By Vance H. Edelson
Quiet periods are poorly understood across Wall Street. A common misperception is that they are legal or regulatory-imposed timeframes, prohibiting companies from speaking with analysts or investors during a stretch of time, often thought to be from the last day of the quarter until results are publicly reported. In reality, it’s merely a best practice for all publicly traded companies to establish their own quiet periods, and the concept fits within broader security laws (which obviously are legally required) designed to prevent the dissemination of Material, Non-Public Information (MNPI).
But the exact start time, duration and process around establishing a company’s quiet period can differ from issuer to issuer, based on a variety of factors.
How then should a company go about establishing its quiet period? How long and how strict should it be? We all know of investors who call a week before an earnings release and claim, “I just want to talk longer term about strategy … nothing about the quarter!” – is that conversation permissible? The answer, not surprisingly, is that it depends and there are indeed grey areas since quiet periods are not mandated by law. One objective in establishing a quiet period policy is to avoid inadvertent disclosure and to avoid the spread of MNPI which is not only morally wrong, but in violation of Regulation Fair Disclosure (Reg FD) which is one of the quickest routes to trouble with the authorities. Another important objective is to avoid the appearance of an uneven playing field with an inconsistent approach to investor communications once a management team might have knowledge of quarterly results, even if no MNPI is actually conveyed.
The first step in establishing a quiet period policy is to determine when management typically becomes aware of quarterly performance, and this varies significantly based on the type of business and predictability of financial results. Some companies, particularly those with recurring revenue models, might decide to begin their quiet period two weeks before the quarter ends. Others may be in industries in which quarterly performance is largely unknown until the books are fully closed, and thus may choose to start their quiet period two weeks after the quarter ends. There’s no “right answer,” but clearly management needs to put thought into “what it knows and when.” Some just set it at quarter end for the sake of simplicity and consistency.
The next step is to determine just how strict the quiet period should be. A common (and acceptable) practice is to make the quiet period increasingly strict as the earnings date approaches. This could allow companies to participate in a conference early in the new quarter as long as certain “guardrails” are established. For example, a company might webcast its presentation to ensure broad dissemination and meet Reg FD requirements. But before speaking with investors, management would be well advised to re-read the transcript from the prior earnings release, to refresh its collective memory on what is already public. As always, all members of a company permitted to speak with analysts and investors should be well trained in what constitutes MNPI, regardless of what time of year they’re interacting with investors.
As a former sell-side analyst myself, my strongest recollection about quiet period policies is how inconsistent and often frustrating they were. I covered one company which began its quiet period two weeks before the quarter ended and wouldn’t report until six weeks after the quarter ended. In essence, this meant the company was blacked out and unable to communicate for two-thirds of the entire year. To me, this increased the risk profile of recommending the stock. Other companies seemed perfectly happy to chat any time, which also didn’t appear to be the optimal policy.
ICR recently conducted a survey to gather thoughts from the sell-side community on how they view quiet periods. Here are the three quiet period questions we posed, along with their responses:
1. When do you think your average company’s quiet period starts / what’s considered normal?
“Probably two to three weeks before earnings.”
“Every company is different, some start once they know the numbers and this could be five days after the quarter-end, for some maybe it’s a couple days before. So the range is probably a week before until a week after the quarter.”
“Not sure there is a ‘normal’ one. Most companies start when the quarter ends or maybe a week before that.”
“There’s a lot of variance…earliest is two weeks before the end of the quarter…latest is two weeks after the end of the quarter.”
One analyst explained that he believes quiet periods have become more lax over time because the issue is much better understood by the Street than 10-15 years ago, as there’s been more of a spotlight on the spread of MNPI. “Now, if a hedge fund tried to get information on the quarter, management would just laugh at them – no one does that anymore.”
2. Do you know of any companies that are notably different / what’s the earliest and what’s the latest quiet period?
“I have companies that are willing and eager to go out on NDRs [non-deal roadshows] a week into the new quarter.”
“Most companies are pretty similar.”
“The important point is that companies don’t go mute…they can’t talk about the quarter, but they’ll engage in strategy, business framework, things like that.”
3. Do you have any issues with a quiet period that begins, say, a week before the end of the quarter?
“Of all the companies I’ve ever covered, none have ever had an issue with my conference, which has always been the last week of the quarter.”
“I think that’s fine, as an analyst I would just know to speak with them before.”
“That’s OK but it depends on how strictly they enforce it – if they couldn’t talk about an acquisition for example that would be ridiculous.”
“They could probably move it back to the end of the quarter – it takes a lot of companies weeks to get a good feel for results.”
So where does this leave us? Management teams should officially establish quiet periods as a best practice and make sure all Street-facing personnel are aware. The nuances around how strict the period is (or how it progressively becomes more strict as the weeks pass) should be part of the policy. If management is well trained in Reg FD and avoiding the disclosure of MNPI, a conversation around strategy early in the quiet period could be acceptable, while a week or two before reporting, it wouldn’t be a bad idea to cut off communications altogether. Most analysts and investors will understand. Most importantly, be well versed in the overarching principles and regulations around Reg FD and MNPI, and always have these in mind when communicating with the investment community.
Get more information about investor relations best practices on ICR Insights.