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SEC's Recent Charges Against AT&T Give Renewed Focus to Reg FD

A recent Reg FD SEC enforcement action against AT&T may signal a renewed focus by the SEC that warrants public companies to assess their disclosure processes.

On March 5, 2021, the SEC charged AT&T and three executives in its Investor Relations department with violating Section 13(a) of the 1934 Act and Regulation FD ("Reg FD"). Reg FD prohibits public companies and those acting on their behalf from selectively disclosing material, non-public information that they have not disclosed to all shareholders.  

According to the complaint, AT&T's 4Q 2015 revenue substantially missed analysts' estimates due to a decline in smartphone sales, leading the CFO to emphasize on an earnings call "the likelihood that these impacts would persist into future quarters." Shortly thereafter, AT&T became aware of a steeper decline in sales that caused the company to project internally that gross revenues would be more than $1 billion below consensus estimate. The company decided not to issue an 8-K but instead to have the CFO discuss the issue at an investor conference.  

At that conference, the CFO referred to his earlier comments regarding the decline in wireless equipment revenue and stated that he "would not be surprised to see that trend continue," but he did not otherwise provide quantitative revenue guidance. After the conference, the CFO instructed employees in the investor relations ("IR") department to "walk the analysts down" so that their estimates would be consistent with the company's internal projections.  

Over the next several weeks, three IR executives held private calls with 20 analysts during which they disclosed material, non-public information that caused the analysts to lower their revenue estimates. As a result, AT&T narrowly beat its Q1 2016 revenue estimates. This matter is now being litigated.  

This action is noteworthy for three reasons.  

First, until recently, Reg FD has not been fertile grounds for SEC enforcement actions, but the AT&T case represents at least the second SEC Reg FD enforcement action in recent years and may portend a new enforcement trend. As this case is litigated, we may see courts clarify some of the questions surrounding Reg FD enforcement.  

Second, the legal standards for determining whether information is material (and thus subject to Reg FD) depend on the particular facts and circumstances and ultimately rest on judgment calls. Companies should be mindful that the SEC will assess those judgment calls with the benefit of hindsight.  

Lastly, companies should design and implement policies and procedures addressing Reg FD and should train relevant employees to mitigate the risk of violations.

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