Web disclosure: proceed with caution

On April 15, 2010, Google announced that it would provide all of its future financial announcements solely through its investor relations (IR) website, bypassing traditional newswire services. In doing so, it became one of the first companies – and certainly the highest-profile company – to take advantage of the SEC’s Regulation Fair Disclosure (Reg FD) guidance permitting financial disclosures solely through a company website. Google’s announcement has some public companies considering whether they should adopt this process.

In evaluating whether to follow Google’s lead, companies should consider the SEC’s recent renewed focus on Reg FD and its willingness to bring actions against firms and individuals when it finds missteps. Specifically, after an almost five-year dormant period, the SEC has filed two Reg FD enforcement actions – SEC vs Presstek and SEC vs Black – since September 2009. Accordingly, any company considering whether to adopt Google’s approach should fully understand the requirements of Reg FD, the SEC staff’s website guidance and the current SEC enforcement environment, where Reg FD again appears to be a priority.  

The inside track
The SEC adopted Reg FD in 2000 to ensure the full and fair disclosure to all investors of material company information. In proposing this rule, the commission referenced publicized reports of issuers disclosing
material non-public information, including advance earnings results, to securities analysts or institutional investors before informing the general public. Those with advance knowledge were able to make a profit or avoid a loss at the expense of the general public.  

Reg FD prohibits a company – and officers, employees or agents of a company who ‘regularly communicate’ with securities professionals or investors – from selectively disclosing material non-public information without simultaneously (or in certain instances, promptly) disclosing the same information to the public. Liability under Reg FD may attach even to inadvertent disclosures; to avoid liability in the event of inadvertent selective disclosure, the company must ‘promptly’ make public disclosure of the information at issue.

The rule defines a public disclosure as either the filing of a Form 8K or the ‘dissemination of information 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.’ The concern for public companies that wish to distribute financial information solely through their own websites is whether that method provides the required broad, non-exclusionary distribution of the information to the public. If not, a Reg FD violation can occur when a company official privately speaks with a securities professional or investor, even after the company has disclosed the same material facts on its website.

A change of mood
In the proposing release for Reg FD in 1999, the SEC stated that simply posting information on a company website would not, by itself, satisfy the public disclosure requirement. The commission’s final rule, however, acknowledged that website disclosure could be sufficient as internet access becomes more common.

The SEC subsequently issued guidance in August 2008 providing that website disclosure could indeed satisfy the public disclosure requirement under certain circumstances. Specifically, the release provides that information disclosed on a website could be considered public under Reg FD if:

• The website is a ‘recognized channel’ of distribution
• The posting serves to disseminate information ‘in a manner that makes it available to the securities marketplace in general’
• There is a reasonable waiting period for investors and the market to respond to the posted information.

The SEC leaves each individual issuer to analyze and determine whether or not its website and postings satisfy the relevant criteria. Before its April 15 announcement, Google apparently took steps to establish that its website disclosures would be considered public. In each 10K and 10Q filed since February last year, Google provided information regarding its IR website. Each statement included the website address, the types of available company filings, and a link to all of Google’s public filings on the SEC’s website.

More importantly, Google informed readers in its 2008 annual report that its website included ‘notifications of news or announcements regarding [Google’s] financial performance, including SEC filings, investor events, press and earnings releases and blogs.’

Similarly, Google directed investors to its website through its press releases and associated Form 8K filings. In every earnings release since at least February 1, 2005, Google informed investors that its earnings call would be webcast, and that the earnings release and supporting materials were available on its website. In March 2009 the company announced that its proxy materials were available on its website. In addition, Google’s IR website clearly identifies a ‘Financial Information’ link and includes menus on the front page for recent SEC filings, proxy materials and featured events such as earnings calls.

Moreover, because of its high profile and large analyst following, Google can reasonably expect that the media and investment community will report, and further disseminate, the information disclosed on its website. To ensure media and public awareness, Google issued its April 15 advisory press release announcing that its first-quarter 2010 financial results were available on its IR website and that it intended to make ‘future announcements regarding its financial performance exclusively’ through its website.

