40 Broad Street
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Washington Office:
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June 21, 2000
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Use of Electronic Media - File No. S7-11-00
Dear Mr. Katz:
The Bond Market Association (the "Association")1 welcomes this opportunity to comment on the recent interpretive release of the Securities and Exchange Commission (the "Commission" or "SEC") regarding the use of electronic media by issuers and market intermediaries.2
The Association appreciates the continuing efforts of the Commission to provide interpretive guidance regarding the application of the federal securities laws to electronic media, and has set forth below its comments on many of the specific questions raised in the Release. At the same time, however, the Association considers it vital that the Commission take this opportunity to reexamine comprehensively its basic conceptual approach to the issues raised by the use of electronic media.
In the Association's view, developments in the use of electronic media have challenged a number of the assumptions underlying the existing securities regulatory framework - including with respect to the sources of information available to investors (particularly institutional investors), the ways in which they obtain that information, the types of communications services they expect from issuers and intermediaries, and the distinctions between written and oral communications. As a consequence, attempts to apply this framework to electronic communications frequently have raised as many questions as they have answered. Moreover, in light of the rapid pace of change in technology and the markets, incremental efforts by the Commission - spaced years apart - to apply the current framework through interpretive guidance have not adequately addressed the flaws inherent in that framework or otherwise permitted market participants to enjoy fully the potential benefits of electronic media. In addition, the Commission's focus on protecting investors who do not have access to electronic media has proved detrimental to the significant number of investors seeking to use information technology.
The Association urges the Commission to take more far-reaching steps - particularly through the use of its exemptive authority - to create a regulatory framework that provides both greater flexibility and certainty to investors, issuers and market intermediaries, thereby permitting them to take full advantage of ongoing developments in information technology. We have identified below several of the principal considerations that are important to achieving this objective. In the Association's view, prompt action by the SEC in this area will facilitate a significant expansion in the information available to investors and in the transparency, liquidity and efficiency of the U.S. and global debt capital markets.
I. EXECUTIVE SUMMARY
The Association's comments on the issues raised in the Release can be summarized as follows:
In connection with offerings of municipal securities:
II. BACKGROUND AND FRAMEWORK
Federal securities regulations governing the use of electronic media have particularly significant implications for the nation's debt markets.3 Many investors in these markets are institutions that, even before the advent of the Internet, had come to depend heavily upon computer technology to obtain and analyze research and market data.4 In the markets for mortgage and asset-backed securities, advanced technology has played a crucial role in permitting the calculation and distribution of cash flows, prepayment scenarios and similar materials. In the municipal securities markets, characterized by a large number of disparate issuers and securities types, information technology offers significant opportunities for improving the depth and quality of data available to investors, as well as the breadth of trading interest in specific issues. More generally, the increasingly global nature of the markets - including many segments of the bond markets - underscores the critical role of electronic media in allowing rapid communication to occur across time zones and geographical borders.
The Association thus considers it crucial that the Commission adopt regulatory policies that will preserve the benefits that electronic media can bring to the debt markets and all investors. For most debt market participants, the Internet and related computer technologies are no longer novelties - they have become the basic tools of everyday life, on a par with the telephone, the facsimile and the photocopier. Old assumptions about behavior no longer hold true in this environment. For example, there is no reason to assume that market participants check their e-mail or log on to the Internet less frequently than they read mail from the postal service. Indeed, if anything, the likely working assumption of most investors is that urgent and important communications will never arrive by traditional mail - but will come via one of the faster and more effective communications tools that technology has now made widely available.
In the Association's view, the Commission should pursue policies that will recognize the substantial changes that have already occurred in investors' use of existing technology and that will permit the continuing evolution of new communications tools involving electronic media. Key considerations in pursuing this goal, described in greater detail below, should be (i) affording market participants sufficient flexibility to implement new technology in their businesses, (ii) ensuring that investors with access to electronic media, particularly institutional investors, obtain the full benefits of new technology, (iii) avoiding regulatory approaches that would discriminate between "online only" firms and those that offer new technologies as an adjunct to their traditional broker-dealer services, (iv) actively seeking to identify areas in which the Commission's exemptive authority could facilitate implementation of technologies that will benefit investors, and (v) coordinating with regulatory agencies in the United States and in other countries to develop a consistent approach to the regulation of electronic media.
A. The Commission's Regulatory Guidance Should Provide Flexibility for Market Participants in Their Use of Electronic Media
The Association urges the Commission, in applying the federal securities laws to the use of electronic media, to emphasize approaches that will afford market participants the greatest degree of flexibility in their evolving use of new technology. In particular, we encourage the Commission to continue to permit market participants to make reasonable judgments regarding whether specific forms of electronic communication satisfy essential statutory and regulatory objectives (e.g., notice, access, etc.) - rather than to prescribe in exhaustive detail how compliance should be achieved based on the ever-shifting detailed implementation of new technologies.
A flexible regulatory framework is essential to accommodating - and to obtaining the full benefits of - communications technology in the securities industry. Given both the rapid pace at which technology has developed in recent years and the equally rapid evolution of the securities markets, detailed regulatory prescriptions are unlikely to anticipate accurately all issues that will arise, even in the relatively near future. Moreover, a flexible approach to regulation will better address differences among market participants in terms of their size and resources, their types of information systems and the scope of their use of electronic media.5
At the same time, the Association recognizes that detailed interpretative guidance frequently may benefit the markets by bringing greater regulatory certainty regarding novel questions. In the Association's view, the Commission can best assist the markets by providing this more detailed guidance in a form that does not eliminate or detract from the broader principles that permit market participants flexibility in analyzing the regulatory framework applicable to their evolving businesses. For example, the Commission could work with appropriate organizations of securities industry participants to develop "best practices" or similar industry standards.6 Similarly, the Commission could adopt "safe harbors" that provide necessary guidance while preserving the flexibility of market participants to develop alternative approaches consistent with regulatory objectives but better suited to their particular needs.
B. Market Participants with Access to Electronic Media - Particularly Institutional Investors - Should be Permitted to Obtain the Full Benefits of New Technology
The Association strongly encourages the Commission to adopt policies that will permit market participants, particularly institutional investors, to obtain the full benefits of information technology, rather than constrain the evolution of the markets by regulating to the "lowest common denominator." Investors with access to electronic media should not be deprived of the benefits of their technology investments merely because a (shrinking) minority of other investors may not yet have access to that form of electronic communication. Instead, where there is a reasonable basis for presuming that a particular investor or class of investors - such as institutional investors or investors with online trading accounts - is capable of using a certain type of electronic medium, issuers and market intermediaries should be permitted to use that medium in communications with those investors.
Investors have greatly benefited (and will, in our view, continue to benefit) from the dramatically enhanced, often real-time access to current information about securities resulting from innovations in communication technology. These improvements have not occurred simply due to a fortuitous and universal shift in investor habits, but rather because of an evolutionary process - in which firms made investments in new business models (e.g., online brokerage) which, in turn, heightened investor interest in and use of new technology.
