Public companies that establish clear and comprehensive Reg FD policies, train employees and directors on Reg FD compliance, and promptly react to improper disclosures may be able to avoid hot water with the SEC—even if an employee goes rogue.
These are the lessons of a recent civil action filed by the SEC against Christopher A. Black, the former CFO of American Commercial Lines, Inc. (ACL), for allegedly aiding and abetting ACL's violation of Reg FD and Section 13(a) of the Securities Exchange Act. The SEC settled the civil action against Black on September 24, 2009, and Black agreed to a $25,000 civil penalty and a cease-and-desist order. No enforcement action was brought against ACL.
What Black Did Wrong
The facts behind the charge against Black present an obvious Reg FD violation.
ACL issued a press release in June 2007 providing earnings guidance for the second quarter of 2007, which was expected to be "similar" to the $0.20 EPS achieved during the first quarter. A few days later, Black received an updated internal analysis indicating that ACL's EPS for the second quarter could be significantly below the earnings guidance announced in the press release. The next day, Black sent an e-mail to the securities analysts covering ACL to explain that the second quarter EPS "will likely be in the neighborhood of about a dime below that of the first quarter," which the SEC characterized in its complaint to be "a significant departure" from the guidance contained in ACL's press release.
Black sent the e-mail to the analysts on a Saturday from his home computer without providing a copy to, or notifying, anyone at ACL or ACL's counsel. As a result of Black's e-mail and the subsequent analyst reports, ACL's stock price dropped significantly on heavy trading the following Monday.
What ACL Did Right
The SEC assigned blame to Black alone for the Reg FD violation and decided not to bring an enforcement action against ACL. Why? Because "ACL cultivated an environment of compliance" by providing training regarding the requirements of Reg FD and adopting policies to prevent Reg FD violations.
As noted by the SEC, not only did Black receive Reg FD training on at least two occasions, but he put together ACL's investor relations policy, which stated that, in the Reg FD context, earnings information should "always be assumed to be ‘material.'" In its complaint, the SEC indicated that Black acted outside of the control systems established by ACL to prevent Reg FD violations and should be solely responsible for the violation.
The SEC also approved of ACL's reaction to Black's wrongdoing. Once ACL found out about the e-mail, it promptly filed a Form 8-K disclosing the revised earnings guidance, self-reported the conduct to the SEC staff and provided "extraordinary cooperation" with the staff's investigation. ACL also beefed up its controls to prevent future violations.
What Public Companies Should Do
Public companies should establish a clear and comprehensive written Reg FD policy and a compliance program that involves regular training, refreshers, accurate record keeping, and guidelines for action and remediation following a Reg FD violation.
If a Reg FD policy and a compliance program are already in place, revisit them and consider holding a refresher training course to bring your Reg FD compliance practices up-to-date in light of the SEC's 2008 guidance regarding company Web site disclosure issues and the SEC's Reg FD Compliance and Disclosure Interpretations, which were updated on August 14, 2009.