SEC Settlement Underscores Value of Regulation FD Training and Compliance Programs

September 25, 2009

The SEC's settlement of In the Matter of Christopher A. Black, announced September 24, is a useful reminder that Reg FD training and compliance programs can be helpful not just for avoiding problems but for mitigating or even eliminating corporate penalties if problems do occur.

The facts asserted by the SEC present a no-brainer FD violation, a term that also aptly describes the behavior in question. Mr. Black, the CFO of American Commercial Lines, sent an email to eight analysts on a Saturday in June 2007 providing "some additional color" on the full year and second quarter guidance that ACL had recently announced. The "color" included the expectation that second quarter EPS "will likely be in the neighborhood of a dime below that of the first quarter", meaning $0.10 rather than $0.20. This contrasted with ACL's prior public statement that Q1 and Q2 EPS would be "similar". Mr. Black apparently sent the email without prior consultation with or review by anyone else at ACL.

The sequence of events from here was predictable: stock opens sharply down the following Monday on unusually high volume, CEO learns of the email, ACL scrambles to get an Item 7.01 Form 8-K on file by Monday afternoon.  Within two months ACL announced Mr. Black's plan to leave the company.   The SEC commenced enforcement proceedings, and in the settlement Mr. Black agreed to pay $25,000 and to submit to a cease-and-desist order.

But the SEC determined not to bring an enforcement action against ACL itself. The SEC noted that ACL had "cultivated an environment of compliance" through training programs and compliance policies, including at least two occasions on which Mr. Black himself received training. ACL's same-day attempt to cure the Reg FD violation was also helpful, as were its self-reporting, its "extraordinary cooperation", and its adoption of remedial policies and additional controls. The SEC concluded, in other words, that this was a rogue act.

Two principal takeaways here:

  • Almost all companies have formal Reg FD compliance policies, but some do a better job than others of maintaining an active compliance program, with training, periodic refreshers, annual certifications, recordkeeping, etc. This doesn't have to be a major effortóour sense is that the principles of Reg FD are at this late date pretty well assimilated among executives and IR professionalsóbut it helps to be programmatic.
  • The SEC understands that individuals, whether acting from malice or carelessness or sheer dimness, can thwart even a solid compliance system. The keys to managing company exposure are immediate response, from-the-top contrition and over-the-top cooperation.



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