Quarterly Earnings Guidance: How to Satisfying SEC Regulations

October 2, 2019 10:51 am Published by
In a previous blog post, we discussed what it takes for a company to plan a successful and efficient earnings event. The question we haven’t yet answered: How do laws and regulations from regulating agencies like the Securities and Exchange Commission (SEC) affect this planning process and execution?

While financial reporting rules may first come to mind when thinking of the SEC, the agency also strictly regulates the practice of distributing earnings releases and holding earnings events. The purpose of the latter is to promote transparency between companies and stakeholders.

These rules seem like a lot for business communications and governance professionals to keep up with; but they serve to protect both stakeholders and executives offering quarterly earnings guidance.

To simplify the compliance process, we’ve broken down how each regulation directly affects the process of planning and executing an earnings call, whether distributing earnings releases or disclosing company information.

  1. Regulation FD: Earnings Call Execution

    Do you have an earnings release coming out in the next couple of weeks? Regulation Fair Disclosure (otherwise known as Reg FD) may affect you. Regulation FD prohibits companies from selectively sharing information related to the earnings event and providing insider information to some shareholders and not to others (selective disclosure).

    Though it may not seem to be the case on the surface, Reg FD protects companies releasing information that is considered “nonpublic.” This helps reduce the chances that they are on the receiving end of a lawsuit.

    Before you think this regulation will affect you, remember that the pharmaceutical company TherapeuticsMD, Inc. got hit with a $200,000 fine from the SEC because they sent private messages with nonpublic information to analysts after choosing not to widely distribute a press release about an important meeting with the FDA.
  2. Form 8-K—Item 2.02(b): Earnings Call Planning

    When it’s time to plan your quarterly earnings call, you have two options – submit an earnings release or complete form 8-K.

    Don’t want to submit Form 8-K? There’s an easy alternative. Earnings releases are an opportunity to share a company’s quarterly earnings message with potential investors and shareholders, so this seems like the easy choice. According to the SEC, any earnings release that goes out at least 48 hours before an earnings event can take the place of Form 8-K, so long as it also satisfies Item 2.02(b).

    Keep in mind that there are two other ways to bypass Form 8-K. The first way is posting information related to the earnings call on the company website or investor relations website and disclosing where this information is located, according to Regulation G. Companies can also bypass completing a separate Form 8-K about the earnings call’s content if it submits the full earnings release on Form 8-K.
  3. Regulation G: Earnings Call Execution

    Regulation G was carried on the back of the Sarbanes-Oxley Act of 2002, which was established to hold company executives accountable and protect whistleblowers from retaliation. It requires public companies disclosing using non-Generally Accepted Account Principles (GAAP) to incorporate information most closely aligned with GAAP measures.

    This regulation also requires that companies disclose written agreements with nongovernmental entities or persons (NGEPs).

    These requirements may sound complicated, but it puts an intuitive, universal rule of business in writing. If you’re a public company, you have to carefully consider the information you disclose and how you disclose it — it’s as simple as that.
  4. PSLRA / Exchange Act—Section 21E: Earnings Call Execution

    The Private Securities Litigation Reform Act of 1995 protects companies from an earnings call audience member filing unnecessary lawsuits about future projections they claim to be untrue.

    By including safe harbor or forward-looking statements in earnings calls and earnings releases, companies ensure that stakeholders dialing in to an earnings call cannot hold them accountable for statements about strategic directions or forecasted company performance. While the company is accountable for reporting on that quarter’s performance, they can’t be subject to any lawsuits because of predictions about the company’s future.

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