Adoption of a "lowest common denominator" regulatory approach will impede this beneficial cycle of investment and increased investor interest by constraining the ability and incentives of innovators to adopt efficient business models. Moreover, it will do so without serving any significant countervailing policy objectives: there is no reason to believe that the marketplace will suddenly begin to ignore a significant group of investors without computers, nor to assume that the development of Internet-based products and services will meaningfully detract from the opportunities that were available to investors before the introduction of new electronic media.
Notably, from a historical perspective, the Commission has not traditionally sought to freeze in place existing market practices until a new communications technology has become universally available. For example, facsimile transmission was adopted piecemeal in the marketplace without any suggestion that its usage should be delayed until the day (still in the future) when every investor has a fax machine. Indeed, for decades after adoption of the federal securities laws in the 1930s, many Americans in small towns did not have home delivery of their mail - they only knew if they had received a letter by going in person to the post office to see whether anything had been delivered. Yet no one appears to have suggested that these investors needed to be provided with "notice" by other means then available (e.g., telegraph or messenger) reminding them to check at the post office for prospectuses or brokerage confirmations.
The Commission's investor protection objectives ultimately can be achieved only by policies that permit market participants to use up-to-date information technology, capable of managing and transmitting relevant information more efficiently to a broad segment of investors. In our view, all investors - including those without access to new technology - will benefit through the increasingly broad and rapid dissemination of useful information about securities markets and issuers. Unnecessary limitations on the use of information technology not only are inconsistent with the enhanced investor protection that this widespread dissemination has provided, and will continue to provide, in the future, but also are likely to frustrate other policy objectives of the federal securities laws, such as efficiency, competition and capital formation.7
C. The Commission Should Avoid Regulatory Policies That Discriminate Between "Online Only" Firms and Those Integrating New Technologies into Their Traditional Broker-Dealer Services
In the Association's view, the use of electronic media by an issuer or market intermediary should be subject to the same general principles regardless of whether that firm communicates with investors exclusively through "online" communications technology. Commission regulations should not encourage the creation of artificial distinctions between firms - e.g., "online" securities firms versus "traditional" securities firms - based solely on the range of technology options that they offer to investors.
From a policy perspective, it does not seem reasonable to limit the ability of "online only" firms to innovate based on regulatory requirements directed at investors who do not use the Internet. At the same time, "traditional" securities firms should have the opportunity to offer online services to customers and, in that context, should be subject to the same rules as "online only" securities firms. For example, as discussed below, the Association does not concur in the Commission's position, set out in the Release, that "online only" firms (but not other firms offering online services) may condition account opening on consent to electronic delivery. This type of regulatory discrimination between different business models can lead to unnecessary regulatory complexity (e.g., by leading firms to establish separate "online only" affiliates) without significantly advancing the policy objectives of the federal securities laws.
D. The Commission Should Exercise its Exemptive Authority in Ways That Will Facilitate the Use of Electronic Media
The Association strongly recommends that the Commission exercise its broad exemptive authority - granted under NSMIA - to modify existing law in a manner that will accommodate more effectively the needs of the electronic marketplace. Congress expressly granted this authority to the Commission to promote the development of efficient, competitive markets.8 In the Association's view, this Congressional purpose has remained unfulfilled by the SEC's failure to apply its exemptive authority in a manner that will more appropriately balance investor protection and market efficiency.
The growing use of electronic media raises a number of questions that could not have been anticipated at the time, several decades ago, when the current regulatory framework was adopted - and thus provides an ideal opportunity to implement the Commission's exemptive powers. Moreover, many issues that arise in connection with electronic media, particularly under the Securities Act, reflect the need for a more general rethinking of the securities offering process that could effectively be addressed through the Commission's exemptive powers. The Association has sought to identify, especially in Part V below, several areas in which the Commission could beneficially exercise its exemptive authority to permit broader use of electronic media.
E. Efforts to Develop a Consistent Regulatory Approach to Electronic Media Should be Encouraged and Strengthened
The ability of investors, issuers and market intermediaries to realize fully the benefits of electronic media depends significantly on the application of a consistent regulatory approach by all relevant regulatory authorities. In this regard, the Association urges the Commission to take steps to encourage uniformity in the regulation of electronic media as between its own rules and those of other U.S. regulatory authorities - including in particular self-regulatory organizations such as the National Association of Securities Dealers, Inc., the New York Stock Exchange, Inc. and the Municipal Securities Rulemaking Board (the "MSRB").
In addition, the Association notes that securities markets have become increasingly global, as more investors seek to diversify their investment portfolios with securities issued or traded in markets outside their own country.9 The use of electronic media - which is inherently international in its reach - can greatly facilitate this process of globalization, breaking down old barriers of time zones, language and geographic boundaries and facilitating the immediate flow of extensive information even to those in remote areas. These developments have made it imperative that the SEC and other governmental authorities work closely with regulators in other jurisdictions to create a consistent regulatory framework for the use of electronic communications. In the absence of such cooperation, the current patchwork of country-by-country regulatory requirements will impose unnecessary and inefficient burdens and uncertainty on investors and other market participants seeking new opportunities for international capital raising and investment through the use of electronic media.10
III. ELECTRONIC DELIVERY
Consistent with the principles identified in Part II above, the Association urges the Commission to modify its framework for analyzing the electronic delivery of information. First, the Association recommends that the Commission adopt an access-equals-delivery model for investors who are capable of accessing any particular electronic medium, with the presumption that institutional investors and investors with online trading accounts generally have such access. Second, to the extent that this model does not apply to some investors, the current notice-access-evidence of delivery model should be modified in important respects.
A. Access Should Qualify as Delivery Where Recipients Have Previously Demonstrated That They Are Computer-Enabled or Where Other Factors Support the Conclusion That They Have Internet Access
The Association urges the Commission to permit issuers and intermediaries to rely upon an access-equals-delivery model in circumstances where the intended recipient has previously used electronic communication or where there are other factors that reasonably would support the conclusion that the investor has access to electronic media.11
Under the approach proposed by the Association, the delivery requirements under the federal securities laws would be satisfied with respect to an investor if the relevant information is made available to the investor through a form of electronic media which the investor has previously used. For example, if an issuer or market intermediary has previously received e-mail from an investor or has other indications that the investor has access to the Internet (e.g., through a record of visits to a password-protected or other web site), the sending of information to the investor by e-mail or the posting of information on the web site should constitute delivery of that information to the investor. Similarly, this approach would permit delivery requirements to be satisfied through a posting to an online web site or account page where other factors permit an issuer or intermediary reasonably to conclude that the investor has access to relevant electronic media.
