Regulation FD and. in Steve Przesmicki, Partner, Cooley LLP. March 17, Presented by

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1 Regulation FD and SEC Whistleblower Rules in 2011 March 17, 2011 Presented by Steve Przesmicki, Partner, Cooley LLP 2011 Cooley LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, CA The content of this packet is an introduction to Cooley LLP s capabilities and is not intended, by itself, to provide legal advice or create an attorney-client relationship. Prior results do not guarantee future outcome.

2 Regulation FD Refresher Designed to prevent selective disclosure of material non-public information (oral or written) to analysts or institutional investors prior to disclosure to the general public Rules took effect on October 23, 2000 Overlaps with Rule 10b-5 obligations 2

3 Regulation FD Refresher Whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding g that issuer or its securities to any person described in paragraph (b)(1) of this section, the issuer shall make public disclosure of that information as provided in Rule 101(e) Simultaneously, in the case of an intentional disclosure; and Promptly, in the case of a non-intentional disclosure Material non-public information disclosed d to certain categories of outsiders by certain corporate insiders must also be disclosed to the general public Information Must be material Must be non-public 3

4 What is Material Information? If there is a substantial likelihood that a reasonable shareholder would consider the information important in making a decision to buy or sell the securities, the information is material SEC says it will not second guess judgment calls of materiality if the judgment was made in good faith and is not clearly incorrect A specific piece of information should not be material if: Unbeknownst to the issuer It helps an analyst complete a mosaic of information that when taken together with other information lawfully received, is material Determining lack of materiality is very difficult to predict in advance If disclosure is followed by significant market activity, movement in stock price or revision of expectations, heavy burden on issuer to demonstrate it resulted from piecing together a mosaic 4

5 To Whom Does Regulation FD Apply? Categories of insiders defined in Rule: Senior officers and directors Investor relations or public relations personnel, including IR and PR firms hired by the company Other employees or agents who regularly l communicate with outside investors or securities market professionals 5

6 To Whom Does Regulation FD Apply? Categories of outsiders defined in Rule to whom selected disclosure may not be made: Broker dealers and securities market professionals, including sell-side analysts Investment advisors, institutional investment managers and buy-side analysts Investment companies, hedge funds Any stockholder, if the disclosure is under circumstances in which h it is reasonably foreseeable that such holder will purchase or sell the issuer's securities on the basis of the information 6

7 Persons or Entities Excluded From Regulation FD Persons who owe a duty of trust to the issuer such as an attorney, investment banker or accountant Persons who expressly agree to maintain the disclosed information in confidence 7

8 Methods of Public Disclosure Furnish or file a Form 8-K disclosing the information Another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public including: Press releases Exchange Act Reports (10-Q s, 10-K s) Conference calls open to the public (advance notice required) Posting information on Company website is not, by itself, sufficient public disclosure 8

9 Situations Where Regulation FD Will Apply Analyst conference calls Individual meetings or calls with analysts or investors Industry or investment banking conferences Roadshows for private placements, PIPES, 144A and Regulation S offerings 9

10 SEC Enforcement Actions From 2002 to 2005, the SEC brought seven Reg FD enforcement actions Twice against Siebel Systems From 2006 to September 2009, the SEC brought only one Reg FD enforcement action 10

11 SEC Enforcement Actions Recent Enforcement Actions Christopher Black (American Commercial Airlines, Inc.); September 2009 weekend to analysts that earnings would be lower than guidance a few days earlier; company not pursued. Presstek/Marino; March 2010 call with registered investment adviser two days before end of quarter; company paid $400,000 fine and implemented remedial measures. Office Depot; October 2010 (actions relate to 2007) concerned that analyst estimates were too high considered issuing a press release, but internal estimates were incomplete directed employees to conduct one-on-one calls with analysts referring to recent public statements of comparable companies that cautioned the impact of the slowing economy CFO assisted in preparing talking points for calls At least one analyst expressed concern over lack of press release six days after calls to analysts, 8-K filed to disclose the earnings would be negatively impacted due to continued soft economic o c conditions o (7.7% drop in price over that period) Company paid $1 million; CFO and CEO each paid $50,000 11

12 Notable Recent Mistakes Ripe for Possible Enforcement Actions? Disney NetApp 12

13 Observations Must be consistent at all times Watch tone, body language, slight wording differences Consult counsel One on ones,,private meetings are areas of focus Balance the practicalities Review written disclosure/reg FD policies Refresh training on a regular basis 13

