Regulation FD and Winks and Nods: SEC v. Office Depot

Regulation FD was controversial when it was adopted (back in August 2000).  Effectively overturning at least one aspect of SEC v. Dirks, it prohibited intentional selective disclosure to shareholders and market professionals (where the selective disclosure is unintentional, the information must be disclosed to the market within a symbolic 24 hours, long after it has any value).  

While Regulation FD arguably may result in less disclosure (one-on-one meetings with analysts and professionals may be less frequent because of the risk that something will be said that has to be disclosed to the entire market), it promotes investor confidence by ensuring equal treatment.  

The prohibition applied whether the selective disclosure is subtle or direct.  Thus, even nods and winks can violate Regulation FD where they convey information selectively.  An example of this arose in SEC v. Office Depot.  The Complaint is here.  

Officials for Office Depot did not convey specific information to analysts but they nonetheless engaged in selective disclosure (at least according to the SEC's allegations).  According to the SEC release, Office Depot made a series of one-on-one calls to analysts.  The calls apparently contained code indicating that the company would not meet analyst expectations.  As the release described: 

• The company did not directly state that it would not meet analysts' expectations, but rather this message was signaled with references to recent public statements of comparable companies about the impact of the slowing economy on their earnings. The analysts also were reminded of Office Depot's prior cautionary public statements. Analysts promptly lowered their estimates for the period in response to the calls. 

The company paid a $1 million penalty and two officers were subjected to cease and desist orders, including the CEO.  Each paid $50,000.  

In addition to the wink/nod aspect of the case, the other unusual aspect of the case was the selective/non-selective nature of the disclosure.  The wink and nod went not to one particular analyst by to all of them (in this case 18 analysts).  As the administrative proceeding noted: 

• On Friday, June 22, 2007, and the following Monday, June 25, 2007, the director of investor relations spoke individually with all 18 analysts covering Office Depot and conveyed to them the information contained in the talking points. Office Depot did not regularly initiate calls of this type to all 18 analysts covering the company. Word of these calls quickly spread among analysts, some of whom believed that Office Depot was “talking down” analysts’ earnings estimates.  

In other words, the "selective" nature of the disclosure was that it went to only one category of market professionals even though everyone in the category benefited (although those who were told first likely benefited more).  

Back in the pre-FD era, disclosure to all analysts covering a company was considered disclosure to the entire market.  Analysts, after all, are largely responsible for digesting information and reflecting it in share prices.  

Regulation FD specifies that disclosure to the market may be either in the form of a Current Report on Form 8-K or "through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public."  Rule 101(e), 17 CFR §243.101(e).  This case stands for the proposition that disclosure to all of the analysts covering the company does not constitute a "non-exclusionary distribution" of information.  

A press release or perhaps disclosure over the Internet may work but selective disclosure to a particular category of market professionals will not.

Comments

[J Robert Brown Jr.]

Your reference to Home Depot in this article is incorrect as this matter does not pertain to us. We would appreciate a correction. Thank you… Ron, Home Depot Communications
November 11, 2010 | Ron

[J Robert Brown Jr.]

Apologies.