The Association recommends that the Commission afford investors and intermediaries considerable latitude in making these determinations in light of developments in business practices and technology.12 At the same time, it would be desirable for the Commission to establish a presumption that all institutional investors could reasonably be viewed as having access to electronic media for these purposes. As noted above, institutional investors have been at the forefront of the adoption of new information technology, and at this stage it is difficult to imagine that an institutional investor, qualifying under any reasonable definition of that term adopted by the Commission, does not have access to the Internet and other standard forms of electronic media.13 In addition, the Commission should clarify that whenever an investor explicitly requests receipt of information through a particular form of electronic communication, an issuer or market intermediary may presume that the investor has access to that form of communication.14
This proposed approach would eliminate the need for explicit investor consent and ease many of the other burdens associated with the current notice-access-evidence of delivery regime, especially in the context of information routinely posted to a customer's online account. At the same time, it would narrow somewhat the broad access-equals-delivery model described in the Release - and thus would not rest on the conclusion that every investor has access to the Internet. Instead, an issuer or market intermediary would need some basis for reasonably determining that the intended recipient of information has access to the type of electronic media used.
The Commission requested comment on whether an investor with Internet access will know that relevant information is available on a web site. In the Association's view, it is critical to note that the market for the provision of financial services is extremely competitive, and those investors that desire any special procedures for the delivery of information (including additional notice or information in non-electronic form) will have no difficulty finding firms eager to accommodate them. In this context, those issuers and intermediaries electing to do so should be permitted to inform investors that, on a going-forward basis, information that is required to be delivered to the investor (including account statements and certain disclosure documents) will be available on a web site.15 In addition, online investors should be presumed to have notice of information available on their trading accounts. If the Commission determines that extraordinary situations or events merit specific, supplemental notice to any investor, it should identify and address those situations as exceptions to the general principle that access equals delivery.16
B. Comments on the Commission's Existing Framework of Notice-Access-Evidence of Delivery
In addition to encouraging the Commission to adopt an access-equals-delivery model for at least some categories of investors, the Association recommends several modifications to the Commission's current framework of notice-access-evidence of delivery.
1. Notice -- Messages posted online should serve as notice in appropriate circumstances
The Association encourages the Commission to reevaluate its position that messages posted to an investor's account at his or her broker-dealer's web site are insufficient notice to the investor. Those who establish and use online trading accounts have, by definition, demonstrated an intent (as well as a preference) to use the Internet rather than to limit themselves to other forms of communication, such as U.S. mail, facsimile or telephone, which they could have used to conduct their trading activities. Moreover, such investors should reasonably expect that notice of information relevant to their securities positions and trading activities, including disclosure information and confirmations of their securities transactions, will be available on their broker-dealer's web site.
The Commission inquired as to whether online notices would shift to investors the burden of searching for material information. Since a message on the investor's online account would direct the investor to the specific Internet or other location of the relevant information, the investor would not be required to "search" for such information. Indeed, it is probable that the investor will actually receive the relevant information more promptly if notice of its availability on the Internet is posted to the investor's trading account than if such information is mailed to the investor in paper form.17 Moreover, by permitting online notices the Commission would not alter any substantive disclosure obligations of an issuer or broker-dealer - in other words, the contents of a disclosure document or confirmation would not vary merely because notice of existence of such documents has been provided online.18
2. Access - The Commission should provide greater flexibility for issuers and market intermediaries to determine that investors have access to information provided in electronic form19
Paper back-up should not be required where an investor has consented to the use of electronic media. In the Association's view, an investor that has consented to electronic delivery - whether in the context of an electronic-only offering, an online trading account, or otherwise - should not be permitted unilaterally to demand paper delivery, any more than a sender that has agreed to deliver information in paper form could require an investor to receive the information electronically. In any event, while an investor should be free to revoke its consent, such revocation should not apply retroactively. In addition, the determination of how to allocate the costs of a request for paper delivery should be left to the parties involved.
In response to the questions raised in the Release regarding the elimination of the paper back-up requirement, in the Association's view this approach will not result in a two-tiered market. Electronic-only offerings, which require some form of Internet access and use and have been permitted at least since the 1995 Release, have not bifurcated the marketplace, and the elimination of the paper back-up requirement is not likely to change this result. Because the investor will already have consented to the use of the relevant electronic medium, no special notice or disclosure requirements should apply. In addition, although technical difficulties may arise from time to time, the resolution of these issues does not require the imposition of any special regulatory requirements. As in the case of disruptions to mail or courier services due to events such as weather or labor disputes, the parties should be provided with the flexibility to resolve these issues in a manner that is reasonable in light of the relevant circumstances. The Association does not perceive a need to maintain the paper back-up requirement in connection with any particular type of debt offering.
As noted in the Release, under the Commission's current regulatory framework there may be circumstances in which an issuer or broker-dealer that otherwise provides certain information only in electronic form must deliver that information to an investor that has not consented to electronic delivery - e.g., where the prospectus delivery requirements apply to secondary market trading. In such circumstances, applicable delivery requirements should be satisfied by providing a print-out of the information otherwise delivered electronically, which will provide the investor with the same substantive information, without any requirement that the paper version correspond exactly to the electronic version.
The use of PDF or any other document format should be permitted whenever the investor is able to obtain access to relevant information. The Association appreciates the Commission's efforts to confirm that delivery requirements may be satisfied using documents in PDF format. It recommends, however, that in providing this type of clarification the Commission take care not to inadvertently limit the ability of issuers and market intermediaries to use new forms of electronic media. The Release appears to introduce specific procedural requirements on the use of PDF that are more stringent than those otherwise applicable under the Commission's framework.20 Moreover, the discussion of PDF in the Release, without any reference to other electronic formats, may cause some issuers to infer that delivery via such other formats (whether currently available or developed in the future) would be problematic.
3. Evidence of Delivery - The Association urges the Commission to expand the circumstances in which an investor's consent may be used to satisfy the "evidence of delivery" requirement
The Commission should expand the circumstances in which an investor's consent to electronic delivery may be implied. The Commission requested comment on whether consent may be implied where an investor previously provided an e-mail address and indicated that e-mail is one of its methods of communication for investing purposes.21 In the Association's view, in these circumstances it would be reasonable to imply consent to delivery by e-mail. An investor's consent to the use of a particular medium should be implied whenever the investor has used or otherwise indicated its willingness to use such electronic medium, regardless of whether the investor has made an affirmative statement consenting to the use of such medium.22
More generally, consent to electronic delivery should also be implied for certain categories of investors. For example, for the reasons discussed in Part III.A above, the Commission should permit issuers and intermediaries to assume that institutional investors have access to the Internet and e-mail and consent to the use of these media to deliver information (unless the investor has specifically indicated otherwise).
