You are walking down a Manhattan street and you see a familiar face. It is an analyst – someone you’ve worked with for years, perhaps, or even someone you barely know at all. It is a sunny day. Of course you shake hands. ‘So how’s it going?’ the analyst asks.
Do you say, ‘Oh, fine thanks. The company is right where we expected to be,’ or do you flip open your cell phone and call your corporate counsel for guidance? Think hard. That could be your career you’ve just chatted away.
In these increasingly litigious days, even the most innocuous statement could be construed as material information, and your passing it on to a single analyst, however informally, could constitute selective disclosure. Sound alarmist? Think again. ‘If she said that in the last two weeks of the quarter, she violated the law,’ says former SEC official Brian Lane, who now advises corporations in private practice. ‘But I guess if it was earlier in the quarter, before the mid-point, then no, probably not.’
It’s never been easy to be an investor relations officer. But a survey of seasoned professionals reveals that it’s probably never been this difficult, either. Confusing new edicts from the SEC have altered the way many companies communicate. At the same time, the economy is contracting and demands from the Street have ratcheted up the pressure to talk. Lawsuits are flying, the ground is shifting, and the IRO is the one who has to piece together a safe passage for the executive team from one quarter to the next.
That’s why even the most seasoned IROs have their corporate counsel on speed-dial and their egos packed up with their tennis racket, where it belongs. Publicly traded companies, large and small, have got to get their communications strategy together and make sure it’s in line with both corporate objectives and government disclosure rules.
Lawyer’s perspective
‘Reg FD has really changed the playing field as to what the IRO can do,’ says lawyer Broc Romanek, a former SEC official who is now editor-in-chief for RR Donnelley Financial’s RealCorporateLawyer.com. ‘You always had to be careful you weren’t giving out inside information, but you always knew in your heart of hearts what that was. From a lawyer’s perspective, that may not be good enough anymore.’
Legal experts, for example, warn investor relations officers in the US not to rely too much on common sense – at least, for the time being. Until everyone figures out exactly where the disclosure dangers and hidden traps are, it’s better to be safe than sorry.
So what can the communications department send out without vetting? ‘Nothing,’ advises Romanek. ‘Well, nothing with numbers on it. New locations, new hires, those are probably okay. But not the lay-offs.’
In the UK, disclosure law is a bit less complicated and the fines less fierce – at least for now. UK companies must make all material announcements – during business hours – through the Regulatory News Service, a text-only scroll of corporate news that feeds secondary disclosure services and the media. It is, say the people who deal with RNS, a depository of government-mandated disclosures and filings, not the place for sweetening a company’s image.
The Financial Services Authority is considering changing the system to let companies put their news out through authorized private services such as PR Newswire, Business Wire or Hugin. Moreover, the FSA has proposed new guidelines for the dissemination of price-sensitive information and it will gain new power of enforcement in November. That should galvanize UK IR in the same way that Reg FD stirred up the US.
In either country, say experts, releases, earnings reports, presentations to limited or even large groups – in short, anything that could contain forward-looking information – should all be run past the lawyers.
Port in a storm
It’s more important than ever to understand safe harbor statements. In the US, misunderstanding disclosure rules can, under Reg FD, have potentially catastrophic results. In the UK it’s more elastic. ‘There’s a lot of stuff that everyone knows has to be channeled through RNS – the annual report information, the quarterly and so on,’ says new media expert Daniel Tunkel, a partner at the London-based law firm SJ Berwin. ‘But here it’s a lot more discretionary than in the US.’ The disclosure laws are fierce for companies that intentionally put out misleading or inaccurate information, he says, but there is considerably more wiggle room in how news is made public, and whether or not it is material. ‘The opportunities to litigate have not been as fully explored here as they have in the States,’ says Tunkel. ‘We’re waiting our turn.’
Publicly traded corporations on either side of the Atlantic don’t necessarily have to start hiring more lawyers, say the experts, but smart IROs all over the business world are solidifying their relationships with corporate counsel, and trying to overlook potential big-footing of traditional IR functions.
Vetting public communications shouldn’t necessarily add days to the time it takes to get timely information out the door. Experts say that most numbers come from the chief financial officer, and they have probably already shown it to legal. Often, earnings statements and reports take weeks to pull together, and it’s a dead certainty that some of those three or five or eleven drafts have gone past corporate counsel. ‘In a big company, at least, you’ve probably got four or five days for it to be bounced around internally,’ says Romanek.
IROs regularly complain that this process slows down their reaction time, and even delays a news release to the point where it isn’t quite news anymore. This is especially true of small companies, which may not have counsel in-house or have counsel without proper respect for deadlines.
The best way to deal with the belching, smoky landscape is to embrace the fact that IROs – even the best – need advice sometimes. Smart ones ask for it. Arrogant ones learn the hard way.
