Reg FD Comes for AT&T

The latest TV advertising campaign for AT&T features two men – an existing subscriber and a new customer – squaring off in one of the company’s stores. They’re jockeying to get the best offer on a smartphone, but the punchline is that the company provides the same great deals to everyone.

As a publicly traded company, AT&T must abide by a similar principle in how it doles out material information: Disclose everything to everyone at the same time. Using a relatively rare type of enforcement action, the Securities and Exchange Commission is charging the telecommunications company with violating that obligation by giving certain securities analysts a heads up on damaging information.

The charges stem from events the SEC alleges happened in March 2016. According to the commission, three executives in AT&T’s investor relations division reached out to analysts at approximately 20 firms and provided them with forthcoming data on smartphone sales. The SEC also claims the executives revealed how the data, which showed a steep drop in sales, would impact AT&T’s company-wide revenues. (Spoiler alert: When sales of a key product disappoint, that typically means a company’s revenues won’t hit analysts’ estimates.) The analysts subsequently cut their revenue estimates, according to the SEC’s complaint, and AT&T’s actual performance ultimately exceeded the consensus revenue forecast.

Given that AT&T was potentially facing a revenue miss for the third consecutive quarter, crisis management experts might call the alleged outreach to analysts a proactive move to keep the company’s stock price from getting creamed. The SEC is calling it “repeatedly violating Regulation FD” – the FD standing for “fair disclosure.” The regulation, enacted in 2000, requires that if a company official intentionally discloses material nonpublic information to “securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information,” the company must simultaneously make a public disclosure of that information. If it happens unintentionally, the public disclosure is required “promptly.”

As Bloomberg Opinion columnist Matt Levine notes, Reg FD poses thorny questions for the SEC in terms of application. After all, meeting with heavy-hitting investors has become a key part of the job description for C-suite executives in today’s corporate culture. Are we to believe that in these meetings taking place every year, only non-material information is being discussed?

Perhaps that’s why Reg FD enforcement actions happen so rarely. The last one apparently went down in 2019 against TherapeuticsMD, a Florida-based pharmaceutical company with a market cap of just $623.9 million.

An active public relations campaign along the lines of what the SEC is alleging in the AT&T case seems awfully brazen, though. The good news for compliance professionals is that AT&T is vowing to fight the action in court. A legal battle between a high-profile company and the Wall Street regulator may clear up some of the questions around how Reg FD really works.