The Commission expressed some concern about possible changes to an investor's e-mail address. Information technology is evolving in ways allowing for prompt notice of electronic address changes and enabling users to forward their e-mail from an old address to a new one. Existing technology generally ensures that a sender would receive a notice of a returned e-mail in instances of an address change. The Association recommends that the Commission allow firms to determine reasonable procedures for handling e-mails returned due to bad electronic addresses just as firms are today permitted to develop procedures for handling the return of paper mail due to bad physical addresses.
All broker-dealers should be permitted to condition the opening of a trading account on the customer's consent to the electronic delivery of information. In the context of discussing a global consent to electronic delivery, the Release states that such consent would not be "informed" if it is a condition to establishing an account. Where a customer otherwise has been apprised of the factors required to make an informed determination,23 there is no reason to presume that the consent is "uninformed" merely because it was a condition to opening the account. The Commission should not seek to regulate the conditions under which firms agree to open accounts with customers. Customers are always free to choose between broker-dealers based on the services they provide - including information delivery - and competitive market forces will ensure that there are always broker-dealers willing to accommodate customers who do not wish to receive information electronically.24
As noted above, the Association recommends that online and other brokerage firms generally be subject to the same requirements regarding electronic delivery. The Release provides favorable treatment for firms that "require accounts to be opened online and all account transactions to be initiated and conducted online," by allowing them to condition the opening of an account on the customer's consent to electronic delivery. The fact that a broker-dealer requires all (rather than some) customers to consent to electronic delivery, however, should not result in a presumption that the consent is uninformed.25
C. Municipal Securities
As noted in the Release, issuers of municipal securities are, with increasing frequency, using the Internet and other forms of electronic media to disclose information and, together with municipal securities underwriters, offer their securities to investors. In so doing, they face a number of issues under Rule 15c2-12 and rules of the MSRB that are analogous to those faced by issuers and underwriters of other securities.26 The Association requests clarification regarding the treatment of municipal securities issuers and underwriters under certain of the principles articulated in the Release.
The Commission should explicitly recognize the regulatory and other distinctions between municipal offerings and other securities offerings. In addressing the use of electronic media by participants in the municipal securities markets, the Commission should give careful consideration to the special features that distinguish these securities from other debt instruments, particularly with respect to the offering process. At a technical level, although municipal offerings are subject to the antifraud provisions of the securities laws, they generally are exempt from the Securities Act and thus, as the Commission is aware, many of the principles discussed in the Release - including the concepts of "in registration," "free writing," and "going effective" - do not apply to these offerings.
More important, at a policy level, the public and/or governmental functions performed by municipal issuers distinguish them in a number of respects from business corporations accessing the capital markets. Municipal securities issuers are subject to a wide range of disclosure and procedural requirements, such as "sunshine" and open meeting laws. In addition, state constitutions or other legal requirements frequently divide state and local governments into different units (including executive, legislative and judicial branches) which may not coordinate their communications with the public. In light of these factors, which make any restriction on communications by municipal securities issuers problematic, if not impossible, the Association urges the Commission to confirm that the restrictions on issuer communications discussed in the Release do not apply (unless specifically noted) to issuers of municipal securities.
A municipal issuer's designation of the documents included in a preliminary, deemed final or final official statement should apply for purposes of the antifraud provisions of the securities laws. The Release notes that a municipal securities underwriter may rely on the issuer to identify which documents on, or hyperlinked from, the issuer's web site comprise the preliminary, deemed final and final official statements.27 The Commission should clarify that this designation would also apply for purposes of determining those documents for which the issuer or underwriter assumes antifraud liability in connection with the offering.
Municipal issuers should be afforded flexibility to provide information on their web sites without it being deemed to constitute "offering" materials or to have been "republished" each time it is accessed. The Association urges the Commission to recognize the importance of allowing municipal issuers to continue to use their web sites to perform their duties to the public, including their legal obligations to provide citizens with open access to government. Although the Commission's actions in this area should necessarily be limited in light of the exempt status of municipal securities under the Securities Act, in the Association's view the Commission can usefully endorse an appropriate interpretation of an issuer's antifraud liability for web site content under federal securities laws. For example, the Commission should support the ability of an issuer to create designated areas on its web site for the disclosure of investor information, which would be separate from other areas of the web site through which the issuer performs its public-service functions.28 Similarly, the Commission should endorse explicitly the ability of a municipal issuer to present information on its web site that is clearly dated without being responsible for having "republished" that information each time the web site is accessed.29 Such steps by the Commission would be particularly important for municipal issuers since, as noted above, those offices of a municipal entity that are responsible for issuing securities generally do not control all information posted to the issuer's web site and in any event cannot limit the types of information which the issuer is required to make publicly available under local law.
Hyperlinks embedded within an official statement should not be deemed to be adopted by the issuer in the absence of other evidence of adoption. The Release states that hyperlinks embedded within an official statement are considered part of the official statement. As discussed below with respect to documents subject to SEC filing requirements, whether hyperlinked information has been "adopted" by an issuer should depend on objective indications of the issuer's intent to adopt such information. The presumption established in the Release will discourage issuers from including in the official statement web site information that is potentially useful to investors but which may be unwieldy or otherwise difficult to deliver to investors. For example, read literally the Release would appear to prohibit an issuer from including in an official statement general references to its own web site, or that of a related entity (e.g., a municipality's reference to a state government site), unless the underwriters undertook the seemingly impractical task of delivering all information on the referenced site to investors.
In offerings of municipal securities, the electronic and paper versions should be required to have the same substantive information, but not necessarily the same format. The Commission indicates in the Release that for municipal securities offerings, "the paper and electronic versions of each of the preliminary, deemed final and final official statements must be the same." This requirement may unnecessarily hinder the ability of issuers and underwriters to use certain forms of electronic media that may prove more efficient in particular circumstances. Although the paper and electronic versions of the same disclosure document should convey the same substantive information, there is no compelling policy rationale for requiring that both versions be exactly the same in terms of format if the differences in format have no material impact on the disclosure to investors.30
The Commission should provide issuers and underwriters greater flexibility to conduct online offerings of municipal securities. The Association notes that the general principles set forth above regarding municipal issuers' web sites and related disclosure requirements should also be taken into account in addressing online offerings of municipal securities. The Commission should seek to identify opportunities to eliminate interpretive positions or regulatory requirements that might impede the effective adaptation of the municipal offering process to an online environment.31
IV. WEB SITE CONTENT
In considering the implications of issuer web sites under the federal securities laws, the Release focuses primarily on the use of web sites as a means to communicate with investors. In the Association's view, it is critical to note that the chief purpose of many issuer web sites is to communicate or enter into transactions with customers or other businesses. The SEC's regulatory guidance should be crafted so as to not impair the ability of businesses to continue to derive significant benefits from using web sites for purposes other than communicating with investors.
At the same time, the Commission should encourage issuers and market intermediaries to use web sites to provide investors with better access to information. Issuers and market intermediaries should be permitted to include relevant hyperlinks on their web sites, without being deemed to have adopted the hyperlinked information, as long as it is clear that the issuer or broker-dealer does not endorse or affirm the hyperlinked information. Improved access to information with meaningful disclosure will enable investors to make more informed investment decisions.