An unclear picture
Despite the steps Google has taken to ensure compliance with Reg FD, there is no guarantee the SEC will agree that its disclosures are publicly disseminated. Because of this, it is difficult to predict the risk for companies that adopt exclusive website disclosure. It remains to be seen whether the recent Reg FD cases evidence a priority area, or are
simply a necessary reaction to the facts at issue on the part of the SEC.

In SEC vs Presstek, for example, Presstek’s then president and CEO Edward Marino privately informed Michael Barone, managing partner of Sidus Investments, that ‘the summer was not as vibrant as [Presstek] expected in North America and Europe’ and that the company’s overall performance was a ‘mixed picture’. Evidence obtained by the SEC indicated that Barone sent text messages conveying the information obtained from Marino: two minutes after the conversation, Barone signaled Sidus’ traders to sell its entire investment in Presstek. Marino did not disclose the negative information to any other analyst or investor. After Presstek publicly announced its revised forecast two days later, the company’s stock dropped nearly 30 percent.  

The SEC sued Presstek and Marino for Reg FD violations, and the two resolved the matter through an agreed cease-and-desist order and payment of a $400,000 fine. The SEC noted that Presstek’s remedial measures, including revising its corporate communications policies, taking appropriate personnel actions and creating a whistleblower hotline, were considered in reaching the settlement.

In SEC vs Black, American Commercial Lines (ACL) issued a press release in June 2007 stating that the company expected earnings similar to its first quarter. Christopher Black, then senior vice president and chief financial officer of ACL, and the company’s CEO conducted multiple meetings with analysts to answer questions about the company’s operations and the recently released guidance. Thereafter, Black learned that ACL’s earnings per share (EPS) would be significantly lower than the projection discussed in the press release and with analysts. In response, Black emailed eight sell-side investors providing additional detail regarding the original press release and disclosing that ACL expected second-quarter EPS to be nearly a dime below that of the first quarter.

Black never sought review from outside counsel or anyone else at ACL prior to sending the email. On the first trading day after his disclosure, ACL’s stock fell 9.7 percent on a 300 percent increase in average trading volume. Upon learning of Black’s disclosure, ACL immediately filed a Form 8K disclosing the information contained in the email.

The SEC sued Black for violation of Reg FD. The matter was resolved when Black consented, without admitting or denying the SEC’s allegations, to the entry of a cease-and-desist order and a $25,000 penalty. Notably, the commission did not bring an action against ACL because of, among other things, its strong compliance environment and remedial actions, including immediate self-reporting and strengthening of existing internal controls.

Pros and cons of web-only disclosure To avoid Reg FD liability, a company considering adopting exclusive website disclosure must satisfy the criteria in the SEC’s August 2008 interpretive release. The company should establish its website as a recognized channel of disclosure by providing its website address in all press releases, SEC filings and online posts.

One measure of whether a company’s website is a recognized channel is the extent to which the general media report on announcements made exclusively through the site. Thus, a company with less of a market following or smaller market capitalization may need to alert media outlets before moving to exclusive website disclosure of financial information. Any company considering web-only disclosure should use an advisory press release to alert the market to the location and posting time of important financial announcements.

Firms must also ensure financial announcements are posted and accessible to those seeking this information. The company website should be configured so that financial announcements are prominently displayed in a ‘location known and routinely used for such disclosures’. Thus, selection of a prominent location (preferably on the home page) and repeated posts in that location will help investors efficiently locate the information. In addition, the company should test its website capacity to ensure it can provide simultaneous access to the anticipated number of visitors seeking to obtain financial information.

Furthermore, companies need to revise their compliance programs to include issues raised by exclusive website disclosure. Among the issues to consider are: processes for the actual posting of information on the company website; processes for counsel review of communications before posting; and the circumstances, if any, when an
advisory release is necessary.

Specifically, the company processes should consider when exclusive website disclosure – rather than a combined advisory press release and website posting – can meet the prompt timing requirement in the event a selective disclosure has inadvertently been made. As explained above, effective compliance programs will be critical should a company or the SEC determine a Reg FD violation has occurred.

Exclusive website disclosure may be a viable option for Google, as it is a large, high-profile company that has routinely posted financial information on its website. It is unlikely, however, that companies outside the top 100, with less analyst and media coverage, will be able to satisfy the public dissemination requirements without substantial effort and cost. Smaller companies may want to avoid the risk associated with early adoption and wait until website disclosures are the norm.