On the fly
‘For an IRO to make that decision on the fly is a little risky,’ says Mitch Haws, vice president of investor relations for Atlanta-based Equifax, the nation’s largest credit reporting agency. ‘With counsel you want a conduit, someone to help make those decisions quickly. It is foolhardy to make them in a vacuum.’
Haws, who joined the $2 bn company in early May, says the legal department was one of his first stops. ‘You have to establish that relationship up front. It’s best when you can have an integrated approach.’ He acknowledges that his situation is a little easier than most because his general counsel is so close he can hit him with a pencil. ‘Of course, I don’t often throw stuff at him,’ he says with a laugh, adding, ‘It’s got to be a lot harder at a smaller company.’
Haws says notions of IR-as-communicator and legal-as-gatekeeper are antiquated and potentially harmful to the company. ‘The way I look at it – and I’ve matured over the years – is that the teamwork approach is the right approach. It’s inclusive and smart to make sure everyone is on board. Most legal counsel want you to communicate, but they want you to do it right. They are an additional safety check. We’re in discussions with the SEC, and we’re managing guidance for the quarter and the year,’ continues Haws. ‘But you always have to ask yourself, Have we disseminated it broadly enough? You have to think proactively.’
Regulation FD – which requires all material information to be publicly disseminated to all investors, and potential investors, regardless of size – is a lot more complicated than it sounds because the definition of material is still somewhat subjective. When in doubt, say the experts, ask.
‘What is material?’ asks an exasperated Peggy Foran, vice president of corporate governance at drug manufacturer Pfizer . ‘The SEC says that before you can tell an analyst that nothing has changed, you have to put out a press release. If he asks if everything is on track, and you say yes, that may be material!’ Foran says that Pfizer, whose executives pride themselves on a history of sound corporate governance, sometimes issues a press release the morning of a planned analyst roundtable to provide a legal cover. Foran says she has authorized press releases saying that nothing has changed – in effect, the anti-news flash.
‘PR Newswire is verrrrrry pleased with Reg FD,’ says one observer with a chuckle. ‘It’s been a real boon for webcasts, conference call services and the lawyers. I’m being cynical, but it’s true.’
Balancing demands
Think you’re getting the hang of it? How to balance the demands of Reg FD with the restrictions of a quiet period? If the SEC says that a company can send out only the most limited information during a quiet period such as the time preceding a public offering, IROs had better walk that tightrope with a lawyer’s guidance.
‘You’re not permitted to hype the stock or send out releases, and there are very specific rules with very limited exceptions,’ warns Brian Lane, who last year joined Washington law firm Gibson Dunn & Crutcher. ‘There is some frustration out there because the rules are not black and white. There are areas of gray that require subjective judgments,’ continues Lane, who spent four years in the SEC’s division of corporation finance. ‘The IR people I have dealt with prefer that the lawyer provide a road map and get out of the way. But it’s not that easy, unfortunately.’
Legal counsel is increasingly urging investor relations officers to take a good and close look at safe harbor statements, which say to investors, in essence, ‘Don’t blame us if things don’t work out the way we say they will.’ Used appropriately, the simple statements are proving to be a reliable shield against lawsuits brought by shareholders with dashed expectations.
However, they are not vaccinations against legal action. ‘Forward-looking information has never been more demanded by the Street, investors, analysts and the media,’ says Lane. ‘There is a pressure that never existed a few years ago. Companies have to make a business judgment, a liability judgment’ about what to release. Intel, for example, provides detailed projections while other companies have been slower, ‘waiting to see if the lawyers are having a class-action field day.’ So far, he says, there have been few adverse judgments and companies appear to be getting more comfortable relying on the safe harbor statements. Of course, the law on safe harbor is still evolving.
Thin line of red tape
If a company is doing a webcast of earnings after Regulation FD, is that defined as written communication or audio communication? The question is crucial because different safe harbors must be invoked depending on the answer.
The standard safe harbor statement for audio, for example, refers listeners to SEC filings for ‘factors that might change these predictions.’ These will logically include economic conditions, the stability of suppliers and clients, and even adverse weather conditions – all common sense.
But written communication requires a disclaimer with ‘meaningful cautionary language accompanying the forward- looking information.’ Lawyers have lately been wrestling to define accompanying. Is a link sufficient? Must it be placed adjacent to the information? ‘The application of the safe harbor to the web is not necessarily intuitive. For example, audio webcasts are considered written communications, even though they feel no different than teleconference calls,’ says Romanek.
The Donnelley web site has for three years surveyed Fortune 100 companies to see how they are using disclaimers on their web sites – and the results are surprising. Just over half – 60 percent of those surveyed – have a ‘terms & conditions’ link at the bottom of their home page. And only 30 percent – the same as last year – use safe harbor disclaimers.
In the UK, the use of technology is lagging dramatically, claims Tunkel, who notes that three of the 100 largest companies don’t even have web sites. One legal expert says it’s shocking that so few sophisticated public companies would take advantage of relatively obvious legal protections.
