Protect Your Corporate Reputation: Safeguards for Inadvertent Disclosure

Makovsky

Recently, fashion retailer J.C. Penney Co, (NYSE: JCP) committed a violation of the SEC’s Reg. FD when a senior executive inadvertently e-mailed its first quarter sales data to an analyst, which resulted in an increase in the company’s share price.

For its part, the company reacted swiftly and correctly following the revelation. In keeping with federal regulations that outlaw selective disclosure, J.C. Penney shared the data with investors by issuing a Form 8-K, which read:

On April 13, 2015, J. C. Penney Company, Inc. (the “Company”) became aware that a senior official of the Company inadvertently sent an e-mail communication to a securities analyst that contained non-public information regarding the Company’s comparable store sales results for the fiscal first quarter of 2015 to date, which are approximately 6 percent. Based on results to date, and taking into account the shift of Easter into the fiscal month of March this year, the Company currently expects comparable store sales for the first quarter to be in the range of 3.5 to 4.5 percent.

What prompted the executive’s decision to release the sales data? Could it have been a lack of understanding of the SEC’s rules governing disclosure? If that be the case, all companies are advised to take a hard look at their procedures for handling the disclosure of investor information as a means of protecting corporate reputation.

In today’s era of rapid technological advances, inadvertent disclosure can be brought about by sophisticated computerized systems as investors seek to gain a trading edge. Consider the case of Twitter. About an hour before its official release, Selerity, a New Jersey firm that crawls the Web for financial data, began tweeting Twitter’s first-quarter numbers. According to Selerity, the

firm said that its software found the link to Twitter’s press release announcing the earnings on the company’s investor relations page.

The inadvertent wreaked havoc at the New York Stock Exchange given that Twitter missed its revenue expectations. Trading in the stock was halted and the company disseminated its press release about a half-hour before the 4 p.m. close.

Twitter’s investor relations site is hosted by Nasdaq’s Shareholder.com. A spokesman for Nasdaq, Joe Christinat, said, “Our Shareholder.com inadvertently made an early version of Twitter’s earnings release publicly accessible.”

Some steps to consider:

Limit the number of messengers. Every company should have executives designated to speak to the investment community. These should be a limited in number as the greater the number of messengers, the greater the chances for inadvertent disclosure. All investor inquiries should be directed to the appropriate parties.

Schedule disclosure refresher classes. All employees need to understand the importance of observing the SEC’s rules regarding the disclosure of material financial information as well as those in the company responsible for handling such matters. Corporations are advised to schedule classes on disclosure on a regular basis for all employees.

Produce and update briefing books. Those executives responsible for interacting with investors should have updated briefing books readily available. These books should contain press releases, conference call transcripts, SEC filings, and analyst reports, among other items. The users would be able to reference these documents to know what has been disclosed.

Make disclosure a part of crisis planning. Inadvertent disclosure can take a number of forms. In addition to direct contact with analysts and investors in meetings or conference calls, press releases can be inadvertently disseminated ahead of schedule. Companies need to have procedures in place to deal with such occurrences as J.C. Penney and Twitter did.

-Scott Tangney