A. Hyperlinked Information
1. An issuer should be deemed not to have "adopted" hyperlinked information if it has clearly indicated that it does not endorse or affirm the hyperlinked information
The Association appreciates the Commission's efforts to clarify the non-exclusive factors that should be considered in determining whether an issuer has "adopted" third-party hyperlinked information.32 The Association is concerned, however, that these factors, which focus on ways in which an issuer may be viewed as implicitly or indirectly endorsing hyperlinked information, may have a chilling effect on the use of hyperlinks by issuers who do not want to inadvertently and unintentionally assume responsibility for the hyperlinked information. This would, in turn, reduce the information available to investors and market intermediaries.
The Association recommends that the Commission endorse the general presumption that an issuer has not adopted hyperlinked information if it has clearly indicated that it does not endorse or affirm that information. Clear disclosure by an issuer will permit investors to make informed decisions about whether to view the hyperlinked information and how to evaluate such information.33 Moreover, a presumption in favor of disclosure will encourage issuers to provide investors with potentially relevant information without requiring them to assume liability for that information.
If the Commission is concerned that an issuer that has clearly indicated that it does not endorse or affirm hyperlinked information may present the relevant hyperlink in a manner that confuses investors by creating a contrary impression, the Association would suggest that the Commission make the non-adoption presumption rebuttable based on relevant facts or circumstances. The factors identified in the Release may be useful in determining whether the presumption of non-adoption should be withheld in particular instances.
2. The standard for determining "adoption" of hyperlinked information contained in SEC-filed materials should be the same as for other materials
The Release subjects SEC filings to a separate analysis, stating that if an issuer embeds a hyperlink within a document required to be filed under the federal securities laws, the issuer will always be deemed to have adopted the hyperlinked information. This per se rule does not take into account the important differences between hyperlinks and URL addresses, on the one hand, and paper documents on the other. While in some cases a hyperlink brings a user to a specific document (which an issuer may want to incorporate by reference), in other cases a hyperlink merely serves as a convenient pathway to third party sources of information - which may include a whole library of documents.34 Indeed, the Commission appears to have recognized implicitly this feature of hyperlinks by soliciting comment in the Release as to the proper scope of hyperlinked information adopted by an issuer (an issue discussed in Part IV.A.3 below).
In the Association's view, instead of applying a per se rule regarding the adoption of hyperlinked information in SEC-filed materials, the Commission should develop a standard under which adoption would depend on the relevant facts and circumstances. Market forces favoring greater disclosure would then provide issuers with an incentive to identify to investors useful sources of third party information, even where an issuer is not in a position to assume liability for or otherwise endorse every statement made by those sources.35 This more flexible approach to the concept of adoption is especially important since the "web" is just that - interconnected linkages of information - and any attempt to treat one piece of information as per se separate will in many cases be at odds with the basic operating premise of the Internet and therefore fail.
3. Where an issuer has "adopted" information in a hyperlinked web site, it should be deemed to have adopted only the referenced site
If an issuer has "adopted" information contained in a hyperlinked web site, it generally should be presumed to have adopted only the information on the referenced site, and not information on other sites for which the referenced site contains hyperlinks. Many web sites - particularly those of news organizations or other third party information providers - contain multiple links to other sites. If an issuer has, for example, adopted information in an article to which the issuer's site contains a hyperlink, the issuer should not be viewed as having adopted all of the other articles that may then be available to the reader, some of which may have nothing to do with the issuer. Given the extensive use of hyperlinks on the Internet, any other rule would in effect prohibit issuers from providing hyperlinks to many sources of information that may be potentially beneficial to investors.
If the Commission is concerned that in particular circumstances an issuer should be viewed as having adopted not only the hyperlinked site, but other sites accessible from the hyperlinked site, the Association would urge the Commission to address those circumstances on a case-by-case basis and as exceptions to the otherwise applicable principle that an issuer is only responsible for information on the hyperlinked site.
B. Historical Information
In the Association's view, information that has been posted to a web site should not be deemed to be "republished" every time a viewer accesses such information. For example, issuers or market intermediaries frequently may provide historical information on their web sites that is very useful to investors and other market participants and that is difficult, if not impossible, to locate from another source. Indeed, widespread access to historical and other information is one of the chief benefits of the Internet. Issuers and underwriters should not be discouraged from making such information readily available by a rule which would require them to continually update or refresh that information, as long as it is reasonably clear - as indicated by a date or other indicia - that the information is historical in nature.
At a minimum, the Association urges the Commission to clarify that information posted to a web site but left unchanged is "published" only on the date of posting. An underwriter may post a research report to its web site well in advance of its participation in an offering of securities of the type discussed in that report. If the report is viewed as continuously republished each day it is left on the web site, concerns may arise as to whether the report should be treated as conditioning the market or as an unlawful prospectus.
C. Issuer Communications During a Registered Public Offering
For issuers in registration, the Release indicates that the entirety of their web sites would be subject to publicity restrictions. As the Commission notes, for some issuers, their web sites are their businesses and not merely a component or useful tool of their businesses. Publicity restrictions applied to these web sites could easily impede issuers' business operations. The Commission should, in the Association's view, encourage efforts by these issuers to create separate sections on their web sites specifically directed at communications with investors and other market participants (e.g., analysts). Only these clearly demarcated sections should, at least presumptively, be subject to the publicity restrictions imposed on an issuer in registration. The remainder of the web site would be available for the issuer's normal business operations.
The Association advocates a similar approach to any issuers that are often engaged in the registration process. Debt issuers that actively use shelf registrations frequently move in and out of "in registration" status. Subjecting such an issuer's entire web site to publicity restrictions would produce frequent and dramatic disruptions in the permissible content of its web site. The issuer will likely opt to maintain less information on the web site rather than incur the burden of repeatedly and substantially altering its web site. The Release's clarifying footnote 10 concerning the definition of "in registration," while helpful in many contexts, does not adequately address the difficulties faced by issuers who regularly enter and exit that definition.36 By allowing issuers to demarcate the segments of their web sites intended to serve as investor information subject to publicity restrictions, issuers frequently in registration will be permitted to use their web sites far more effectively in the ordinary course of their business.37
More generally, as noted above the Commission should give greater deference to the fact that issuers consistently use their web sites for many purposes other than communicating with investors. By viewing every publication on a web site as tantamount to a press release for purposes of applicable publicity guidelines, the Commission discourages issuers from providing information to their consumers or their business partners, lest it be viewed as offering-related.
V. ONLINE OFFERINGS
Current regulatory requirements pose particularly significant barriers to achieving the full benefits of electronic media in the context of securities offerings. As noted in the Release, issuers and broker-dealers have been using the Internet, e-mail and other media with increasing frequency to offer securities and provide related information to potential purchasers quickly and efficiently. At the same time, the lack of clarity regarding, or the prohibition on, the use of electronic media for certain types of communications has frustrated the ability of issuers and underwriters to satisfy investor demand for information during offerings.
