June 16, 2000
Secretary Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington, D. C. 20549-0609
Re: File Number S7-11-00
Comments on SEC Interpretive Release - Use of Electronic Media
Dear Secretary Katz:
The Florida Division of Bond Finance is pleased to have the opportunity to comment on the SEC Interpretive Release on using electronic media. The Division of Bond Finance is responsible for issuing bonds for the State of Florida. We maintain a web site containing preliminary and final official statements and other relevant financial information related to the State's bond programs. Therefore, the standards applied to electronic dissemination of information regarding municipal securities will directly impact our operations and disclosure practices.
I commend the SEC and its staff for taking a proactive approach to this important issue. The guidance provided by the Interpretive Release addresses some of the uncertainties for governmental issuers regarding how the securities laws apply to web based disclosure. This in turn eliminates potential concerns and encourages governmental issuers to use their web sites for disclosure purposes. Even though the Interpretive Release does not provide definitive answers to all issues, it is extremely helpful and provides very timely guidance. However, I believe the SEC should go even further in providing guidance and resolving uncertainties for us regarding the use of this powerful tool for disseminating information. Additionally, I believe you have introduced some very troubling concepts which you should address with further guidance on the SEC's position. In particular, and as addressed in more detail below, the concept of "republishing" information presented on a web site each time the information is accessed by an investor is problematic.
Access to Historical Information and the "Republication" Issue
The guidelines state that information posted on an issuer's web site potentially has a longer life than a traditional press release which is issued only once, because the web site "provides a record that can be accessed by investors at any time and upon which investors potentially could rely when making an investment decision without independent verification." (Guidelines, at p. 16) The guidelines further state that "a statement may be considered to be 'republished' each time that it is accessed by an investor, or....each day that it appears on the web site." This interpretation presents serious problems for governmental issuers using web sites to provide information to the market because of the potential for significantly increasing a governmental issuer's disclosure obligations.
The practical effect of the foregoing interpretation would be to impose a continuous disclosure obligation on governmental issuers merely because they make information available on a web site. The medium that a governmental issuer uses to provide information to the market should not change its obligations under the federal securities laws. If information on a web site is considered republished each time it is read, an issuer would be required to continuously (daily) review its web site and determine if anything had changed to make the information misleading. This could apply even if the issuer is not engaged in a primary offering, i.e., the concept could be expanded to include all information presented on a web site (not just an electronic POS or OS) and apply to secondary market trades. Such an interpretation dramatically changes the disclosure obligations for governmental issuers far beyond the existing statutory and regulatory framework that currently exists. As recently as May 15, 2000, in its own post-hearing brief in administrative proceedings brought against the City of Miami and others, the SEC has recognized that governmental issuers do not currently have a continuing obligation to update information it has provided. The SEC states "As there has been some confusion in the municipal finance community regarding the Division's position in this matter, the Division ... is not claiming that Miami was obligated to update its CAFR every time that it further disseminated this document. Rather...Miami was obligated to ensure that its CAFR was not materially misleading..." (SEC Administrative Proceeding File No. 3-10022, Division of Enforcement's Post-Hearing Brief, p. 1, fn. 1). Imposing an additional substantive disclosure obligation on municipal issuers based purely on the medium used to disseminate information would place form over substance and run counter to current law and practice.
Such an interpretation would cause governmental issuers (such as ourselves) to seriously reconsider using a web site for disclosure purposes. The State of Florida would probably discontinue its web-based disclosure platform because of the significant increase in exposure to 10(b)(5) liability and the attendant administrative burden resulting from this interpretation of the securities laws. This chilling effect on the use of electronic media would deprive the market of the substantial benefits the SEC has recognized as flowing from such technology.
We have two suggestions regarding how the SEC should deal with the "republication" issue. First, the SEC should explicitly acknowledge that the disclosure obligations of governmental issuers are the same for both paper disclosure and electronic disclosure. This will clarify an issuer's legal obligation and eliminate investors' confusion regarding the timeliness of information required to be filed.
