In the old days, companies sometimes tried to soften the shock of bad news by getting on the phone with key analysts to tweak their assumptions, whether on this quarter’s earnings or another issue. A Regulation FD case against an IRO, resolved Friday by the Securities and Exchange Commission, sends a clear message: The old days are over.
Here’s my non-lawyer version of what Reg FD says to IROs: When things are changing in ways that may be material for shareholders, don’t think about “signaling” or “telegraphing” the market by talking to a few analysts and investors. Instead, broadly disclose the changes through a news release, 8-K filing, or conference call open to all investors. Selective disclosure is out, fair disclosure is in – that’s been true at least since Reg FD took effect in 2000.
The recent SEC case involves Lawrence Polizzotto, former head of investor relations for First Solar, Inc., an Arizona firm whose financing was part of the political controversy a couple of years ago over Energy Department loans to renewable energy companies. On Friday, Polizzotto agreed to pay a $50,000 penalty in the selective disclosure case and accepted a cease-and-desist order with the SEC, without admitting guilt.
Here’s the scenario the SEC painted: In September 2011 Polizzotto attended an investor conference with First Solar’s CEO at the time. The firm had conditional commitments from the Energy Department for three loan guarantees totaling $4.5 billion, and the CEO expressed confidence the company would receive that backing. Two days later, word came that First Solar would not get at least one of the guarantees. According to the SEC:
A group of employees including Polizzotto and one of First Solar’s in-house lawyers began discussing how and when the company should publicly disclose the loss of the loan guarantee. The company lawyer specifically noted that when the company received official notice from the Energy Department, “we would not have to issue a press release or post something to our website the same day. We would, though, be restricted by Regulation FD in any [sic] answering questions asked by analysts, investors, etc. until such time that we do issue a press release or post to our website …”
Comment: When lawyers talk, IROs should listen. SEC went on …
Polizzotto violated Regulation FD during one-on-one phone conversations with approximately 20 sell-side analysts and institutional investors on Sept. 21, 2011 – the day after a Congressional committee sent a letter to the Energy Department inquiring about its loan guarantee program and the status of conditional commitments, including three involving First Solar. This Congressional line of inquiry caused concern within the solar industry about whether the Energy Department would be able to move forward with its conditional commitments.
Analysts began issuing research reports about the Congressional inquiry, and analysts and investors began calling Polizzotto. Despite knowing that the company had not yet publicly disclosed anything, Polizzotto drafted several talking points that effectively signaled that First Solar would not receive one of the three loan guarantees. His talking points emphasized the high probability of receiving two of the loan guarantees and the low probability of receiving the third.
Polizzotto delivered his talking points in the one-on-one calls with analysts and institutional investors, and he directed a subordinate to do the same. Polizzotto went even further than his talking points when he told at least one analyst and one institutional investor that if they wanted to be conservative, they should assume that First Solar would not receive one of the loan guarantees.
So there it is: material nonpublic information. The proof of materiality is that, when First Solar learned of the one-on-one disclosures and issued a press release the next day, its stock dropped 6 percent.
If you want guidance on Regulation FD or its application, ask your securities counsel. You can read Reg FD here, see the Polizzotto order here or explore links on the SEC’s selective disclosure webpage.
The philosophical heartbeat of Reg FD was captured by Michele Wein Layne, director of the SEC’s Los Angeles office: “All investors, regardless of their size or relationship with the company, are entitled to the same information at the same time.”