SEC Charges AT&T and Executives With Regulation FD Selective Disclosure Violations

On March 5, the Securities and Exchange Commission (SEC) announced that it had charged AT&T and three of its midlevel investor relations executives with violating Regulation FD, a rule that bars issuers from selectively disclosing material nonpublic information, in a complaint filed in federal court in the Southern District of New York. AT&T in a statement issued the same day vowed to fight the charges and called them meritless.

Regulation FD, adopted by the SEC in 2000, prohibits issuers or persons acting on their behalf from disclosing material nonpublic information to securities market professionals, including analysts, without disclosing that information to the general public. The SEC complaint relates to the practice of “walking the analysts down.” It contends that in the weeks before AT&T issued its earnings for the first quarter of 2016, the three individual defendants spoke with equity stock analysts from 20 different Wall Street firms in an effort to induce the analysts to lower their overall revenue estimates so that AT&T would not miss consensus revenue estimates for the quarter, as had occurred previously. In these calls, the individuals allegedly focused on the company’s “equipment upgrade rate,” the rate at which existing customers purchased new smartphones. They purportedly disclosed AT&T’s projected or actual equipment upgrade rate and information about the associated projected or actual wireless equipment revenue amount. The SEC contends that the information conveyed was material and nonpublic. It cites as an example that one defendant represented to analysts that he was conveying publicly available consensus estimates when he knew or was reckless in not knowing that the then consensus estimates were higher, and that the information he provided in fact matched AT&T’s nonpublic projected or actual results.  

In its statement, AT&T argues that the information the executives disclosed concerned widely reported and industrywide trends on smartphone upgrade rates and equipment revenues. The company says that not only were these trends disclosed on multiple occasions to the public but also AT&T made clear that declining phone sales had no material impact on its earnings. In addition, analysts allegedly understood that AT&T’s core business was selling connectivity (that is, wireless service plans), not devices, and that smartphone sales were immaterial to the company’s earnings. According to AT&T, none of the analysts called as witnesses during the investigation testified that they believed they had received material nonpublic information.

Issuers are frequently forced to make delicate judgments as to the materiality of information that they may disclose to analysts in one-on-one conversations, as opposed to Regulation FD-compliant earnings and analyst calls and conferences that are available to the public. Materiality is generally a question of fact, and issuers make materiality judgments in good faith but in real time, in what may be a dynamic and changing factual environment. Regulators often assess materiality in hindsight. The closeness of the issues in the case is perhaps reflected by the fact that the SEC filed its charges only days before the five-year statute of limitations would have run out on some of the analyst calls. By bringing an enforcement action against the company and three midlevel employees, a blunt instrument in this context, the SEC reminds market participants that it will zealously prosecute perceived Regulation FD violations and that issuers need to exercise care in assessing the materiality of information disclosed to analysts one-on-one. As the SEC’s enforcement action demonstrates, attempting to talk analysts down through the use of supposed public or immaterial information carries with it risk. In hindsight, success in altering the analysts’ estimates may perversely promote the appearance that the information conveyed was material. Such enforcement actions may put issuers in a difficult position when, despite public disclosure by the issuer and others of trends and uncertainties, some analysts’ projections remain inaccurate. In that event, if the issuer is unsatisfied with the state of play, the SEC’s action underscores its position that the better practice will be for the issuer to disclose in a Regulation FD-compliant release the most reliable facts then within the issuer’s possession, even though the underlying matter itself may be of borderline materiality.