Regulation FD is a rule to prevent the selective disclosure of material non-public information (MNPI) by publicly traded companies. Enacted in 2000, Regulation FD was responsive to perceptions that public companies were providing earnings guidance to certain analysts and large investors ahead of their release to the general public. The sentiment was that receiving such market moving information earlier than the general public enabled certain investors to trade on the basis of the information.

When MNPI is unintentionally disclosed to selective investors, the company must promptly take action to broadly disseminate the information. This is typically done by filing a Form 8-K current report with the Securities and Exchange Commission (SEC) and/or issuing a press release.

A company violates Regulation FD if it selectively discloses MNPI and it is reasonably foreseeable that the recipient of such information would trade on it. There is no bright line definition of “material.” Rather, the analysis is heavily facts and circumstances based. Courts consider a combination of qualitative and quantitative factors in their assessment of materiality. Information that would have been viewed by a reasonable investor as altering the “total mix” of information available in making an investment decision is one standard used by courts.

The SEC can commence an enforcement proceeding against a public company for Regulation FD violations. A number of enforcement actions have been brought against public companies for alleged violations of Regulation FD.

One notable Reg FD case involved Tesla in 2018. Elon Musk tweeted on his personal Twitter account that he was considering taking Tesla private at $420 per share, which represented a significant premium to Tesla’s trading price at the time. He also noted in his tweet that he already had “funding secured” for the deal. Tesla did not promptly file a Form 8-K or issue a press release regarding this tweet. The tweet led to a substantial increase in Tesla’s stock price. The SEC charged Mr. Musk with violating the antifraud provisions of U.S. federal securities laws and misleading investors. The SEC ultimately reached a settlement with Mr. Musk, in which Mr. Musk agreed to pay a $20 million fine and to resign from his position as executive chairman of Tesla’s board.

Another noteworthy Reg FD case involved Netflix. In July 2012, Netflix CEO Reed Hastings posted on his personal Facebook account that Netflix monthly viewing exceeded 1 billion hours for the first time ever. Netflix did not subsequently file a Form 8-K or issue a press release regarding this Facebook post. The next trading day, Netflix’s stock price surged. The SEC responded by sending a Wells notice to both Mr. Hastings and Netflix asserting that the Facebook post violated Reg FD. A Wells notice is a notification indicating that the SEC intends to recommend bringing an enforcement action against a public company. Netflix responded by filing a Form 8-K about the Wells notice. A few months later, the SEC issued a Report of Investigation noting that Mr. Hastings’ disclosure on his personal Facebook account without advance notice to investors was not an acceptable method of disclosure under Regulation FD. However, the SEC ultimately decided not to proceed further with the Netflix matter.

SEC enforcement actions for violations of Reg FD offer some key takeaway lessons for public companies. In particular, public companies should make sure executive officers work to create a culture of compliance. Senior investor relations professionals should be vigilant in monitoring disclosures about the company to prevent Reg FD violations. In the event of non-intentional selective disclosure, corrective measures should be taken right away such as filing a Form 8-K or issuing a press release.