Comcast Disclosure Said to Highlight SEC Rule Uncertainty

At issue is whether Comcast revealed material information in a Sept. 8 meeting with Banc of America Securities analyst Douglas Shapiro. Under SEC Regulation FD ("Fair Disclosure"), material information provided to one person must be available to all. But the rule, imposed in late 2000, doesn’t define “material,” and securities law experts often defer to a 1976 Supreme Court ruling.

The AFL-CIO is considering whether to complain to the SEC about the disclosures, said analyst Brandon Rees. The union, whose affiliate Communication Workers of America has been losing members at Comcast, instead could discuss the issue with the firm, he said. He said no decision has been made. “We'll take whatever action is necessary to get the right outcome for public shareholders,” said Rees. The union had overseen about $400 billion in assets invested on behalf of members. That figure doesn’t exclude assets managed by large unions that recently broke with the AFL-CIO. “We're strong supporters of Regulation FD, and we are evaluating what this means and whether there is a concern that should be referred to the SEC,” Rees said. The AFL-CIO is reviewing previous Comcast public disclosures to see what, if anything, the firm revealed in the Sept. meeting that wasn’t yet public, Rees said: “We're going to review the record… Then there is the question of was this material, inside information that was disclosed? Clearly it was disclosed selectively to [Banc of America] and its clients.” That’s contrary to what Rees said is the intent of the rule: “to put all public shareholders on a level playing field.” An independent corporate governance expert said the SEC should take a closer look. “I think it is serious enough to merit a thoughtful investigation,” said Corporate Library Chmn. Nell Minow. “There is no item so small that someone is not going to claim it’s material. You don’t need very much to support a complaint -- the question is how seriously the SEC would take the complaint.”

Though even Comcast’s toughest critics are unsure about filing formal complaints, independent legal experts, including securities law professors, said the case points to a gray area firms should work even harder to avoid.

The incident may show a need for clearer rules for all publicly traded companies, not just for Comcast, which has a good overall financial disclosure reputation. Many firms walk fine lines in private analyst meetings, said Georgetown U. Prof. Donald Langevoort: “There still is a large number of informal meetings and informal conversations at which the risk of a Regulation FD violation remains… Inevitably that is going to create situations where carelessly or not, someone steps over the line.”

All material provided to Shapiro was disclosed previously, Comcast said. “Comcast takes seriously its disclosure and other obligations under securities laws,” co-CFO John Alchin said in a statement. “We have rigorous standards and controls relating to Regulation FD. Our investor relations presentations, announcements, talking points and all interactions with investors and analysts are reviewed and approved by counsel to ensure that they are in full compliance… We and our counsel emphatically believe that our meeting with Bank of America was in complete compliance with the letter and spirit of Regulation FD.”

A paucity of enforcement cases to use as guidelines means companies must read the rule, which is vague. “Like any rule, it’s filled with ambiguities,” Duke U. Law Professor James Cox said. “The biggest ambiguity is the threshold one: What’s material, and what’s not public information.” In its text, Regulation FD says it “does not define the terms ‘material’ and ‘nonpublic,’ but relies on existing definitions of these terms established in the case law. Information is material if ’there is a substantial likelihood that a reasonable shareholder would consider it important’ in making an investment decision.” A 1976 Supreme Court ruling experts say sets the standard for what’s considered material has a high threshold. “There must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ’total mix’ of information made available,” Justice Thurgood Marshall wrote for the Court in TSC Industries Inc. et al. v Northway. “The issue of materiality may be characterized as a mixed question of law and fact.”

A given investor’s idea of “important,” however, is open to interpretation. “The SEC has sort of a schizophrenic view [about the public interest], which is short of material non-public information, that it’s in the public interest to encourage conversation with analysts,” Cleary Gottlieb’s David Becker, a former SEC gen. counsel who helped write Regulation FD, said: “Short of materiality, if you think it’s good for the public to talk, discuss, ask questions, I don’t think it’s such a good idea in effect to pressure companies to make public the contents of their conversations.”

