June 15, 2011
I am the President of IR Web Reporting International Inc., an independent consultancy that helps issuers effectively communicate their essential disclosure information to investors on the Internet. My firm does not compete with any of the vendors that NYSE has contracted with. I am also the editor of IRWebReport.com, a website that covers online investor relations website best practices and news. My work in this area spans a decade. I routinely evaluate the products of all online investor relations service providers and make recommendations about those products to my issuer clients. My central philosophy is that online investor relations disclosures and communications must work for the end-user investors otherwise they will fail to meet the objectives of companies, regulators and the capital markets in general. My prior experience includes four years developing educational materials for the public at The Investor Learning Centre of Canada, the non-profit public education foundation of the Canadian Securities Institute. It is there that I gained an appreciation for the many challenges retail investors face in understanding issuer disclosures and for the vast potential of the Internet to improve their access and understanding. These are the people I try to have in mind whenever I make a recommendation or write an article.
The vibrancy and competitiveness of the US investor relations technology industry is an issue that goes to the heart of the SEC's investor protection mandate. If investors in US issuers are denied the opportunity to benefit from new technologies and innovations due to the dominance of complacent, sheltered service providers, they will be disadvantaged and be less able to make informed judgments about their investments. The SEC can mandate all the disclosures it wants, but if investors do not have easy access to them in usable formats that use the most current and convenient technologies, then investors are less likely to access and use the information.
Over the years, the SEC has taken many important steps to embrace new technologies to level the playing field for all investors. The Commission has also encouraged issuers to adopt best practices for online disclosure. From EDGAR to Reg FD to the Commission's 2008 interpretive guidance for company websites to XBRL, the Commission has been at the forefront of adopting new technologies to improve investors' access to disclosure information and to reduce costs for issuers. However, the fact is that while the Commission has led, the issuer community has lagged, often taking the minimum steps necessary to comply with new regulations but rarely if ever adopting best practices. In my view, one of the main reasons for this is the near total dominance in the investor relations technology field by two vendors – Thomson Reuters and Nasdaq OMX, which owns the Shareholder.com investor relations website hosting business and the PR wire service Globe Newswire. Together, Thomson Reuters and Shareholder.com easily control more than 70% of all US issuer investor relations websites, and in some industries it is closer to 90%.
The privileged relationships that Thomson Reuters and Shareholder.com have with the self-regulatory organization stock exchanges has helped them to attain their current respective market shares. It is my view that these relationships have also made these service providers complacent and less willing to adopt best practices or provide services that can improve investors access to information. These service providers rarely take the initiative to innovate because they don't have to compete on a level playing field with other service providers. When they do innovate, it is most often to catch up to new minimum regulatory requirements from the SEC or merely to match each others' service offerings.
Consequently, US investors are harmed by being denied opportunities to receive issuer disclosure information using the latest technologies and best practices. This is confirmed by various international benchmarking reviews of corporate websites which have found that US company investor relations websites, dominated by Thomson Reuters and Shareholder.com, are generally inferior to those provided by companies in Europe, where the market is more competitive and there are many different service providers competing for business from issuers. For instance, in the recent KWD Webranking of the top 100 global companies, only one US company (Hewlett-Packard) made the top 20, while all of the rest were European companies. See: http://www.webranking.nu/Results/Results-2010/Global-100/
Issuers may not be required to use the exchanges' service providers, but there is little incentive for issuers to go elsewhere considering how heavily the deck is stacked against all other service providers. Having the endorsement of the NYSE or Nasdaq OMX signals to issuers that Thomson Reuters and Shareholder.com carry a regulatory blessing the others do not enjoy. This false perception will be further reinforced if the NYSE (and Nasdaq OMX) is permitted to include the proposed information in its Company Handbook under the label of a "rule." I agree with other commenters that it is likely to cause more confusion and suggest that 1) use of the services is part of the NYSE's listing requirements and 2) the SEC has approved these services. Consequently, issuers will be even less inclined than they are now to seek services elsewhere for fear of drawing unwanted scrutiny from the exchanges in their regulatory roles. A negative outcome of this might also be that issuers which currently use non-NYSE service providers may decide to switch, which might drive independent IR companies out of business.