The Association notes that several characteristics of the fixed income markets make these restrictions on communications particularly problematic for debt offerings. Issuers tend to offer debt securities frequently (e.g., medium term notes or other underwritten shelf takedowns),38 with the result that a debt issuer might be "in registration" and subject to publicity restrictions almost continuously (notwithstanding the Commission's interpretation of the "in registration" concept in the Release).39 Moreover, the economic features of certain debt securities, especially asset-backed securities ("ABS"), are often best communicated outside the prospectus through quantitative presentations that do not lend themselves well to oral dissemination and for which electronic delivery would be particularly effective.40 Finally, as noted in Part II above, investors in the fixed income markets are predominantly institutions who are both able and eager to use electronic media to obtain offering information.
The Association's comments below address the use of electronic media first in connection with registered public offerings and then in connection with private placements. In both contexts, the Association urges the Commission to exercise its exemptive authority to modify the existing regulatory framework - particularly for shelf registrations and offerings to institutional investors - in a manner that will better meet investor protection concerns while creating more efficient, competitive capital markets.
A. Registered Public Offerings
Advances in information technology, coupled with increasing investor demand for access to information (including through the Internet), have made liberalization of communications during offerings essential. The Association recommends that the Commission adopt a framework that substantially deregulates communications during all offerings, including those conducted online. At a minimum, the Association urges it to expand the types of information permitted by Rule 134 and take steps to provide greater flexibility for participants in online offerings.
1. The Commission should take steps to deregulate communications during the offering process
In the Association's view, the difficult practical and legal issues raised by the use of electronic media in the offering of securities are simply new symptoms of the same old problem: as currently implemented, the regulatory framework for the offering of securities is outdated and impractical, and it restricts access to information desired by investors and the marketplace.
To better meet the needs of investors and the markets, the Association recommends that the Commission develop an alternative framework for the regulation of communications in securities offerings.41 Among other things, the Commission should permit oral, written or electronic communications at any stage during the offering process, at least in the case of offerings that qualify for use of a shelf registration statement.42 As long as all material facts are disclosed in an issuer's formal disclosure documents, the freedom of issuers and underwriters to provide information to the marketplace enhances, rather than diminishes, investor protection by providing more information to the markets.43 In addition, in the case of offerings that qualify for use of a shelf registration statement,44 any communications made while the issuer is "in registration" are unlikely to "condition" the market or stimulate interest in a proposed offering in any material way. For all offerings, investor protection concerns would continue to be adequately addressed by other, existing requirements - e.g., each communication would still be subject to antifraud requirements.45
In the Association's view, the benefits achieved by a framework that deregulates communications would be substantially defeated if the framework included requirements, such as those in the Commission's Aircraft Carrier proposal, that such communications be filed or subject to Section 12(a)(2) liability. Filing would impose a substantial burden that, as a practical matter, would be difficult to satisfy and discourage communications, and there is no compelling evidence that filing would enhance investor protection.46 The imposition of Section 12(a)(2) liability also would reduce the amount of information available to investors, since underwriters and dealers - seeking to control their liability risk - would restrict the use of materials that they are confident are not fraudulent, but which do not satisfy their standards for assuming Section 12(a)(2) liability.47
2. At a minimum, the Commission should expand the information permitted to be disclosed under Rule 134
An expansion of the information permitted by Rule 134 to be disclosed after a registration statement is filed would allow market participants greater flexibility in developing procedures for online offerings and taking advantage of technological advances to provide information to investors more quickly and cost-effectively. The Association suggests that in addition to the existing permitted information, Rule 134 should allow the following information in particular:
In addition, the Commission should clarify that materials providing information about a variety of offerings by different issuers should be permitted under Rule 134 if the information about each offering comprises only permitted Rule 134 information.
For established ABS issuers, moreover, the Commission should clarify that certain factual business communications should not be treated as prospectuses or required to be filed, including factual and analytical information on programs, asset types, underwriting guidelines, structures used in prior transactions, performance information on past transactions, servicing history, and other background information.
3. Further guidance from the Commission in the area of online offerings should allow market participants flexibility in developing efficient offering procedures as technology evolves
The Association considers it highly desirable that the Commission's guidance regarding online offerings be based on general principles, and avoid any actual or implicit codification of specific procedures presented to the Commission staff in the context of a particular transaction.48 Procedures that were appropriate in one offering may not be appropriate in another, and in any event developments in technology and market practice will quickly make overly-detailed regulatory guidance outdated.
The Association recommends that the Commission address the following issues in respect of online offerings:
B. Private Offerings
Restrictions on communications with investors in private offerings raise many of the same issues as those discussed above with respect to registered public offerings. Indeed, in the private placement context - in which investors are often limited to "accredited investors" or "qualified institutional buyers" who have a greater desire to use electronic media - the effect of these restrictions is, if anything, more onerous. The Association recommends that the Commission modify its application of the prohibition on "general solicitations or general advertisements" in a manner that permits market participants to develop more efficient private offering procedures.52
1. The Commission should exercise its exemptive authority to eliminate the prohibition on general solicitation or advertising, at least for online communications clearly indicating that securities may only be purchased by qualified investors
The Association urges the Commission to create a framework in which communications in a private offering would not be subject to a prohibition on "general solicitation or general advertising."53 In light of the requirement that actual sales may only be made to investors qualified to participate in the private placement (e.g., accredited investors or qualified institutional buyers), this prohibition on communications serves no useful purpose. At the same time, the threat of the severe consequences arising from a violation of this prohibition causes issuers and underwriters to substantially restrict the flow of information to investors - including in particular qualified investors who may not already have an ongoing relationship with the issuer or underwriter.
If the Commission is concerned about investor confusion regarding who may participate in the offering, this could be addressed by requiring a communication to clearly indicate that the securities may only be purchased by certain qualified investors. For example, in the online context, information regarding the particular securities being offered could be accompanied by appropriate disclosure, or made available only to persons who have "clicked through" a page clearly describing the applicable offering restrictions.
2. At a minimum, the Commission should exempt from the prohibition against general solicitations or advertisements online offerings in which issuers or underwriters have a reasonable basis for concluding that participants satisfy applicable offering restrictions
As an alternative, the Commission should permit communications in a private offering to be made to any persons who an issuer or underwriter reasonably believes satisfies the requirements for the private placement. In the Association's view, if an investor qualifies to participate in a private placement (e.g., if it is an "accredited investor" or a "qualified institutional buyer," as applicable), market participants should be permitted to contact that investor (whether through the Internet or otherwise) to participate in the offering.
