Why disclosure work needs barriers
A filing is public only when it is released. Until then, the numbers, the narrative and the timing are all confidential, and the people who work on it know things the market does not. Securities rules treat the handling of that kind of information seriously, and Regulation FD shows the shape of the concern.
Under Regulation FD, when an issuer, or a person acting on its behalf, discloses material nonpublic information to the persons the rule lists, the issuer must make that information public: at the same time if the disclosure was intentional, and promptly if it was not.
That requirement does not apply to a person who owes the issuer a duty of trust or confidence, such as an attorney, investment banker or accountant, or to a person who expressly agrees to keep the information in confidence.
People who prepare a filing for a registrant are often in the position that the exception describes, because they owe the registrant a duty or have agreed to keep what they see in confidence. But an exception is a reason a disclosure may be lawful. It is not a reason to be loose with the information. The more people see an unreleased filing, the more places it can travel from.
A team that serves many registrants has a further problem. It may hold unreleased information about several companies at once, some of them competitors, some on opposite sides of a deal. The people, the files and the conversations all need to stay where they belong. Barriers are how a team keeps that promise to each registrant it serves, and keeps it provable.
Independence
Independence is a question about who is allowed to do a particular piece of work for a particular registrant. The SEC states the standard for accountants who audit.
The SEC will not recognize an accountant as independent of an audit client if the accountant is not, or a reasonable investor with knowledge of all the facts would conclude the accountant is not, capable of exercising objective and impartial judgment on all issues in the engagement.
This is the auditor’s rule, and it is aimed at accountants and the registrants they audit. It does not say that a firm that prepares disclosures must itself be independent of the registrant. It does give any team a question worth asking before it accepts work: does this firm, or any firm in its network, audit the registrant it is about to serve, or one that is closely connected to it? If so, the answer affects who may do what.
- Ask the question at the start, before work is staffed. An engagement discovered to be in conflict halfway through is expensive to unwind.
- Record the answer and the date. A result that cannot be shown later is of little use.
- Ask again when something changes. A new relationship, an acquisition, or a change of auditor can turn an engagement that was clear into one that is not.
- Make the check a gate, not a reminder. A check that can be skipped will be skipped in the week the deadline is closest.
Ethical walls
An ethical wall separates two sets of work, and the people who do them, so that what one side knows does not reach the other. Walls are used where the same team serves parties whose interests differ: two bidders, a buyer and its target, or two competitors in the same filing season.
A wall works only if it is real. These are the properties worth insisting on.
- It is defined by sides. Each side is a set of entities and a set of people, and the wall says that people on one side may not open what belongs to the other.
- It holds whatever the person’s role. A senior title must not be a way around a wall. If a partner needs to see both sides, that is an exception, and exceptions are recorded.
- It is enforced by access, not by agreement. A promise not to look is not a wall. Access removed is.
- It has a named owner, a start date and a review date, and it is closed deliberately when its purpose ends.
Securities law describes the kind of policy that can help a firm that trades.
Rule 10b5-1 lets a person other than an individual show that a trade was not made on the basis of material nonpublic information where the person deciding was unaware of it and the firm had reasonable policies, which may include policies that prevent individuals from becoming aware of such information.
That describes the kind of policy that can help a firm make that showing, and no more. The rule does not require a wall. It is useful here because it shows how the law thinks about barriers: reasonable policies that stop individuals from becoming aware of information they should not have. A wall is such a policy for a team that handles other people’s unreleased information.
Embargo
An embargo closes a piece of work to everyone except a named group until a stated moment. It suits the period before a release, when the circle of people who may see a filing should be as small as the work allows.
- Decide the circle before the embargo starts, and make it as small as the work permits. Adding people later is easier than recovering a leak.
- Treat the embargo as closed by default. Anyone not on the list cannot open the work, and cannot be told its contents indirectly.
- Add people by decision, with a reason, and record the time they were added.
- End the embargo at the release, deliberately, and not by drifting. Note when it ended and who ended it.
An embargo and a wall solve different problems. A wall keeps two parts of a team apart for as long as their interests differ. An embargo keeps the whole world but a few people out for the time until a release. A busy team often needs both at once.
Insider lists
An insider list is a record of the people who had access to sensitive information, and when they got it. It is a practice, kept because it lets a team answer a question that otherwise takes days: who knew, and from when?
- Record who, what and when. The person, the work they could see, and the moment they could first see it.
- Record the way they were added. A person who was added at a named person’s request is easier to explain than one who simply appears.
- Keep it current as people join and leave. A list that is right at the start and wrong a week later is worse than none.
- Keep it with the work. A separate spreadsheet that someone has to remember to update is not a list that will survive the season.
This guide makes no claim that any rule does or does not require such a list for your team. Ask your counsel what applies to you. The value of the practice stands on its own: when there is a question, the list is the first thing anyone will ask for.
Segregation of duties
Barriers between registrants have a counterpart inside a single filing. The person who prepared a number should not be the only person who checks it, and the person who prepared it should not be the person who approves it.
- Set the rule in a policy, so that it does not depend on who happens to be on the team that week.
- Apply it to the facts, the review and the approval. Each step has a different person, and the person who prepared the work is barred from the later ones.
- Write down the exceptions. A small team will sometimes have no choice, and a recorded exception with a named second reader is a controlled one.
- Check the rule is applied. A policy nobody tests is a wish.
Separating the preparer from the reviewer is a barrier of the same family as the others. Each exists so that no one person can both create and approve the thing they are creating.
Keep the evidence
A control that cannot be shown to have worked is hard to rely on. The last habit is to keep a record that someone else, later, could read.
- The independence check for each engagement: the question, the answer, the date and who made the decision.
- Each wall: its sides, its owner, its start date, its exceptions and its end.
- Each embargo and its insider list: who was in the circle, who was added, and when it closed.
- Who changed what, and when, on each filing, and who read it before it was released.
Then test the barriers. Pick a person on one side of a wall and ask whether they can open an entity on the other. Compare the insider list with the people who actually opened the work. A barrier is as good as its last test, and the best time to find a gap is before anyone has relied on it.
How Disclose IQ approaches it
- Each registrant you serve is an engagement, from proposal through to its wind-down.
- Independence is checked before an engagement can go ahead.
- People on one side of a wall cannot open the entities on the other, whatever their role.
- Embargoed work stays closed, and the insider list records who had access.
- The person who prepared facts can be barred from reviewing or approving them.
- Who changed what, and when, is recorded, and so is who read a filing before its release.
General information, not legal advice. Read the current form and rules.