How to Create an Environment of Compliance
There are important lessons to learn from the U.S. Securities and Exchange Commission’s charging of the former head of investor relations at a Nasdaq-listed solar energy company with violating fair disclosure rules.
Aside from the fact that the September 6, 2013 charge was the first Regulation FD enforcement action in two years, the IRO’s employer was not charged, due to several factors that public companies would do well to consider.
In this issue of IR focus, we examine these factors – but first, some background.
Lawrence D. Polizzotto was Vice President, Investor Relations at First Solar Inc., a company that serves a marketplace reliant on government support. In June 2011, the U.S. Department of Energy (DOE) issued conditional commitments to provide $4.5 billion in loan guarantees for three First Solar projects. That summer, analysts wrote numerous reports speculating on the likelihood that the company would satisfy the conditions by September 30, the cut-off date, particularly on the largest guarantee known as Topaz, which had the steepest regulatory hurdles.
At an investor conference on September 13, 2011, First Solar’s CEO expressed confidence that the company would receive all three loan guarantees. Two days later, Mr. Polizzotto and other executives learned that the DOE likely would not provide the Topaz guarantee and began discussing how and when the company should disclose this.
First Solar’s in-house counsel advised Mr. Polizzotto that “if we receive a DOE notice tomorrow, we would not have to issue a press release…the same day…we would though, be restricted by Regulation FD in answering questions…until such time as we do issue a press release…assuming DOE doesn’t make this notice public.”
After receiving this communiqué, Mr. Polizzotto, an IRO with 20 years of experience, sent his own email, which read: “They (DOE) need to recognize we are a public company and this is a material event for us. If they notify us of this without the other two approvals, it will create huge concern to the investment community. We need them to communicate the whole picture with the other two at the same time…”.
Over the next six days, First Solar worked on a press release with the DOE. Meantime, analyst speculation began to mount, fuelled by a congressional inquiry into the loan guarantee program. On the morning of September 21, First Solar’s share price dropped $6 or 8% on news of the inquiry. Mr. Polizzotto received numerous investor phone calls.
Even though he knew that First Solar did not intend to issue a press release until the next morning, Mr. Polizzotto created ‘talking points’ that he and a subordinate then used to signal, in one-on-one conversations with approximately 20 analysts and investors, that First Solar no longer expected it would receive the Topaz guarantee. These talking points also purportedly shaped the message so as to cushion the blow. After hearing from Mr. Polizzotto on September 21, some analysts emailed their equity sales teams to say they expected First Solar to receive two guarantees.
When First Solar learned that Mr. Polizzotto selectively disclosed the news, it issued a press release before market open on September 22. First Solar’s share price opened lower still, down 6%, indicating that this development was of a material nature. While not admitting guilt, Mr. Polizzotto agreed to pay a $50,000 fine.
Company’s Dedication Avoids Penalty
The company, on the other hand, was spared enforcement action for reasons that included First Solar’s:
- level of cooperation with SEC investigators, including its prompt self-reporting of the misconduct;
- actions in creating an “environment of compliance” through the use of a disclosure committee (even though Mr. Polizzotto served on that committee);
- quick response time in issuing a news release once it discovered the violation; and
- initiative in providing follow-up training for employees responsible for public disclosure.
First Solar’s dedication to fair disclosure clearly helped it to avoid a penalty, while Mr. Polizzotto paid the price for personally violating Section 13A of the Exchange Act and Regulation FD.
To IROs and public companies alike, whether listed in Canada and covered by National Instrument 51-201, or in the U.S., the Polizzotto case is a cautionary tale that encourages ongoing diligence to ensure that a proper public disclosure process is designed, understood and followed every time out.
While there is no indication that First Solar’s executives studied CIRI’s Standards and Guidance for Disclosure and Model Disclosure Policy, published in 2011, it appears they took a page out of the document in setting up their disclosure regimen.
To paraphrase page 9 of the CIRI guide, “Companies, directors, and officers have a due diligence defence. Disclosure controls and other processes adopted to promote compliance with disclosure requirements are elements of such a defence…a well-developed disclosure policy, effective disclosure committee, and internal disclosure controls and procedures, with documentation of the committee’s disclosure activities and implementation of the procedures, are important protections...”.
In section 3.7, National Policy 51-201 – Disclosure Standards states that the Canadian Securities Administrators (CSA) may consider a number of “mitigating factors” in selective disclosure enforcement proceedings. This includes whether and to what extent a company has implemented, maintained and followed reasonable policies and procedures to prevent contraventions of the tipping provisions.
Nothing in this policy limits the CSA from taking enforcement action but the message is clear: being able to prove your company’s commitment to proper disclosure is important. In its 2001 proceedings against Air Canada for selective disclosure, the OSC mitigated its penalties, saying, “we do take some comfort from what appears to be a culture of compliance”.
How frequent are disclosure violations? Between 2010 and 2012, the CSA levied $5.9 million in penalties. While the number of proceedings (31) started over the period was small relative to the number of companies listed in Canada, disclosure violations harm the integrity of the capital markets, not to mention the reputations (personal and corporate) of those involved.
While your company may not tie its fortunes to government guarantees such as those prevalent in Solar, you may face, in the ordinary course of business, questions such as whether you are still comfortable with your guidance for the year. This is a question that can only be answered in a fair and non-selective way.
IR’s Role in Creating an Environment of Compliance
It stands to reason that IROs and IR consultants should understand and fully abide by NP 51-201 and listen to legal counsel; something Mr. Polizzotto did not do. But more than this, IR practitioners should see themselves as promoters and protectors of their companies’ compliance environments.
How?
1. Become a human clearinghouse for disclosure best practices. Periodically review and refresh yourself on NP 51-201, CIRI’s Standards and Guidance for Disclosure and Model Disclosure Policy, your company’s disclosure policy and the policies of other companies (TD Bank posts its disclosure policy online) and share this material with your colleagues to ensure they are reminded of required practices and understand the importance of rigorously applying them. CIRI also keeps members current on disclosure-related items (see IR leader’s recent article “Full Disclosure in the Modern Age?” which references National Instrument 43-101 – Standards of Disclosure for Mineral Projects. It’s important to share these updates as well.
2. Keep a written record of all disclosure-related activities. This includes the proceedings of disclosure committee meetings, extra-curricular activities such as seminars and one-on-one discussions with analysts and investors. If you are ever called upon to show that you created and nurtured an environment of disclosure compliance, these records will be critical.
3. Host a seminar annually on disclosure. Invite guest speakers to address your company. Organize a disclosure quiz and give out prizes for the most correct answers.
4. Constantly remind all employees – not just the C-suite – of prohibitions on participating in Internet or social media discussions on company-related topics, including the share price. Use company newsletters or intranets to promulgate your policies and provide instructions on what employees should do if they encounter an online discussion about the company.
5. Always err on the side of rapid disclosure. The longer you wait, the greater the damage to your reputation and the greater the likelihood that you will be subject to regulatory enforcement actions and class action lawsuits.
Personal Protections
While always doing the right thing is the best way to protect yourself, it is also advisable for IROs to be covered by directors’ and officers’ insurance because they have actual or implied authority to speak on behalf of the companies they represent and may be implicated based on selective oral communications. Similarly, consultants should have written contracts indicating that the companies they work for are solely responsible for the timeliness, accuracy and completeness of disclosure events/materials.