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Three years ago, Regulation Fair Disclosure, or Reg FD, was headline-making news. The controversial Securities and Exchange Commission rule aimed at preventing selective disclosure of market-moving information had small investors cheering, analysts lamenting and companies cowering in fear of becoming the first Reg FD poster child. Today, with all eyes on the SEC’s anti-fraud initiatives, a more likely reaction is Reg F-what? In the three years it has been in effect, the agency has brought just four Reg FD enforcement actions. Its latest, announced this month against Schering-Plough Corp. and its former chief executive, barely made a blip in the business news. Yet, lawyers say, businesses should not rest easy. For a number of reasons, they say, the rule poses a danger to even the most squeaky clean of companies and their executives. “These aren’t bad guys,” Robert Profusek, a partner at the New York office of Jones Day, said of the companies accused of violating the rule. “This isn’t fraud — they didn’t get anything out of it,” he said. “They just screwed up.” He said Schering-Plough was a case in point. According to the SEC, Schering-Plough’s former chief executive, Richard Kogan, met with analysts and executives of institutional investors in a series of meetings on Sept. 30 and Oct. 1 and 3. The SEC found that in those private meetings, “through a combination of spoken language, tone, emphasis and demeanor,” Kogan disclosed a host of negative information causing the decline in the stock price. Yet only after those meetings, over the course of which the company’s stock price fell 17 percent, did the company issue a press release late on Oct. 3 releasing some of the bad news. The SEC fined the drug company $1 million, the largest penalty thus far for a violation of Reg FD. In a first, it also fined Kogan $50,000. Neither admitted or denied any wrongdoing. The SEC’s latest action follows three earlier actions against Raytheon Co., Siebel Systems Inc., and Secure Computing Corp. and an investigative report against Motorola Inc. in November 2002. Of the four, Siebel alone agreed to pay a $250,000 fine. PET PROJECT Reg FD had been a pet project of former SEC Chairman Arthur Levitt. It was passed in August 2000 over the strenuous objections of Wall Street and went into effect the following October. The rule was drafted largely by SEC Commissioner Harvey Goldschmid when he was general counsel at the agency. The rule then slid onto the back burner. This happened for several reasons, according to Herbert S. Wander, a partner at Chicago’s Katten Muchin Zavis & Rosenman. For one, the market climate changed dramatically, with companies finding themselves more frequently the bearer of bad news than good. “If the market had stayed hot, we would have seen a lot more action,” Wander said. The collective fall from grace of the analyst community also contributed. “They are in such disrepute that they don’t carry nearly as much weight with companies,” he said. Finally, Wander said, his sense was that companies were actually trying to comply with the rule. Surveys by the Association for Investment Management and Research, an analyst trade group in Charlottesville, Va., in the year following Reg FD’s enactment support this view. “Companies don’t want to meet with analysts and don’t want to come to meetings,” said Stuart Kaswell, general counsel of the Securities Industry Association, a Washington D.C.-based Wall Street trade group. “They use Reg. FD as the reason.” But the actions against Schering-Plough and the others show that companies would be unwise to take the rule too lightly, lawyers said. “These cases show that Reg FD violations are very easy to prove,” Wander said, citing the ease of getting phone records of analysts and documenting market reactions and analyst actions after a call. “If you do violate Reg FD, it’s like shooting fish in a barrel.” Edward H. Fleischman, senior counsel at Linklaters’ New York office and a former SEC commissioner, said the cases send a message that companies must have adequate internal procedures in place to ensure Reg FD compliance. “The perceived mandate from on high is you’ve got to have controls,” he said. In fact, Jones Day’s Profusek said, Schering-Plough and the other cases show that the attitude in Washington is that “there is no such thing as an innocent mistake.” “These are people trying to do the right thing,” he said. “All they were doing was following through with what proved to be a badly timed road-show visit in which they obviously showed up with slumped shoulders,” he added, noting that Schering-Plough was suffering from a drop in sales of its key allergy drug, Claritin. “They were trying to communicate without overcommunicating.” Profusek concurred that the penalties imposed by the SEC under Reg FD have not been much more than a slap on the wrist: Investor protection groups described Schering-Plough’s $1 million fine as “pocket change” for the giant drug company. But such actions not only subject the companies involved to the inevitable class action suits but also tarnish their image, which Profusek said is a “big-time issue” for a large public company like Schering-Plough. The ramifications are severe enough, Profusek said, that companies should consider cutting off outside communications altogether, as Coca Cola Co. did shortly after the SEC revealed its first set of Reg FD enforcement actions, announcing that it would no longer provide any earnings guidance at all. Profusek said, however, that most companies could not afford the “Coke approach,” which requires an extremely solid stock. But at a minimum, they should think about adopting a blackout period barring outside communications around the time earnings are reported, he said. Otherwise, Profusek said, companies are forced to walk a tightrope, trying to say something meaningful without violating SEC guidelines. “And if you fall off, if you’re not dead when you hit the ground, the SEC will make sure that you are.” If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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