Remarks Presented at "The SEC Speaks in 2001"
by Commissioner Isaac C. Hunt, Jr.
U.S. Securities & Exchange Commission
Sponsored by The Practicing Law Institute
March 2, 2001
Good afternoon, as always it is a pleasure and honor to be here today. But before I begin I am obligated to give you the usual disclaimer that you have probably heard more than once today. The views I express here today are my own and do not necessarily reflect those of the Commission, other Commissioners, or the Commission's staff.
Today, I would like to speak to you about the Internet and my hopes for what you may see from the Commission in the coming year. As regulators, we often strive to stay ahead of or at least keep pace with market changes. After all, our mission is to prevent the next crisis, not to react to it. But alas, this is not always possible.
I believe that the Commission has been at its best when it has anticipated changes in the marketplace and provided the necessary guidance and flexibility in interpreting and adopting its rules as those changes took place. Perhaps the best example of Commission foresight can be seen in its creation of the EDGAR system. The EDGAR system was designed and developed when commercial e-mail was in its infancy and the scientific community was the predominant user of the Internet. It was the foresight of previous members of the Commission and the staff that have enabled investors throughout the world to have instant access to the library of Commission filings. Prompt access to companies' disclosures is no longer just available to large investors and who live in major cities but, rather, such disclosures are now available around the globe, 24 hours a day, to anyone with a computer and access to the Internet.
With greater access to information came record numbers of small investors to our markets. These investors helped move our markets to record heights in the 1990s. EDGAR was, perhaps, the first step in providing small investors with real time access that previously was reserved for professional investors. As you all know, last year we took another step in enhancing the fairness of our markets with Regulation FD. While the jury is still out on whether Regulation FD is a success, preliminary surveys suggest that it is accomplishing its objective.
Unfortunately, however, I believe we have fallen behind in the area of EDGAR. It has been almost five years since all filings by domestic public companies have been accessible through EDGAR, yet foreign issuers are still not required to file through EDGAR. Foreign issuers compete with domestic issuers to raise capital in our markets, their securities trade in our markets, and yet U.S. investors do not have the same access to material information filed by these issuers. Additionally, today, most insiders still do not file their Forms 3, 4 and 5 that report changes in ownership of their employer's securities on EDGAR. This information, I believe, can be very valuable to investors. Who would want to buy the stock of a company when insiders of that company are the predominant sellers? Yet this information for most companies is not available on our web site. It is my hope that, by the end of this year, all Forms 3, 4, and 5, as well as all foreign issuer filings, will be filed through EDGAR and available on our web site. The Commission should also consider posting all granted and denied No-Action letters on our web site.
Additionally, I believe the Commission in the coming year should re-examine the area of communications made during a public offering, specifically communications made during the waiting period. While the waiting period has never been considered quiet, it has historically been limited to the preliminary prospectus and a limited audience roadshow presentation. Today, however, the Internet and television have made the waiting period a lot noisier. Generally, investors and others are free to publicize their views and concerns regarding a company's offering. Whether through chat rooms, web postings, or CNN, investors are actively communicating with each other. Generally, I believe this to be a good thing. But when investors and others have questions regarding a particular offering, the people with the best information to answer such questions, generally, are limited in the medium by which they can answer investors' questions.
The Internet provides a mechanism that would allow investors and companies to get together on a non-selective basis to discuss a company's public offering. It is my hope that the Commission will find a way to allow companies and investors to take greater advantage of the Internet and thus, as I have said previously, transform the waiting period into the education period. The waiting period should be a time when any investor can ask questions directly to the company and/or its underwriters, with both being free to answer such questions without fear that their answers, whether communicated via the Internet, by fax, or by e-mail, violate the registration requirements under the federal securities laws.
Now, I am not so na´ve as to think that, by permitting greater communications during the waiting period, companies will use this new opportunity only for "educational purposes." I am almost certain that some companies would attempt to turn the waiting period into marketing campaigns that would rival Superbowl Sunday's commercials and the Cola wars. There likely will be television ads, and radio spots, and I would not even be surprised to see some companies attempt to hawk their stock on Leno or Letterman.
Some will argue that the opening of communications will further supplant the need for a preliminary prospectus. Even today, many have argued that the prospectus has become obsolete. Indeed, investors are investing based on a vast array of information: from web sites and analyst reports to television programs. Information is everywhere. It is the quality of the information, however, that causes me concern.
It seems like every day the Division of Enforcement brings me a new material misrepresentation case. Not surprisingly, however, few involve underwritten public offerings. It is just amazing how strict liability can increase the quality and reliability of information.
Accordingly, it is the continued existence of the preliminary prospectus, combined with Section 11 of the Securities Act, that relieves my concerns about the quality of information. I believe that the preliminary prospectus, instead of becoming obsolete, will become even more important to investors. For it is the prospectus where investors can look for a balanced picture. It may not answer all their questions, but it sure exposes both a company's beauty marks and its warts. Thus, the possibility of some companies conducting a full-scale marketing campaign to hawk their stock is less distressing, provided that investors continue to have a place to turn to for a balanced plain-English discussion of the risks associated with a company's offering.
Delivery through the Internet is another area where I believe the Commission must regain its leadership role. I would like to see the Commission begin to consider issuing a concept release that would examine the possibility of taking greater advantage of the Internet. Specifically, I think it is time for the Commission to begin to consider an implied consent electronic delivery model for accredited and institutional investors. While I still believe that a digital divide exists with respect to retail investors, I do not think such a divide exists with regard to accredited and institutional investors. Consequently, I think it may be time to consider an implied consent model for electronic delivery of prospectuses and proxies to accredited and institutional investors.
Unless an accredited or institutional investor specifically objected to electronic delivery, I believe we should consider allowing issuers to assume that such investors have access to the Internet. Accordingly, issuers, underwriters, broker-dealers, and other sellers could satisfy their delivery obligations simply by including in their Rule 10b-10 confirmations the web site address where the final prospectus is located.
Now I realize there are many issues that we would need to resolve before we could actually adopt such a model. First, is it even practical to essentially be establishing two delivery models, one for small retail customers and a second for accredited and institutional investors? Clearly, brokerage firms may experience backoffice problems distinguishing between small retail investors and accredited and institutional investors. Would we be establishing a delivery system that would provide incentives for issuers and brokerage firms to exclude small investors from registered offerings? Or, are there sufficient business reasons that ensure that at least some portion of a registered offering will be sold to smaller investors?
And of course, there are legal issues that would need to be resolved as well. For example, does the Electronic Signatures in Global and National Commerce Act preclude the Commission from adopting an implied consent model for electronic delivery of prospectuses and proxies? Would we need additional legislative authority?
While the issues surrounding such a change are plentiful, I believe the Commission must begin to consider these issues if it wishes to continue to lead in the area of the Internet. Let us remember, the Internet offers benefits to investors, issuers, underwriters, broker-dealers, and other market participants. For investors, the Internet provides them with ease of access to information that previously was much more difficult for them to obtain, especially on a timely basis. For issuers, underwriters, broker-dealers, and other market participants, the Internet provides a low cost means of satisfying their regulatory obligations. The Commission must continue to seek new ways of regulating in order for everyone to take greater advantage of the opportunities that the Internet provides. For the Internet creates both the opportunity to enhance investor protection and a means to lower the cost of capital formation.
Well these are just some of the areas I think the Commission would be wise to examine in the coming year. Thank you again for allowing me to express my thoughts here today. I hope that you find this conference both useful and enjoyable.