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: The Race to the Bottom

An Uninterpretive Interpretive Release: Encouraging the Use of Corporate Web Sites and the Opportunity Foregone (Part 1)

By J. Robert Brown

A huge component of corporate governance is disclosure.  The SEC uses disclosure for a variety of purposes including to influence the substantive behavior of officers and directors.  This is discussed at length in Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure.

Last week, the SEC put out the long awaited interpretive release containing guidance on the use of company websites.  The release is a great disappointment, containing nothing that the average security lawyer doesn't already know.  Take a look at the chapter on Electronic Communications in The Regulation of Corporate Disclosure.  The Release largely deals with Regulation FD and the antifraud provisions, covering such topics as hyperlinks and republication.  So, does disclosure over a public website fulfill the disclosure requirements of Regulation FD?  It depends upon the facts and circumstances.  Will hyperlinks result in a company "adopting" the linked material?  It depends upon the facts and circumstances.  Will a document placed on a website be constantly "reaffirmed" or "republished" each day it appears?  It depends upon the facts and circumstances.

These areas, particularly the antifraud provisions, are full of uncertainty so the "facts and circumstances" test will often be the answer.  But there is no reason to use an interpretive release to repeat well known lore (or in this case, to confuse well known lore).  Instead, the release should have pushed the luddite companies without web pages to start using them.  Indeed, the Commission confessed in the release that "today we have reached a point where the availability of information in electronic form ? whether on EDGAR or a company web site ? is the superior method of providing company information to most investors, as compared to other methods.?  if its superior then why dance around the need for a web page?  Companies are only required to post filings and beneficial ownership reports on their website "if they have one."     Isn't it time to make them have one and to subject them to uniform standards? 

The Commission had a chance to use the release to push companies in a direction of increased public availability of information and real time disclosure.  The avenue was Regulation FD.  Regulation FD prohibits intentional selective disclosure of material non-public information.  See 17 CFR 243.100.  Thus, if information is already public, the Regulation does not apply. 

The Commission could have provided a safe harbor for companies that maintained a public web page and met certain standards (perhaps initially limited to accelerated filers).  The exemption might, for example, apply to companies with web sites that have an easily accessible page dedicated entirely to shareholders (investor relations) and has had the page in place for a specified time period (perhaps a year).  It's not enough to have a page.  Shareholders need to know that it will be used to disseminate important information.  The safe harbor could extend, therefore, to companies that post all periodic reports simultaneously with filing in EDGAR, post all press releases and other disclosure made to the market simultaneously with release, and agree to broadcast all earnings conferences and shareholder meetings by webcast and keep the webcast posted on the site at least a year. 

They would need to have written standards for what will appear on the web site and both post the standards and repeat them in periodic reports.  Shareholders would then know that the company's web site would be the "superior" method of disseminating important information.  In those circumstances, defining information disclosed on the web site as public for purposes of Regulation FD would be appropriate.

The Commission knows this and danced around the issue.  Information disclosed on the website would sometimes be public.  In resolving whether and when, companies were left with an amorphous set of standards that they already knew. 

• companies must consider whether and when: (1) a company web site is a recognized channel of distribution, (2) posting of information on a company web site disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information.

In other words, it depends.  The release provides no real security and no real safe harbor.  The existence of a facts and circumstances test has long been recognized.

A safe harbor under Regulation FD would likely have been a considerable impetus to the use and standardization of corporate web sites.  All public companies are subject to the regulation and therefore must worry about its applicability.  A safe harbor would have alleviated these concerns while, at the same time, benefiting shareholders. 

With respect to Regulation FD, this release provides nothing new.  More importantly, it was an opportunity not taken.  The Release could have taken huge steps in ensuring the use of corporate web sites and ensuring that shareholders received a predictable and uniform stream of disclosure.  Perhaps with regime change after the 2008 elections the agency will revisit the issue. 

Full post as published by The Race to the Bottom on August 04, 2008 (boomark / email).

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