SEC’s Regulation FD Action Highlights Risks Associated with Private Calls to Analysts

Caitlyn Campbell is partner at McDermott Will & Emery LLP. This post is based on her McDermott Will & Emery memorandum.

On Friday, March 5, 2021, the US Securities and Exchange Commission (SEC) announced a rare litigated action against a large public company and three of its investor relations employees for alleged violations of Regulation FD (Fair Disclosure).

Overview of Regulation FD

In 2000, the SEC adopted Regulation FD to address issuers’ selective disclosure of material nonpublic information and to promote the full and fair disclosure of information. The rule provides that when an issuer, or a person acting on its behalf, discloses material, nonpublic information to certain entities or individuals (in general, securities market professionals and shareholders who may trade on the basis of the information), the issuer must also publicly disclose that information. In its release announcing the new rule, the SEC expressed its concern that “many issuers [were] disclosing important nonpublic information, such as advance warnings of earnings results, to securities analysts or selected institutional investors or both, before making full disclosure of the same information to the general public.” The SEC noted that this practice leads to a loss of investor confidence in the integrity of the markets because investors perceive that certain market participants have an unfair advantage.

Enforcement Action Taken

SEC enforcement actions involving Regulation FD are rare. In its recent action, the SEC alleges that the company violated this rule when it selectively disclosed material nonpublic information relating to research analysts in March and April 2016. According to the SEC’s complaint, the company learned that a steeper-than-expected decline in smartphone sales would cause the company’s revenue to fall short of analysts’ estimates for the first quarter of 2016. The complaint alleges that the company’s internal data showed that that the “equipment upgrade rate” (or the rate at which existing customers purchased new smartphones) would be a record low for the company. According to the complaint, the company’s chief financial officer allegedly instructed the company’s investor relations department to “work the analysts” whose estimates for equipment revenue were “too high.”

According to the SEC, three of the company’s investor relations employees then allegedly made private, one-on-one phone calls to analysts at approximately 20 separate firms to induce them to reduce their estimates. On these calls, the investor relations employees allegedly disclosed internal smartphone sales data, including the fact that the equipment upgrade rate was at a record low, and the impact these lower sales figures had on internal revenue metrics. The SEC further alleges that the analysts took what they learned on these calls and substantially adjusted their revenue estimates, reducing analysts’ consensus to a level that the company was able to beat when it ultimately reported to the public on April 26, 2016.

The company disputes these charges, claiming that the action represents a significant departure from the SEC’s long-standing Regulation FD enforcement policy. In the past, the SEC typically has not pursued standalone Regulation FD violations absent share price movement and heavy trading volume after the selective disclosure of the material, nonpublic information. The company promised to fight these charges in federal court, where it vows to demonstrate that its investor relations employees complied with the law.


Issuers should take note of the SEC’s willingness to bring this lawsuit against a large public company and three individuals from its investor relations department. Private meetings and other communications with analysts and institutional investors carry heightened risk. This lawsuit makes clear that these meetings and other contacts will be scrutinized by the SEC, especially when they result in substantial changes to analysts’ reports. This action also serves as a reminder that investment professionals need to have policies and procedures in place with respect to their communications with insiders at issuers. Further, it may signal an increased willingness by the SEC to litigate charges against companies and individuals alike.

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