alleged that the executives “privately encouraged analysts to reconsider their earnings estimates for Office Depot, which had of late fallen well below forecasts. Specifically, during the course of these private discussions, executives of Office Depot referenced the company’s previously issued warnings of stock volatility as well as, the analysts reports of other competing issuers’ similar financial results. According to the SEC, executives then suggested that analysts rethink their assessments in light of both factors, all without disclosing to the public the underlying material non-public information that led to the analysts’ decisions to lower their earnings forecasts for Office Depot.”

In First Solar, Inc., the SEC charged the company’s former head of investor relations, Lawrence D. Polizzotto, who agreed to pay a $50,000 civil penalty to resolve a Regulation FD charge. The SEC alleged that executives of First Solar “privately disclosed material non-public information by admitting to a private group of investors that the issuer’s application for a federal loan guarantee was unlikely to result in the issuance of a guarantee.” This disclosure was made prior to First Solar publicly announcing that it had filed an application for federal loan guarantee and had not yet received a determination. First Solar had filed a disclosure regarding this violation with the SEC, and then it provided the SEC with extraordinary cooperation.

In Siebel, the court dismissed an SEC enforcement action that sought to address alleged selective disclosures made by executives of Siebel Systems, Inc. The executives were accused of privately disclosing material non-public information during meetings with investment analysts. However, the court noted that the analysts’ estimates for the issuer’s future sales had remained the same after the meetings, and found that the executives’ challenged private statements were “substantially equivalent to the information that the issuer had previously and publicly disclosed, and therefore not ‘material’ in light of the general availability of these facts in the market.”

How Can Companies Prevent Selective Disclosure Violations?

The examples of both past and recent enforcement action involving Regulation FD highlight the need for companies to be aware of the risks they face, not just in terms of Regulation FD but in terms of the federal securities law and the insider trading laws that Regulation FD makes operational.

Below are eight examples of company practices that can be implemented to limit these risks:

1. Determining When the Issuer’s Website Can Satisfy Regulation FD’s Public Disclosure Requirement

As outlined above, a company’s website can qualify as a source of public disclosure if it is used “in a manner that is reasonably designed to notify the public.” For companies that use their websites as distribution channels for non-exclusionary disclosure, this generally means that the company provides advance notice to investors when the company’s website can be regarded as its public disclosure channel. Once this is accomplished, the company’s website will be considered a sufficient means for making “broad, non-exclusionary distribution” of corrective disclosures.

2. Determining When Social-Media Posts and Other Online Activity Qualify as a Broad, Non-Exclusionary Distribution

To ensure their social-media posts qualify as a broad, non-exclusionary distribution, covered issuers and their executives can engage in practices similar to those they adopt regarding the use of their company websites to disseminate public disclosures. For instance, companies can inform the investor community in advance that they will use their social-media accounts as disclosure channels. This will establish them as recognized sources of public information, which will facilitate making the necessary disclosures as soon as the companies identify information that is not yet publicly available.

3. Determining When Public Earnings Calls Qualify as a Broad, Non-Exclusionary Distribution

Public earnings calls present the same challenges and opportunities as other online communications and need to be approached carefully to avoid selective disclosures. This includes ensuring that they are open, unhindered, and uninvited, so that any interested investors can attend. This is achieved by providing advance notice of the earnings calls and identifying both the date and time for the call and the method of access.

4. Assessing Risks of “Confirming” Information During Communications with Analysts

Private confirmation of a research analyst’s projection can also represent a disclosure that is “material” and “nonpublic.” As a result, issuers should avoid confirming anything and should only provide the answers the analysts need for their reports, carefully considering if their reports’ information is truly “non-exclusive.”

5. Establishing Written Regulation FD Compliance Policies and Procedures

As a preventative measure, companies should adopt written Regulation FD compliance policies and procedures. These policies can designate the company’s authorized Regulation FD spokespersons and establish a clear escalation procedure that requires the spokesperson to provide all information to compliance.

6. Developing Analyst-Call Scripts and Conducting Pre-Call Compliance Reviews

Another example of a preventative strategy for avoiding selective disclosures is to have compliance review analyst-call scripts before calls take place. Compliance can flag any information that might be considered material and non-public and suggest language that the company can use in order to ensure that information remains protected.

7. Developing Escalation Procedures Following Analyst Calls

Following analyst calls, covered issuers can also develop escalation procedures to ensure that any selective disclosures that occurred during the call can be corrected promptly.

8. Conducting Regulation FD Training for Employees in Charge of Social Media

Finally, covered issuers can conduct Regulation FD training for the employees in charge of company social media. This was an area of failure for DraftKings, where the employee posting information to the company’s social media account was not trained on what constitutes a selective disclosure.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 212-300-5196 to speak with our team.