Secondly, having acknowledged that the substance of the law is the same for electronic media, the SEC should make it clear that information presented "as of" a certain date is not to be considered "republished" each time it is accessed by an investor. Additionally, information that is time-sensitive, such as an announcement analogous to a press release, could contain the date that it is posted on the web site to avoid confusing investors about when the information was disseminated. This practice is already commonplace in the market through information services such as Bloomburg where news releases are posted with date and time stamps. This practice does not create confusion about timeliness nor has it created an implication that such information is legally required to be updated. Governmental issuers should be able to rely on language indicating that information speaks as of a certain date and there is no obligation to update such information. Governmental issuers could then be certain that they are not assuming additional disclosure obligations because they are using an electronic medium to provide information to the market. Additionally, it will make it clear to investors the exact date which applies to the information and eliminates any implication that the governmental issuer has undertaken to update such information more frequently than required under the Rule 15c2-12.
Adopting the foregoing approach would encourage governmental issuers to use web sites to provide information to the market because they could do so without creating burdensome on-going disclosure requirements.
The design and organization of an issuer's web site can also help minimize investor confusion regarding historical information presented on a web site. For example, a governmental issuer can segregate archival offering documents from other more current information on its web site. Also, the portal for entry to the web site could contain a warning that the information he/she is accessing may be stale and is presented for historical purposes only. This would put the investor on notice that the information being presented is not current. However, governmental issuers need to know that this approach is sufficient to adequately protect them from additional exposure to 10(b)(5) liability. If they have this certainty, they are more likely to provide historical information, such as a library of the issuer's offering documents and/or financial statements, benefitting the ease of investor access to relevant information.
Additionally, in determining the standards for use of electronic media, regulators should be mindful of the reasons governmental entities make use of a web site. Unlike corporate entities whose web sites are designed for investors and customers, public bodies provide a great deal of information in furtherance of their governmental functions with no intention of influencing investor sentiment. This is particularly true in Florida, which has a policy of "government in the sunshine" and strong open records laws. Public access to governmental information is of constitutional significance in Florida, and is frequently supplied via electronic media. An overly burdensome standard which deems information republished each time it is accessed could place the State of Florida in the untenable position of choosing between satisfying state constitutional mandates or securities law guidelines. A mechanism whereby securities disclosure can be clearly identified as such would provide the certainty governmental entities need in order to comply with legal requirements.
There is little doubt that governmental issuers will be less likely to provide disclosure in other than paper form if electronic information is considered republished each time it is accessed. The Commission recognized the "significant benefits that investors can gain from the increased use of electronic media," and that "the Internet has helped to promote transparency, liquidity and efficiency in our capital markets." (Guidelines, at p. 3) Imposing additional disclosure obligations on governmental issuers beyond those currently in place with respect to traditional information delivery systems would result in less use of electronic media and run counter to the SEC's statutory goals (Id.).
Use of Portable Document Format
The SEC states that the use of PDF would be permissible if issuers and intermediaries:
What constitutes "technical assistance" for purposes of the SEC guidelines? Common practice for providing access to electronic information in the Portable Document Format ("PDF") is to furnish software, such as Adobe "Acrobat", which can be downloaded free of charge for viewing documents posted on a web site. As a part of the software download, the user obtains access to technical assistance through drop-down help menus, as well as online technical advisors. We, as an issuer of municipal securities, do not employ staff technicians to provide additional technical assistance, although we do advise the web site user how to contact us.
It should be sufficient that the software is made available, with a "help" or "support" button available from the software provider; the issuer/intermediary should not be required to expand the software provider's technical assistance. As to questions arising from the content of the document, instructions as to how to contact the appropriate office should be sufficient. Taken together, these steps adequately address the SEC's concern that "the use of a particular medium should not be so burdensome that intended recipients cannot effectively access the information provided." (Guidelines, at p. 6)
We are very interested in the SEC's development of further guidance. In that regard, we would welcome the opportunity to answer any questions you have or to share our perspective on the practical application of regulatory requirements. Thank you for the opportunity to present our reaction to your Interpretive Release.
Very truly yours,
J. Ben Watkins III