Five years after the Securities & Exchange Commission (SEC) passed Regulation FD (“Fair Disclosure”) a court finally had a chance to interpret its application.  On September 1, 2005 the United Stated District Court for the Southern District of New York dismissed the SEC’s claims against Siebel Systems, Inc. [1]  Regulation FD prohibits a company from disclosing information to analysts and investors that is non-public. [2]   Adopted in 2000, the regulation has often been criticized for being overly broad. However until Siebel no company challenged the regulation in court.

Regulation FD is based on the idea that no group should have advance access to information about a public company that may impact stock prices or that may influence trading.  Unsurprisingly, one of the regulation’s main purposes is to prevent insider trading.  In an effort to help companies comply Regulation FD considers information to become public by posting information on a company website,  making earnings calls open to anyone, or the filings of an 8-K. [3]  However, many companies have been wary of sharing information and some have even stopped giving earnings guidance as a result of the potential liability.  Some companies have even gone as far as to adopt Regulation FD disclosure policies which outline a procedure, with certain controls in place, for dissemination of company information. 

This was not the first time Siebel has come under SEC scrutiny.  In 2002 the Siebel paid $250,000 to settle a alleged violation of regulation FD.  In that case the SEC claimed that selective disclosures were made at a Goldman, Sachs technology conference.  [4] Other companies that have dealt with the SEC enforcement actions under regulation FD and settled include Motorola, Raytheon and Secure Computing. [5]

In the present case the SEC alleges that Siebel violated Regulation FD by comments made by its CFO Goldman at private events in 2003 attended by investors.  Goldman made comments that the activity level of the company was “good” or “better” and noted that a few deals were in the works. [6] These statements are said to contrast the public statements made by CEO and Chairman Thomas Siebel earlier in the month.  [7] Furthermore, the complain states that the required 8-K filing disclosing the non-public information was not submitted. [8]  The court dismissed the case for failure to state a claim.  In its opinion the court noted that “the SEC has scrutinized, at an extremely heightened level, every particular word used … .” [9] Additionally, the court found that application of the Regulation in such an aggressive manner would not encourage the full disclosure of information. [10]

While this is the first court decision, it may not be the last.  The SEC has 60 days to decide if it will appeal to the Second Circuit located in New York. [11]  Especially since two questions raised by Siebel, if the SEC had authority to issue the regulation at all and if the regulation is overly broad, remain to be answered.

In the meantime, what does this decision mean for companies?  First, it means that the SEC will likely be a little less aggressive in looking for violations.  But more importantly it gives a little guidance on hot to draft disclosures.  If the case is followed, the informational content, not the form will be the focus of Regulation FD violations.  Consequently those speaking on behalf of the company may have a bit more leeway then was originally thought.  Although Regulation FD still survives, hopefully after this case clearer guidance will be provided for the future.

[1] SEC v. Siebel Systems, Inc., ___F. Supp. 2d ___, 2005 Westlaw 2100269 (S.D.N.Y. Sept. 1, 2005).

[2] 17 C.F.R. § 243.100 (2000). 

[3] Id.

[4] Floyd Norris, Market Place; S.E.C. Puts Data Disclosure in the Spotlight, N.Y. Times, Nov. 26, 2002 at C1.

[5] Id.

[6] SEC v. Siebel Systems, Inc., ___F. Supp. 2d ___, 2005 Westlaw 2100269 at  *1.

[7] Id. at *2.

[8] Id. at *3.

[9] Id. at *8.

[10] Id. at *11.

[11] Stephen Labaton, Judge Dismisses Disclosure Suit Brought by S.E.C. Against Siebel, N.Y. Times, Sept. 2, 2005, at C9.