Don Draper is the dapper CEO of your good client Sterling Cooper, Inc.¹ Sterling Cooper, one of the great success stories of the 1960s advertising world, has gone on to even greater prominence since its IPO in the 1970s. Don is calling with questions about Regulation FD, and especially how the landscape was changed by the recent Dodd-Frank Act. We all know Don has a few things he’d like to keep quiet, but today he is in disclosure mode. What do you tell him?

Regulation FD provides that when an issuer, or person acting on its behalf, discloses material non-public information about the issuer or its securities to specified persons, the issuer must broadly disseminate that information to the public.

The specified persons are:

• broker-dealers;
• investment advisers and institutional investment managers;
• investment companies and hedge funds; and
• any holder of the issuer’s securities who are reasonably likely to trade on the basis of the information.

Regulation FD requires the public disclosure to occur:

• simultaneously, for intentional disclosures; and
• promptly (i.e., within 24 hours) for unintentional selective disclosures.

Under Regulation FD, the required public disclosure may be made by filing or furnishing a Form 8-K or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public, such as a press release issued on a wire service.

The SEC has also indicated that, in appropriate circumstances, issuers can use their web sites to make information public for purposes of Regulation FD compliance if (i) the website is a “recognized channel of distribution,” (ii) posting information online makes the information generally available to the market and (iii) investors have had a “reasonable waiting period” to react to the information. This issue is discussed in more detail in Release No. 34-58288.

In an effort to ensure that Regulation FD did not have a chilling effect on issuer disclosure, the SEC included several exemptions to the rule. That is, the following exempt disclosures could be made – even if the disclosure included material non-public information – without needing to make the same disclosure public:

• communications made to a person who owes the issuer a duty of trust or confidence such as an attorney, investment banker, or accountant;
• communications made to any person who expressly agrees to maintain the information in confidence (e.g., by entering into an express oral or written confidentiality agreement);disclosures to a credit rating agency, provided the information is disclosed solely for the purpose of developing a credit rating and the ratings are publicly available; and
• communications made in connection with certain offerings of securities registered under the Securities Act (e.g., disclosures made in a road show).

Section 939B of the Dodd-Frank Act directed the SEC to amend Regulation FD to remove the specific exemption for the benefit of disclosures made to ratings agencies, which the SEC has now done. See Release No. 33-9146.

In the wake of this change, the key question for Don is whether he can still make disclosures of material non-public information to credit rating agencies without the need for public disclosure. We’ll assume that the rating agency is not a broker-dealer or the like, so what this really boils down to is whether Sterling Cooper can take the position that disclosure to the rating agency is made to a person who owes it a duty of trust or confidence and therefore within a Regulation FD exemption.

Regulation FD does not require an agreement of this sort to be in writing, but Don may nonetheless prefer to have a written agreement. Market practice since Dodd-Frank is for rating agencies to address confidentiality in their form engagement letters.