The Commission should provide issuers and underwriters the flexibility to develop appropriate procedures for reasonably determining that an investor qualifies to participate in an offering. For example, consistent with existing SEC guidance, such a determination could be based on a pre-existing relationship with the investor. Alternatively, the issuer or underwriter should be permitted to rely on representations by the investor that it qualifies for the offering, at least in the case of fixed income offerings, and especially ABS offerings, typically of interest only to institutional investors.54 The Association notes in this regard that Rule 144A already permits sellers to rely on certain representations by purchasers as to facts relevant to their status as "qualified institutional buyers." As technology evolves, other satisfactory methods of determining an investor's qualifications may be developed and should be permissible.
Importantly, the timing of the determination of an investor's qualification should not be relevant, so long as it occurs prior to the sale of securities. If an investor is determined to be qualified to participate in a private placement only after the offering has already commenced, the investor should still be permitted to participate in that offering.
VI. SUMMARY
In light of the dramatic expansion that has occurred in recent years in the use of electronic media by investors and other market participants, the time is ripe for a significant review of the Commission's regulations and interpretive guidance regarding information technology in the securities markets. While the Association has identified above a number of specific comments and proposals regarding electronic delivery requirements, the disclosure and liability implications of web sites, and the regulation of online offerings, we emphasize that any action by the Commission in this area should be based on an overall conceptual framework appropriate for today's securities markets. In our view, the Commission should use its exemptive and other authority to advance the key objectives outlined at the outset of this letter: flexibility, enhanced access to information, elimination of artificial distinctions between firms offering comparable services, and consistency of regulation.
The Association appreciates this opportunity to provide its views to the Commission in connection with the Release. If it would be helpful to the Commission and its staff, we would be happy to make Association staff and member firm personnel available to meet and discuss any of the points raised in this letter. Please address any questions or requests for additional information to Paul Saltzman, Michel de Konkoly Thege or Joseph W. Sack of the Association at 212-440-9400, or to Giovanni Prezioso or Robert Cook of Cleary, Gottlieb, Steen & Hamilton, special counsel to the Association in this matter, at 202-974-1500.
Sincerely,
/s/ Marcy Engel
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/s/ Robert G. Knox
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/s/ Benjamin Wolkowitz
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/s/ Craig C. Messinger
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cc: The Honorable Arthur Levitt, Chairman
The Honorable Norman S. Johnson, Commissioner
The Honorable Isaac C. Hunt, Commissioner
The Honorable Paul R. Carey, Commissioner
The Honorable Laura S. Unger, Commissioner
David B. H. Martin, Director, Division of Corporate Finance
Annette L. Nazareth, Director, Division of Market Regulation
Michael McAlevey, Deputy Director, Division of Corporate Finance
Robert L. D. Colby, Deputy Director, Division of Market Regulation
Footnotes
| 1 | The Association represents securities firms and banks that underwrite, distribute and trade debt securities, both domestically and internationally. This letter was prepared by the staff of the Association and outside counsel, in consultation with the Association's Internet Release Task Force, On-Line Bond Trading Committee, and Division Executive and Legal Advisory Committees. More information about the Association is available on the Association's Internet home page at http://www.bondmarkets.com. |
| 2 | SEC Release No. 33-7856, 65 Fed. Reg. 25,844 (May 4, 2000) (the "Release"). |
| 3 | The Association noted a number factors contributing to the significance of electronic media for the debt markets in its comment letter on the Commission's 1996 release regarding electronic delivery of information. SEC Release No. 33-7288, 61 Fed. Reg. 24,644 (May 15, 1996) (the "1996 Release"). |
| 4 | The Association estimates that as of December 31, 1999, of the $14.7 trillion of debt securities outstanding in the markets that the Association represents (U.S. government, federal agency and government-sponsored enterprise securities, municipal securities, mortgage and asset-backed securities, corporate debt securities and money market instruments), approximately 91% was held by institutional investors (including mutual funds). |
| 5 | The Association notes that the framework for analyzing the electronic delivery of information articulated in the SEC's 1995 and 1996 releases - i.e., notice, access and evidence of delivery - is generally consistent with the flexible approach recommended by the Association above. 1996 Release and SEC Release No. 33-7233, 60 Fed. Reg. 53,458 (Oct. 13, 1995) (the "1995 Release"). As described below, however, the Association proposes an alternative framework for analyzing the use of electronic media to satisfy information delivery requirements. |
| 6 | Of course, market participants would also need to be provided with some assurance that compliance with such industry "best practices" would not expose them to enforcement actions or civil claims alleging violations of the relevant federal securities or other laws. The Association would be willing to work with the Commission and its staff, as well as other trade associations, in exploring the potential for developing such "best practices." |
| 7 | The Association notes that the objective of protecting investors must be appropriately balanced against the other policy objectives of the federal securities laws. Indeed, Congress made clear in the National Securities Markets Improvement Act of 1996 ("NSMIA") that the Commission, in exercising its authority under those laws, also must consider the objectives of efficiency, competition and capital formation. See, e.g., Section 2(b) of the Securities Act of 1933 (the "Securities Act") (as amended by Section 106(a) of NSMIA) ("Whenever pursuant to this title the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation"). |
| 8 | Chairman Levitt has acknowledged that the broad exemptive authority granted to the Commission under NSMIA offers "an almost unique opportunity for change" and that a "new vista for possibilities has opened up." See Remarks by SEC Chairman Arthur Levitt, "Corporate Finance in the Information Age," Securities Regulation Institute (Jan. 23, 1997). |
| 9 | This process of globalization has been underscored in recent years by the efforts of exchanges to provide cross-market and global platforms for investors to buy and sell securities. |
| 10 | The Association notes the current undertaking of IOSCO's Internet Task Force to develop further guidance on Internet-based securities activities, including web site content and disclosure issues on the Internet. See, e.g., Final Communique of the XXVth Annual Conference of IOSCO "Global Markets, Global Regulation," May, 2000. The Association encourages the Commission to work closely with IOSCO in examining these issues. |
| 11 | In the Release, the Commission states that under an "access-equals-delivery" model "investors would be assumed to have access to the Internet, thereby allowing delivery to be accomplished solely by an issuer posting a document on the issuer's or a third-party's web site." While the model proposed by the Association would not require explicit consent to electronic delivery by investors, it also would not, as noted below, be based on the general presumption that every investor has Internet access. |
| 12 | Indeed, nothing in the access-equals-delivery model should preclude issuers and intermediaries from using any particular method (e.g., explicit consent or negative consent letters) to determine whether a particular investor has access to electronic media. |
| 13 | The Association suggests that the definition of institutional investor for these purposes include all institutions that are accredited investors, although the SEC may want to consider other potential criteria. |
| 14 | A particular investor could always communicate to an issuer or intermediary its preference not to use any form of electronic media. |
| 15 | Broker-dealers electing to do so could go beyond this requirement by, for example, notifying customers that account statements will be available as of a certain date each month. |
| 16 | In any event, notice would clearly exist where an e-mail or other timely notification has been provided to the investor.
