The SEC recently settled a Regulation FD action against Office Depot and several of its executives. This Update summarizes the key issues addressed in this action and offers practical guidance.

Background on the Office Depot Enforcement Action

The SEC charged that the CEO and then-CFO of Office Depot, in an effort to encourage analysts to revise downward their sales and earnings forecasts for the second quarter of Office Depot's 2007 fiscal year, arranged private calls with eighteen analysts who followed the company. During those calls, begun just eight days before the end of the quarter, the director of investor relations referred the analysts to recent earnings statements by comparable companies that discussed the effect of the slowing economy, and reminded them of statements made by Office Depot at the beginning of the quarter that referenced the softening economic climate. Although Office Depot was careful not to state directly that it would not meet analysts' expectations for the quarter, the SEC took the position that Office Depot's statements nevertheless communicated that very message.

Following the conversations, 15 of the 18 analysts lowered their earnings expectations for the quarter. After several analysts expressed concern about the lack of a company press release regarding earnings, the CFO asked the director of investor relations to provide the company's top institutional investors with the same talking points given to the analysts. Six days after the initial calls, Office Depot filed a current report on Form 8-K with the SEC in which it announced reduced expectations for sales and earnings. Between the time of the first calls and the filing of the Form 8-K, Office Depot's stock dropped almost 8%.

Practical Tips

More Active SEC Enforcement of Regulation FD. This SEC action, the third in little more than a year, should serve as an additional reminder that the SEC has become more aggressive in policing potential Regulation FD violations. A few takeaways from the Office Depot case include:

  • It's Not Just What You Say, It's Also How You Say It. Though the Office Depot executives were careful not to say anything about earnings directly to the analysts, the message was clearly communicated. As the SEC made clear in its Schering-Plough enforcement action, companies cannot evade the requirements of Regulation FD by using code words or phrases to convey material nonpublic information.
  • Have a Regulation FD Policy—And Train Your Team To Know It. Office Depot did not have written Regulation FD policies or procedures at the time of this violation, and the company had never conducted any formal Regulation FD training prior to June 2007. Companies should be sure to have a Regulation FD policy in place and to conduct training frequently.
  • Use Extreme Caution In Private Conversations Near the End of the Quarter. Be especially cautious when the discussions relate to financial results and earnings guidance. In this case, the calls with analysts were near the end of the quarter, a particularly sensitive period. If your company needs to provide advance warning of earnings results or otherwise update its financial disclosures, do it first in a press release or with a Form 8-K filing. Don't try to "talk down" Wall Street on earnings expectations without a public disclosure.
  • Seek Legal Counsel. In this case, there is no indication that the CEO or CFO ever asked inside or outside counsel about either arranging these analyst calls or the talking points used by the director of investor relations. A brief consultation with an attorney regarding these types of communications can help prevent inadvertent Regulation FD violations.

Additional Information

This Update is only intended to provide a summary of the key issues addressed in the SEC's enforcement action. You can find a copy of the SEC's press release regarding this enforcement action at http://www.sec.gov/news/press/2010/2010-202.htm.

You can find more information on Regulation FD and enforcement actions by the SEC in Chapter 3 of The Public Company Handbook and our Updates dated March 31, 2010, October 5, 2009, September 13, 2005, April 11, 2005, September 16, 2003 and December 11, 2002.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.