Reg FD update

Almost two years ago, our CEO and I had a discussion in which he challenged some of the legal restrictions placed on him concerning blogging about Sun’s financial results and more generally about use of Sun’s IR website. He very convincingly pointed out that these restrictions were inconsistent with the objectives of Reg FD. That conversation resulted in a blog, an unexpected response from SEC Commissioner Cox and an invitation for several of us to meet in Washington with members of the SEC.

It was my first time at that institution and my visit had a Capraesque feel to it. But, the attorneys on the Commissioner’s team were intelligent, engaged and receptive. Clearly they listened to us and many other reporting companies as indicated by the SEC’s recently released interpretive guidance on the use of company websites under the Securities Exchange Act of 1934. You can find a PDF of it here.

When Reg FD was first adopted eight years ago, the SEC took the position that website disclosures alone would not be viewed as meeting the public disclosure requirements of the regulation. Since then the U.S. has seen explosive growth of internet access. With it’s latest release, the SEC has recognized this growth by making clear that depending on the circumstances website disclosures can meet the public disclosure requirements of Reg FD.

While the release does not provide much in the way of objective standards, it is not surprising that the SEC was reluctant to provide a “bright-line” test given the differences in size, market following and web infrastructure among reporting companies. However, absent that clarity, the Commission did give pragmatic guidance on factors a company should evaluate in considering whether it’s use of website disclosures are Reg FD complaint. These include the extent to which a company :

-Informs the market of the company’s website practices;

-Establishes a pattern of regular website disclosures;

-Makes the disclosures prominent;

-Takes steps to increase market and media attention to the website;

-Makes the website accessible through RSS feeds and similar technologies;

-Keeps the website current and accurate; and

-Uses the website as a predominant method for public disclosure.

(The nature of the information disclosed is obviously a significant factor as well.)

It was also nice to see that we have already incorporated much of this guidance in Sun’s disclosure process and website. To see what it looks like go here.

Finding Value

Years ago, I worked for an established New York based law firm. I was assigned to support one of our major clients, a large international pharmaceutical company. As a junior associate I grappled with billing – trying to juggle the minimal value of my limited legal experience with the pressure of meeting the firm’s billable hour requirements. I shared this with the senior partner on the account and, to my surprise, he told me to bill for all of my time and that he would ensure that the firm received “compensation commensurate with the value the firm provided to the client”.

At the time, I wasn’t confident enough to ask how this was accomplished. But I later found out that this partner had a long standing relationship with the client’s CEO. At the end of each year, the two of them would meet over a nice dinner and bottle of wine and review the work that the firm had done the previous year. Among other things, they would discuss the amount and type of legal support the firm had provided and the value of that work to the client. At the end of the meal, they would agree on an annual fee for the following year – usually memorialized on a napkin. Some years the fee increased; in others, it decreased.

I was thinking of this story while attending a meeting with lawyers from a number of San Francisco Bay Area companies and law firms. Under the aegis of the ACC we were together to discuss the devolution of legal services from the halcyon days described above to the present where law firms optimize for profits per partner while in-house legal departments focus on efficiency and value. It was a lively discussion and, although there wasn’t a clear solution, some ideas resonated with me.

1. Legal Education – Law schools (especially in the U.S.) remain primarily focused on theory, rather than practice. As a result, a significant expense for law firms is attributable to providing practical training to recent law school graduates. In turn, this expense is passed on to clients in the form of higher hourly fees. Our legal education system needs to provide better practical training. In this respect it should mirror the residency requirements of medical schools or legal programs in other countries. For example, in Germany, a practice residency is already incorporated in the law school curriculum. In addition, law schools need to recognize that the “legal profession” is also a business for providing legal services. To be successful, lawyers need to be trained in how to manage a competitive business enterprise. Interestingly, future members of our profession already understand this and are focusing on the issue.

2. Legal Media – As a public company, Sun provides a very transparent view into all aspects of our business operations. This transparency drives increased competition in the marketplace for our products and services. Obviously, law firms aren’t required to provide this type of information. However, the limited information that is available focuses on the wrong metrics. Legal media need to shift the focus from metrics like profits per partner to those metrics that are valued by clients. When legal periodicals begin to report firm operating expenses, average cost per billable hour and similar metrics, the legal world will change very quickly – and for the better. Law firms understandably dislike RFPs. In-house legal departments feel the same. Unfortunately, there is no other mechanism for clients (i.e. customers) to ensure that they are getting cost-effective value.

3. Law Firms – Law firms need to better understand that they are both licensed professionals and also employees of a business enterprise in an increasingly competitive (and global) market. This means they need to understand every component of their operating expense and business model. What is the cost of attorney turnover in the firm? What are its core v. non-core technical strengths? Can the firm manage sub-contractors (i.e. other legal service providers) to provide more cost effective services to clients in non-core areas? Does the firm fully understand its customers and does it tailor its services to the customer’s specific needs? (In this regard, I note that I have never had a firm propose a non-standard billing relationship for a specific matter. Instead, I’ve always had to request it.)

4. In-House Legal Departments – We need stop complaining and be part of the solution. This includes not just considering, but engaging firms that provide alternatives to the traditional legal services model. (Some examples – Axiom, Paragon Legal and the recently announced Virtual Law Partners). We also need to be more willing to retain small to mid-sized firms and firms in other geographical regions. Above all else, we need to more actively share information about attorneys and firms that deliver the value that we need as consumers of legal services.

If you want to be part of the dialog, contact the ACC for more details.