Speech by SEC Commissioner:
Navigating the Sea of Communications
Isaac C. Hunt Jr.
Commissioner, U.S. Securities & Exchange Commission
At the Practicing Law Institute's SEC SPEAKS
February 26, 1999
The views expressed herein are those of Commissioner Hunt and do not necessarily represent
those of the Commission, other Commissioners or the staff.
Good afternoon. I hope you are enjoying this conference as much as the SEC enjoys hosting it. Throughout the years, this conference has offered us the opportunity to present our thoughts, plans and concerns regarding the state of our securities markets. I am personally very appreciative of this year’s new format that allows the Commissioners themselves to speak directly to you. Today, I would like take this opportunity to talk to you about the SEC’s Aircraft Carrier proposals.
As some of you may recall, back in November of last year, at PLI’s 30th Annual Institute on Securities Regulations, I expressed some of my concerns regarding the Aircraft Carrier proposals. There is one concern, however, that I left out of my November speech. Brian, I am sorry, but I can no longer remain silent. It is just too important an issue. I have grave concerns about the NAVY bias of this project. What happened to the ARMY?
Now, I know you may think that I am a little bit biased myself, since for a brief period of time I served as the Acting General Counsel of the Army. But nonetheless, I believe objectively this is a job for the ARMY, not a NAVY Aircraft Carrier. After all, how many offerings occur at sea?
But in all seriousness, rather than repeat the concerns I raised in November, I would like to talk to you about what I consider to be some of the strongest proposals in the Aircraft Carrier package for increasing the efficiency and fairness of our markets.
Most notable is the proposal to permit issuers to use free writing materials during the waiting period. This would allow companies, for the first time, to take full advantage of the Internet and other electronic media. Today, more and more companies are using the Internet to disseminate their prospectuses and proxy materials. Many companies make available their quarterly and annual reports on their web site. Some have even broadcasted their annual meetings through their web site. But more can be done.
As the Commission noted in its 1995 Electronic Media release, we believe that the Internet offers benefits to both issuers and investors. The Aircraft Carrier proposals would allow companies to take greater advantage of the Internet, especially during the waiting period. For example, by permitting the use of free writing, issuers and underwriters could use the Internet to broadcast their roadshows to both retail and institutional investors; they could hold "chat room" discussions about their offerings; and they could use electronic mail to answer investors’ questions about their offerings.
But let me pause here for a second and remind you of something that the Aircraft Carrier did not propose. The Aircraft Carrier did not propose that a company’s free writing materials replace the prospectus as the primary document used by investors. Rather, a company’s free writing materials are to be in addition to the prospectus. It is our hope that by permitting the use of free writing, these materials will serve as an introduction to the offering, encouraging investors to become more informed by reading the prospectus. Moreover, by permitting this new use of free writing, we hope to change the waiting period to the education period. By encouraging a dialogue between the issuer, investors, and other market participants, we hope to see more informed investment decisions and greater efficiency in our markets.
Like the original drafters of the Securities Act, however, I am concerned that some nefarious companies and individuals may use their free writing materials to fraudulently hype their offerings. But I believe the Aircraft Carrier is equipped with three weapons that should strike fear into the heart of any evildoer: sunshine, accountability, and prospectus delivery.
The Aircraft Carrier proposed to require that all free writing materials be filed with the Commission. This requirement should shine sunlight on any fraudster that may choose to use its free writing materials to attack the integrity of our markets. To paraphrase Louis Brandeis in 1914, in discussing the efficacy of disclosure: "Sunlight is . . . the best of disinfectants . . . ." By requiring the filing of free writing materials, the Aircraft Carrier would ensure that such materials would be available for all to see, including our Division of Enforcement. So for those of you out there who may be thinking about conducting a roadshow with Hollywood sizzle, just remember that our Division of Enforcement has purchased its ticket.
