September 02, 2005
The Death of Regulation FD?
Posted by Gordon Smith

Larry Ribstein is pronouncing last rites on Regulation FD after reading the first case under the decision, SEC v. Siebel Systems, Inc. Larry writes:

The second aspect of the opinion that should disturb the SEC is that the court refused to infer materiality from the fact that recipients of the information bought Siebel, causing the stock to rise and trading to surge. In other words, the court said the SEC had to prove materiality by linguistic analysis rather than market reaction. Yet the court condemned just such a linguistic analysis in this case, topped off with a warning about the rule’s potential “chilling effect.” If this case stands, the Rule is basically dead, at least for dissemination of soft information. Yet this is precisely the sort of information that Reg FD was aimed at.

Hmm. Larry might be right about the ultimate fate of Regulation FD, but the holding of Siebel is considerably narrower. The court held that private statements by Siebel's CFO had essentially the same content as public statements previously made by the company. The take-home language from the court: "As long as the private statement conveys the same material information that the public statement publicly conveyed, Regulation FD is not implicated, and hence no greater form of disclosure, pursuant to the regulation, is required."

That is a pretty narrow holding, and largely uninteresting if that is all there is to the case. But, as Larry observes, the Court had a lot more to say about Regulation FD. In particular, the court repeatedly emphasized the potential of Regulation FD for "chilling" corporate disclosures. I thought this passage was particularly important:

It would appear that in examining publicly and privately disclosed information, the SEC has scrutinized, at an extremely heightened level, every particular word used in the statement, including the tense of verbs and the general syntax of each sentence. No support for such an approach can be found in Regulation FD itself, or in the Proposing and Adopting Releases. Such an approach places an unreasonable burden on a company’s management and spokespersons to become linguistic experts, or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company’s public statements.

Reasoning like this reminds me of the Delaware courts, when they talk about the duty of care or the duty of good faith (as in the recent Disney opinion). In those circumstances, the courts grant corporate managers lots of leeway at least in part because they do not want managers to become overly cautious in their decision making. This is precisely the idea underlying the Siebel court's reasoning, only with respect to disclosure rather than decision making. In simplest terms, judicial intervention that is too vigorous is counterproductive. If other courts embrace this idea, then Regulation FD will serve, at best, the sort of aspirational function served by the duties of care and good faith in corporate law.

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