In addition, by apparently using their issuer listing fees to subsidize their preferred service providers, the exchanges are creating significant anti-competitive barriers for innovative service providers who may be in a position to offer superior services that may improve investors' access to information and advance the SEC's investor protection mandate. As commenters from SNL IR Solutions, PrecisionIR and MZIllios have submitted to the Commission in their own comments, they offer the same or better services as Thomson Reuters and Ipreo, yet they are not able to do business on a level playing field because it is impossible to compete with free services that carry an apparent regulatory blessing.
Possibly most troubling is that the NYSE's rule proposal comes at a time when, after several years of near complete stagnation, the industry is now just beginning to see the emergence of new players. Firms like Q4 Web Systems, IR 20/20, Virtua, MeetTheStreet and StockTwits are coming to market with exciting new services that harness the latest social media and Web 2.0 technologies. Without a level playing field, these firms will face potentially insurmountable challenges. Other entrepreneurs and venture capitalists will be reluctant to start or fund new businesses in an industry where self-regulatory organizations own or endorse the dominant players and enshrine their privileged positions in their rules.
It's my earnest opinion that approving the NYSE's proposed rule will exacerbate the already negative impact that the stock exchanges have had on competition in the disclosure and investor relations services industry. Approval will further erode the quality of US disclosure communications technologies and practices relative to Europe, and even some emerging market countries, by removing incentives for innovation and discouraging start-up companies. And all of this could ultimately harm US investors and the global competitiveness of the US capital markets.
Of course, merely disapproving the NYSEs proposed rule will not improve the current imbalances in the investor relations services market. The broader issue is whether for-profit exchanges which also have self-regulatory status should be in the investor relations services business at all. There is an obvious conflict of interest that arises between the exchanges' roles as service providers or endorsers of service providers and their roles as SROs with the ability to set and enforce disclosure requirements for their listed companies, including how information should be provided to the market. For instance, despite the Commission approving the 2008 interpretive guidance for company websites and finding that postings on company websites can – under certain circumstances -- meet the public disclosure requirements of Reg FD, both Nasdaq OMX and the NYSE discourage companies from implementing the guidance and encourage them to use PR wire services instead.
Of course, the optics of this are not good to an observer who knows that Nasdaq OMX owns a PR wire service (Globe Newswire) or that NYSE offers PR wire services to its issuers via Thomson Reuters. The optics are even worse if one knows that the NYSE approved Thomson Reuters' PR wire service last year even though it did not have distribution to the most popular investor website in the US – Yahoo Finance. Even now, the Thomson Reuters PR wire service is shockingly inferior to any similar service on the market, yet the NYSE has endorsed it as meeting its regulatory requirements. Such perceived conflicts by institutions widely viewed as being bastions of the capital market system has the potential to undermine public trust in these institutions and the capital markets as a whole. Trust is paramount to the public's confidence to invest in securities and any activities that have the real or perceived potential to undermine that trust, particularly by cornerstone institutions such as the stock exchanges, should be avoid at all costs.
Finally, it is not clear from the NYSEs proposed rule what the fee arrangements are for these included services. For instance, does the NYSE receive payments from its chosen investor relations service providers? It is also not clear if issuers pay for services over and above the minimum services available to them on a complementary basis and whether these revenues are shared with the NYSE, or if these additional services are competitively priced.
While I do not believe that stock exchanges should be providing disclosure solutions or investor relations services to issuers, I agree with other commenters that a fairer system would be for the NYSE (and Nasdaq OMX)to reimburse issuers for any IR services of their own choosing up to the stated value of the complementary services available from the exchanges. Such a system would seem to better serve the NYSE's objectives of attracting listings because it would give issuers a real choice. It also would help to foster competition in an industry that badly needs it, which ultimately could improve the standard of issuer communications to investors.
Thank you for the opportunity to comment.