The information at issue resulted in an investor message Shapiro sent. In it, he said he heard from Comcast officials that the following scenarios were unlikely: (1) A major recapitalization. (2) Buying a large media firm. (3) Carrying only digital broadcasts. Many investors deem those statements important, which means they should have been made publicly, said Sumanta Ray, analyst with CWA, which has had labor disputes with Comcast. Comcast records don’t seem to indicate the statements were made previously, but Comcast disagreed, saying all information in the analyst note had been reported publicly.

Perhaps the closest iteration of the recapitalization comment was an Aug. remark by CEO Brian Roberts: “We have already made a significant investment in returning capital [to] shareholders.” Ray, who reviewed Comcast disclosures at our request, said he thinks the private meeting contained new details. “It seems to me a definitive statement that they are making, one they have not made before,” he said. Nonetheless, the Banc of America analyst didn’t alter his rating on Comcast shares, which he recommends investors buy, and the stock price didn’t change significantly after the meeting.

Comcast seems not to have stated previously and publicly that it believed none of the 6 major media firms are viable acquisition targets. In June 2004, regarding Comcast’s failed bid to buy Disney, Roberts said: “I don’t think there’s five Disneys. If we were so lustful, we would have kept bidding.” Earlier this year, when asked by us about potential cable acquisitions, he said: “There’s nothing we're looking at doing” (CD July 27 p7). Some analysts see differences between last year’s remarks and those made at the analyst meeting. “I think the fact that they have ruled out any big merger, that statement seems fairly definitive too,” said Ray. He said the recapitalization and acquisition comments “both seem to me to have some play in the market” and might be important to investors.

Others, including former SEC officials who helped write Regulation FD, said the rule allows such disclosures to analysts. The debate illustrates some Regulation FD vagaries. “There is some gray area,” said Rees. Still, he said the union “would hope that in the future Comcast plays by the best practices in fair disclosure, which appears to have not happened in this instance.” What any investor considers important, however, is subject to interpretation. “It does seem that the SEC would take the position that it is in the public interest to encourage conversations with analysts about non material information,” said Cleary Gottlieb’s Becker. “We want analysts digging… we don’t want to inhibit that,” said Columbia Law School Prof. and former SEC commissioner Harvey Goldschmid, who helped write Regulation FD. “The Commission’s releases [on Regulation FD] were very careful to say that individual meetings with analysts were still okay,” he said.

Comcast should adopt better financial disclosure practices, said several securities law professors. They compared the Banc of America note to information previously disclosed and provided by the firm at our request. Referring to remarks by Comcast executives, including COO Steve Burke and Alchin, Cox said: “That tone in and of itself can easily be seen as transmitting material non public information… You're conveying information that the market doesn’t otherwise have. That’s just what I find astounding.” Were a complaint lodged against Comcast, he said: “You may very well find a judge that with a full briefing at the end of the day would find this non material.” But, he asked: “Why the hell do you want to incur that set of costs? Why would you want to do that when it’s so easy to avoid?”

Another securities expert agreed. “It seems perfectly clear to me that communications of this sort is not the same thing as public revelation, and that’s what securities laws are all about,” said George Washington U. Prof. Theresa Gabaldon. “I doubt that anyone set out to do anything that they realized was illegal or even questionable… It seems to me that it was a very understandable impulse to give more information.” Comcast said its policy is to not comment on analyst reports -- even when a research note is based on a discussion with its executives. A better approach, said Duke Prof. Cox, would be to post “speaking points” Comcast prepares for meetings on its Web site, before the event, and follow up by streaming a post-facto recording of the meeting. “Why not go ahead and put it online?” asked Gabaldon: “Then everybody is covered, and everybody has access to the same information.”

At the very least, AFL-CIO and CWA analysts said, they hope Comcast will tilt more toward disclosure. “We would hope that they would adopt better practices, and we'll keep monitoring the changes here with these issues,” said CWA’s Ray. But posting information from every analyst meeting overloads investors with information, said Charles Hill, a former research director for Thomson First Call, main U.S. compiler of earnings estimates, and a frequent critic of analysts. “If you put something out, then you are going to be bombarded with calls about ‘what did you say?'” said Hill, pres. of Veritas et Lux, which compares analyst earnings estimates to financial results. “Everybody’s going to want to call or come because they feel like they missed something.”