Recent Regulation FD Enforcement Action Provides Lessons for Closed-End Funds
Written by: Kimberly V. Mann
The Security and Exchange Commission’s recent enforcement action against Lawrence D. Polizzotto serves as a reminder to all issuers that Regulation FD enforcement is alive and well.
The Polizzotto Case
Polizzotto, the former vice president of investor relations at First Solar, Inc. (and, ironically, a member of the company’s Disclosure Committee, which is responsible for ensuring the company’s compliance with Regulation FD), was found by the SEC to have violated Section 13(a) of the Exchange Act of 1934 (the “Exchange Act”) and Regulation FD by selectively disclosing material nonpublic information to certain analysts and investors before the information was publicly disclosed. The selective disclosures were made to reassure certain analysts and investors about the company’s prospects of obtaining two loan guarantees and to correct information that was previously disclosed about another loan guarantee. Polizzotto knew that First Solar had not yet issued a press release containing information about the status of the guarantees, but went forward with the selective disclosures in any event to counter adverse research reports about the company and stem substantial declines in the company’s stock price. The SEC also determined that Polizzotto directed a subordinate to make similar selective disclosures in advance of the public announcement. First Solar did not publicly disclose the information about the guarantees until the morning after the selective disclosures were made and the company’s stock price declined by 6% on the news.
Polizzotto’s selective disclosure caused First Solar to violate Section 13(a) and Regulation FD. Because First Solar provided what the SEC described as “extraordinary cooperation,” and because the company demonstrated a culture of compliance, it was not charged with any violations. The SEC’s order can be found at www.sec.gov/litigation/admin/2013/34-70337.pdf.
Regulation FD Basics
- Under Regulation FD, an issuer or any person acting on its behalf that intentionally discloses material nonpublic information to (i) broker-dealers or their associated persons, (ii) investment advisers or their associated persons,
(iii) investment companies or entities such as hedge funds that would be investment companies but for their reliance on exceptions available under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 or their affiliated persons or (iv) any of the holders of the issuer’s securities, where it is foreseeable that the recipient of the information would purchase or sell the issuer’s securities on the basis of the information disclosed is required to make simultaneous public disclosure of the information. Disclosure is intentional if the disclosing person knows or is reckless in not knowing that the information being disclosed is material and nonpublic.
- If selective disclosure is unintentional, public disclosure is required to be made promptly following the selective disclosure. Public disclosure is made promptly by a fund if it is made as soon as reasonably practicable after a senior official of the fund or of the fund’s investment adviser learns that there has been unintentional disclosure of material nonpublic information. In no event will public disclosure be deemed promptly made if it is made after the later of (i) 24 hours after the senior official learns of the unintentional disclosure and
(ii) commencement of trading on the New York Stock Exchange on the trading day after the senior official learns of the unintentional disclosure.
- In the context of an investment fund, the term “issuer” means a closed-end fund that (i) has a class of securities registered under Section 12 of the Exchange Act (for example, a fund that has more than $10 million in assets and at least 2000 record holders of any class of its equity securities, or has at least 500 record holders of such securities that are not accredited investors) or (ii) is required to file reports under Section 15(d) of the Exchange Act. Open-end and other types of investment companies are not issuers for purposes of Regulation FD. Foreign private issuers also are not subject to Regulation FD.
- A “person acting on behalf of a closed-end fund” would include a senior official of the fund or of the fund’s investment adviser or any other officer, employee or agent of the fund that regularly communicates with any person to whom selective disclosure of material nonpublic information is prohibited. An agent of a closed-end fund would include a director, officer or employee of the fund’s adviser or another service provider that is acting as an agent of the fund.
- The requirements of Regulation FD do not apply to disclosures made by a fund (i) to its attorneys or any other person that owes a duty of trust or confidence to the fund, (ii) to any person that is subject to an obligation to keep the disclosed information confidential, or (iii) in connection with most primary registered offerings of securities under the Securities Act of 1933. The requirements of Regulation FD apply to disclosures made in connection with unregistered private offerings; however, information may be disclosed privately to select recipients if the recipients are bound by a confidentiality agreement.
- Public disclosure may be made by way of public filings under the Exchange Act, such as on Form 8-K, or by using any other method reasonably designed to provide broad, nonexclusionary public distribution (such as press releases through wire services with wide circulation, news conferences that are open to the public or publication on the issuer’s website). In 2008, the SEC issued guidance on public disclosure through company websites, which can be found at http://www.sec.gov/rules/interp/2008/34-58288.pdf.
- On April 2, 2013, the SEC issued guidance indicating that social media outlets are permitted to be used to disseminate material information publicly in compliance with Regulation FD. The principles outlined in the 2008 guidance on company websites should be used to determine whether a particular social media outlet is an appropriate channel of distribution for purposes of Regulation FD. In order to use a company website or social media to disclose information publicly, investors must be notified of the specific website or social media channel to be used to provide information to the public. The SEC’s investigative report on social media and Regulation FD can be found at http://www.sec.gov/litigation/investreport/34-69279.pdf.
Regulation FD Compliance Measures
The following is a partial list of measures that funds and their advisers might implement to assist with Regulation FD compliance.
- Review existing Regulation FD policies with counsel and update them from time to time as appropriate. Indicate in the Regulation FD compliance policy the names and titles of those persons that are authorized to speak to investors on behalf of the fund.
- Establish procedures for responding to inquiries from investors and market professionals.
- Develop a definition of “material information” and incorporate it in the Regulation FD policy.
- Establish procedures for handling one-on-one discussions with investors and market professionals.
- Develop policies and procedures for the use of a website or social media to disseminate information to the public.
- Maintain records of prior disclosures of material information.
- Conduct periodic Regulation FD training for persons acting on behalf of the fund.
- Conduct periodic Regulation FD compliance audits.
- Establish accountability for Regulation FD compliance at top management levels.
Establishing effective policies and procedures designed to ensure compliance with Section 13(a) and Regulation FD may, in addition to reducing the risk of violations, have the effect of reducing the risk of liability in the event a violation occurs.