Last year, the SEC charged Christopher Black, the CFO of American Commercial Lines (ACL), a marine transportation and services firm, with violation of Regulation Fair Disclosure (Reg FD) and fined him $25,000. The company, however, was let off the hook.
The enforcement action at ACL provides an elucidating contrast with the recent enforcement action against Office Depot, which also fell foul of Reg FD rules but suffered a $1 mn fine, while its former CEO and CFO received fines of $50,000 each.
Why did the SEC go easy on one and not the other? It comes down, at least in part, to the different compliance cultures at the two companies. In the ACL case, the SEC said the company had cultivated a culture of compliance through Reg FD training and implementing controls to protect against violations.
By contrast, the commission said in its case against Office Depot that the company ‘did not have written Regulation FD policies or procedures at the time’. The regulator added that the company ‘had also never conducted any formal Regulation FD training prior to June 2007, although its general counsel had occasionally distributed guidance and updates on Regulation FD’.
There is little companies can do about one rogue individual. Instigating the right culture across a business, however, will not only help discourage potential violations of Reg FD but also help insulate the company against enforcement if a breach does occur.
‘There are real benefits to having written Reg FD compliance policies in place,’ says Michael Littenberg, a securities lawyer at Schulte Roth & Zabel in New York. ‘Companies should also conduct periodic training of their relevant personnel covering Reg FD.’
At ACL, the SEC was able to clearly distinguish between the actions of a rogue individual on one hand, and the company’s strong culture of compliance on the other. Once the CEO found out what Black was up to, an 8K was issued straightaway.
At Office Depot, on the other hand, the CEO, CFO and IR department were all in on the plan to bring down analysts’ estimates through the ‘wink and nod’ approach of pointing to cautious statements made by other companies. And an 8K did not emerge until six days after the analyst calls began.
This collaboration, plus a lack of internal controls and Reg FD training, meant the SEC took a far harsher line against Office Depot than it did against ACL.
