The Securities and Exchange Commission (SEC) got a little
bit of a disciplining from the U.S. District Court for the Southern District of New York on its somewhat ferocious enforcement of Regulation FD, just as the fair disclosure rule approached its fifth birthday. In the first lawsuit to spring from Reg FD, the court dismissed the SEC's charges that Siebel Systems Inc. had released nonpublic information in private meetings. While the decision was viewed as a blow to the SEC, lawyers say it's not likely to have much impact in the corporate community or on the way companies comply with Reg FD. In the years since its passage, executives have become accustomed to watching what they say, especially in private meetings, and this ruling–especially since it's not from an appellate court–doesn't signal that they can relax their vigilance. What the decision does suggest is that SEC enforcement may have to rein itself in, observers say.
Reg FD, which went into effect in October 2000, aimed to stop executives from providing investment analysts with material information that they hadn't disclosed to the public. In the Siebel case, the SEC charged that in April 2003, CFO Kenneth Goldman disclosed material nonpublic information at two private meetings, which were also attended by Mark Hanson, the company's head of investor relations and senior vice president. It was the second time that the SEC had accused Siebel of violating Reg FD; the first time, in 2002, the company paid a $250,000 civil penalty and agreed to a cease-and-desist order. This time, Judge George Daniels ruled that the SEC's charges were unjustified.
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Comparing Goldman's comments in the private meetings with what company executives previously had said publicly, the court ruled that Goldman did not reveal any new material information. In his decision, the judge criticized the SEC's exhaustive analysis of Goldman's comments. The SEC's approach in the Siebel case "places an unreasonable burden on a company's management and spokespersons to become linguistic experts," the decision stated. "The enforcement of Regulation FD by excessively scrutinizing vague general comments has a potentially chilling effect which can discourage, rather than encourage public disclosure of material information."
"There is some good news for companies, in that the court strongly suggests that the SEC's using [Reg] FD in a manner it was never meant to be used, and actually in a way that's at odds with statements by top SEC officials at the time Reg FD was adopted," says Thomas Hanley, a partner in the Washington office of Pepper Hamilton. The most significant part of the decision "is the idea that Reg FD doesn't require corporate officials in private meetings simply to parrot verbatim what they've previously said in various public forms," Hanley says. "That was something that was a concern, and you can see it in the SEC's charges against Siebel: Changes in tense, slight changes in language, even a change in tone, were asserted to add up to a violation."
The court also ruled that the movement in Siebel's stock price after the meetings did not in and of itself prove that material information had been disclosed. Disclosure experts say that that's reassuring for executives, who fret if they see stock prices move after remarks by a company official, no matter how innocuous. "That's the thing you worry about if you're on an audit committee," says Amy Hutton, an associate professor at Dartmouth University's Tuck School of Business. Even if the company does not regard a statement as material, "you don't have control over what moves the stock price."
Elizabeth Saunders, a partner and co-founder of Ashton Partners, an investor relations advisory firm, says that while she doesn't expect the Siebel decision to have a big effect on companies' disclosure practices, it may make executives more comfortable about attending private meetings. Although company lawyers often advise against such meetings, many Street analysts and investors are anxious to meet with company executives, she says.
The SEC hasn't said yet whether it will appeal the decision, and some lawyers doubt that it will. "They were rebuffed pretty strongly in this case," says Janet Fisher, a partner at Cleary Gottlieb Steen & Hamilton in New York. "Unless they feel they have the kind of record that would really support going to the mat, they may choose to use their resources on other matters."
Saunders also suspects that the agency won't appeal. If it loses again at the appellate level, the Siebel decision gains teeth, she says. In that case, "you have an important district and a well respected judge making a judgment and an appellate court affirming it," Saunders says. "It becomes a very important case, which is probably why the SEC leaves it alone."
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