14 Tips for Dealing with One-on-Ones Hold conversations shortly after a public release of information and, if applicable, related conference call when the universe of material nonpublic information is smaller Avoid conversations during black-out periods Establish ground rules for questions that t will not be answered Company reps should be fully informed about what information is publicly available Consider debriefing IR or counsel immediately after one-on-ones Consider keeping log of one-on-one conversations 14

15 Tips on Guidance Establish policy as to whether you will update guidance communicate this policy when asked to update (i.e., our policy is to not update guidance given in our conference calls ) If you intend to update guidance, you should issue a press release prior to the conversation If material, you can t confirm guidance currently in a one-on-one can t say nothing has changed or we remain comfortable with our prior guidance as this constitutes a new statement 15

16 Analyst Conferences and Roadshows No material non-public information in presentation and breakout sessions otherwise must disclose the information publicly in advance, e.g., file the presentation on an 8-K and post on website Rehearse presenters Scrub slides for material non-public information 16

17 Analyst Conferences and Roadshows Many companies are insisting that they be allowed to webcast their presentations for full access Sponsors of these meetings are generally offering webcast services, but it is the company s responsibility to provide notice to interested investors and media that the live webcast is being conducted, and how to access it Even if the company does not plan to provide any new material information, the webcast is your insurance policy against allegations of selective disclosure if during a webcast Q&A a material disclosure occurs 17

18 Introduction to Rule 21F Enacted on July 21, 2010 as part of the Dodd-Frank Consumer Protection Act Purpose is to encourage whistleblowers to come forward a early as possible with high quality tips Two primary components: Prohibits retaliation by employer against whistleblowers who provide SEC with information about potential violations of federal securities laws Requires SEC to pay monetary award to whistleblowers in certain circumstances Proposed Regulation 21F to implement Section 21F 18

19 Eligibility for Monetary Award Monetary award is required if whistleblower : Provides original information to the SEC Information is provided voluntarily Information leads to successful enforcement by SEC of a federal court or administrative action SEC obtains monetary sanctions of more than $1 million Must comply with specific procedures and submit required forms Must cooperate with SEC If tip provided anonymously, must disclose identity 19

20 Original Information Derived from independent knowledge or analysis Not already known to SEC from other sources or materially adds to information SEC already possesses Not exclusively derived from allegation made in governmental proceeding or investigation unless whistleblower is the source Provided to SEC for first time after July 21, 2010 Within 90 days of original report to other governmental entity Within 90 days of original report through company s internal channels Certain exemptions apply Attorney-client communications Auditors Internal company reporting process 20

21 Voluntarily Provided Before whistleblower (or representative) receives request from government or regulatory authority Request to a whistleblower s employer is imputed to the whistleblower unless employee fails to provide information in a timely manner Not voluntary if under pre-existing legal or contractual duty to report securities violations Law enforcement Employees of self-regulatory agencies Auditors (under Section 10A of Exchange Act) 21

22 Leads to Successful Enforcement Led SEC to commence, open, reopen, expand investigation AND information significantly contributed to success of the action OR Information was essential to success of a pending examination or investigation Commentary suggests this would be a rare circumstance 22

23 Collection of $ 1 Million Must be $1 million in a single action Sanctions collected from all defendants in an action are added together All claims are added together Amounts that whistleblower is ordered to pay are subtracted Amount attributed to liability based substantially on conduct whistleblower directed, planned or initiated is subtracted 23

24 Amount of Award No less than 10% and no more than 30% of total monetary sanction collected Within those guidelines, amount of award is discretionary dsceto ay SEC considers following factors: Significance of information to success of action Degree of assistance provided by the whistleblower SEC s interest in deterring securities violations Whether award enhances SEC s ability to enforce securities laws, protect investors and encourage submission of high quality whistleblower tips 24

25 Whistleblowers Protections Identity of whistleblower is generally confidential Employers cannot retaliate Creates federal private right of action against employers Remedies available include reinstatement, backpay, attorney s fees and litigation costs But no amnesty for whistleblowers 25

26 What Do Proposed Rules Mean for Public Companies? Every employee, agent, vendor is a potential whistleblower (with few exceptions) May lead to an increase in SEC inquiries and investigations s May interfere with internal reporting procedures and impede company s ability to police itself Impact on company s decision to self-report Potential cottage industry for plaintiffs lawyers 26

27 Contact Information Steve Przesmicki Partner Cooley LLP 858/