The Aircraft Carrier also proposes to provide investors with their own weapon: Section 12(a)(2) liability. This should ensure that all free writing materials will be prepared with the same thought and care that is currently customary with offering communications. For those of you that do not believe you can invest such thought and care into these materials, then perhaps free writing is not for you. But I expect that, for many small businesses, the availability of additional avenues of communication will be quite useful.
As I noted earlier, the Commission continues to believe in the primacy of the prospectus. This should be evident to all by the Commission’s plain English campaign. As I am sure you are aware, the Commission has made plain English a priority. We have allocated significant resources to our plain English program, and I am proud to say it has begun to show results. Today, the prospectus is much easier to read than ever before. In fact, just last month Vice President Gore presented the Commission with an award for our plain English campaign.
But no matter how well written a prospectus is, it offers investors little protection if it arrives after investors have made their investment decisions. Unfortunately, today this is usually the case. It becomes even more problematic in the case of offerings by new and smaller issuers as to whom the market may be less informed. The Aircraft Carrier proposals further complicate this problem by permitting this new use of free writing materials. There is a real danger that free writing materials, rather than serving as an introduction to the offering, would replace the prospectus as the primary document used by investors.
I believe, however, that the Aircraft Carrier’s arsenal provides a strong defense against such danger. Earlier delivery of the prospectus should help defend investors from any dilution of the prospectus as the primary offering document. By delivering the prospectus earlier, investors would have the opportunity to review and compare the prospectus with the company’s free writing materials before making their investment decisions.
As I noted earlier, the Aircraft Carrier proposals also should help bring greater fairness to our markets. Through its filing requirements, it would attack the insidious problem of selective disclosure. Selective disclosure is wrong. It attacks the very core of our markets. Fairness in our markets can never be optional. When fairness disappears, corruption starts to grow. Today, our IPO market is known more for "flipping," "spinning," and "penalty bids" than for long-term investments. When our capitals markets cease to be fair to investors, you can be sure their dollars will flow to other markets.
Last year, Chairman Levitt focused your attention on the analyst conference call. This year, I would like to draw your attention to the selective disclosure being provided at roadshows. Today, it is customary for issuers and underwriters to conduct roadshows for most, if not all, IPOs. While these presentations primarily discuss information contained in the prospectus, they also, almost always, include non-public, forward-looking information not contained in the prospectus. In some cases, this non-public forward-looking information may be provided to large investors in one-on-one presentations. The staff also has been told that some institutions won’t invest without such information. This begins to sound a lot like the legal definition of materiality. How can we say our markets are fair to all investors, when only some are receiving material non-public information?
First, let me make it clear that I think that it is wonderful that issuers and underwriters are providing this information. What I am concerned about, however, is that they are providing this information to the privileged few. Now I know some of you may have argued that we should not be overly concerned about selective disclosure, since it is these large investors, through their purchases and sales, that will set the security’s price. Accordingly, the security’s price would then reflect the selectively disclosed information. Thus, all investors would benefit from such information through their purchase or sale of the security. These large investors, however, no longer appear to be the sole price setters. Rather, today, it is often the retail market that appears to be driving the price of many of our securities. One only needs to look at some of the recent offerings by Internet companies to see the effect that the retail market can have on the price of a security.
Well, the good news is that the Aircraft Carrier’s filing requirements should shine some "sunlight" on these roadshows. The filing requirement should enhance the fairness of the offering process by letting all investors have access to the information provided at the roadshow. I am not, however, so naive as to think that the Aircraft Carrier’s filing requirements will end selective disclosure. I am certain some will continue this practice by providing such information orally to avoid any filing requirement. Nonetheless, the Aircraft Carrier proposals should begin to level the playing field. For those who would continue this practice and those who would profit from it, I can only say-stay-tuned. As you may have read, our staff is considering possible rulemaking in the area of insider trading, and I am hopeful that we will be able to find a legal way to stop these practices.
In conclusion, I hope I have not unduly alarmed you today. I want to thank you for allowing me the opportunity to express some of my views on the Aircraft Carrier proposals. I look forward to reading your comment letters, and please be assured that, if you know a better way to increase efficiency and fairness in our markets, I am always listening.