Service providers owe their livelihood to the investors who put capital at risk to support their organization and development. Whether privately or publicly owned, management of service providers has a fiduciary duty to the shareholders. Lapses in securities law compliance that impair good investor relations can result in regulatory investigation and penalties, not to mention damage to reputation and possible shareholder litigation.
Impact upon Board of Directors and C-Level Executives
Boards of directors and C-level executives know that they can be held liable personally. They learned in 2005, in some settlements of shareholder litigations against a few companies, that executives can be forced into settlements that put their personal wealth at risk and prevent their reliance upon the company’s “directors’ and officers’ liability insurance.
Privately Owned Service Providers
Modern corporation laws generally define the rules of “investor relations” between management and shareholders. For the executives of privately held service providers, adoption of regular board meetings and timely annual shareholders’ meetings might not be legally required, but could avoid career-ending mistakes in communication.
Publicly Owned Service Providers
In public companies, U.S. securities laws and regulations impose heavy burdens of disclosure and compliance. The SEC’s “full disclosure” rule requires public issuers of securities to disclose material information equally to all investors and potential investors, without early warnings to favor a small group of investors.
All Service Providers
Section 10 of the Securities Exchange Act of 1934 and SEC rule 10b-5 prohibit the use of any manipulative or deceptive devices, fraudulent scheme or materially misleading statements (whether by omission or affirmative statement) in connection with the purchase or sale of any security. This rule applies to both private and public issuers.
Disclosures to Non-Shareholders relating to Inside Information
Service providers may find themselves being asked to disclose material non-public information to third parties in support of their business relationships. Abuse of such disclosures will distort securities markets, resulting in losses to the company. Accordingly, any such disclosures need to be carefully planned, restricted and monitored to avoid breaches of securities law.