The Association urges the Commission to refrain from imposing a specific requirement of evidence that information has actually been accessed in each instance. It should be sufficient that the investor was aware the information was available to be accessed. In the paper context, a firm is not required to assure that an investor opens and reads information delivered by mail. Likewise, in the online context, firms delivering electronic communications should not be required to show that an investor actually accessed and read a particular electronic communication. |
| 17 | As noted above, in light of the competitive market environment for the provision of financial services, if investors indicate a desire for additional notice, broker-dealers will have every incentive to provide such notice (e.g., by indicating to investors when certain information can be expected to be available on a web site). |
| 18 | If the Commission determines not to adopt the approach recommended by the Association, the Association requests that the Commission clarify that a confirmation can be made available on a broker-dealer's web site if notice of the availability of the confirmation is sent to the customer (including via e-mail). The Commission's statement in the Release that "a Rule 10b-10 confirmation must be sent directly to the broker-dealer's customer" could be read to suggest that confirmations do not qualify for treatment under the Commission's notice-access-evidence of delivery model. Release at 25,854. |
| 19 | The Association's comments in Part III.C. below - urging that equivalence of form between electronic and paper versions of official statements for municipal securities need not be required as long as there is equivalence of substance - applies equally with respect to determining an investor's "access" to disclosure information for non-municipal securities. |
| 20 | The Release indicates that an issuer or intermediary must inform investors as to how to use PDF when obtaining consent to such use, and must provide investors with any technical assistance and software at no cost. |
| 21 | See Release at 25,854. |
| 22 | This approach would be a logical elaboration of the position already taken by the Commission in the 1996 Release with respect to a customer's consent to the electronic delivery of personal financial information. The Commission indicated that consent may be presumed where the sender is responding to a request for information that is made through electronic media, or where the person making the request specifies delivery through a particular electronic medium. 1996 Release at 24,647. |
| 23 | See note 26 in the Release. |
| 24 | The Association notes that the Commission has permitted "electronic-only" offerings, in which investors are permitted to participate only if they agree to accept electronic delivery of all documents in connection with an offering. In this context, there is no inference that consent is not informed merely because such consent is a condition to participation in the offering. |
| 25 | At the very least, the Commission should clarify that those firms that offer both online and traditional accounts to customers may condition the establishment of an online account on a customer's consent to electronic delivery of information. |
| 26 | As noted above, the Association urges the Commission to encourage the MSRB, as well as other self-regulatory organizations, to adopt a consistent approach to the use of electronic media, particularly with respect to electronic delivery requirements. The Association supports efforts such as the MSRB's recent roundtable on "Electronic Trading Systems for Municipal Securities: Regulatory Issues" (May 5, 2000) and notes that an Association Task Force is being formed to focus generally on issues relating to the use of electronic media for municipal securities transactions. |
| 27 | See Release at 25,848. |
| 28 | The issuer would have antifraud liability only for information in the portion of its web site clearly designated for investors. The Association recommends a similar approach for non-municipal issuers in Part IV.C below. |
| 29 | See also Part IV.B below. |
| 30 | This comment applies equally with respect to the treatment of electronic and paper versions of disclosure documents for non-municipal securities. |
| 31 | In addition, the Commission noted in the Release that certain offerings of municipal securities may involve the offering of a separate security that is not itself a "municipal security" exempt as such from the Securities Act and that therefore may be sold in a private placement. See Release at n.70. The Association's proposals with respect to private placements in Part V.B below also should apply to any such separate security. |
| 32 | See Release at 25,849. |
| 33 | The Release notes the Commission's concerns regarding attempts to disclaim liability for information provided to investors. See Release, n. 61. In the Association's view, it is important to distinguish between this type of general disclaimer of liability and the type of disclosure proposed above, which may provide useful background regarding the source of particular information and enable the user to make an informed decision about whether and how to use such information. |
| 34 | For example, a company may desire to accurately report the availability of industry information through the web site of a trade organization or governmental entity, without taking responsibility for the information. |
| 35 | In any event, the Commission should clarify that an issuer referring to its own web site in an SEC filing need not file the paper-equivalent of its web site or any site hyperlinked to its web site. |
| 36 | The Release clarifies that an issuer that has filed a shelf registration statement but "has not commenced or is not in the process of offering or selling securities `off of the shelf'" will not be considered to be in registration. |
| 37 | At a minimum, shelf issuers should be permitted to designate parts of their web site for information on outstanding deals (e.g., monthly remittance data), regardless of whether they are in registration with respect to a new offering of securities. |
| 38 | While most corporations typically have a single class of common stock, many have numerous categories, maturities and structures of debt outstanding. According to the CUSIP Bureau, there were over four million fixed income issues outstanding at the end of 1999. The number of listed equity issues (on the NYSE, AMEX and NASDAQ) totaled an estimated 9,727 at that time. |
| 39 | The impact of this "in registration" concept on the use of electronic media is also discussed in Part IV.C above. |
| 40 | The Association has been in the forefront of forging solutions to this long-recognized problem, including through the procurement of staff no-action letters permitting such written computational materials. See, e.g., Distribution of Certain Written Materials Relating to Asset-Backed Securities, SEC No-Action Letter (avail. Mar. 9, 1995). |
| 41 | While attempting to set out a comprehensive proposal for the deregulation of communications during an offering exceeds the scope of this letter, the Association would naturally be willing to work with the Commission in addressing alternative approaches in greater detail. We note that the principles described in this letter are consistent with the detailed comments of the Association regarding the Commission's specific proposals for an alternative regulatory framework in its "Aircraft Carrier" release. |
| 42 | The Association notes that by adopting our recommendations in Parts III and IV above with respect to electronic delivery and the regulation of web sites, the Commission would mitigate some of the concerns that have been raised regarding certain current offering requirements, such as the final prospectus delivery requirement. At the same time, the Association urges that the Commission continue to consider appropriate modifications to this requirement, whose marginal benefits may no longer justify the burdens - even in the context of electronic delivery - imposed on underwriters in light of today's shorter settlement cycles, the public availability of information in a final prospectus, and the reality that in today's marketplace delivery of a final prospectus usually does not occur until after an investment decision is made (typically on the basis of other information that has been conveyed to the investor, including a preliminary prospectus). |
| 43 | The Association notes that the Commission recently adopted a similar approach in the context of business combinations and similar transactions. See SEC Release No. 33-7760, 64 Fed. Reg. 61,408 (Nov. 10, 1999). |
| 44 | Forms S-3 and F-3 generally require that either (1) the issuer has been subject to the reporting requirements of Section 12 or 15(d) of the Securities Exchange Act of 1934 for at least 12 months or (2) the securities being registered are investment grade asset-backed securities. The Association notes that, in addition to the policy considerations identified above in support of deregulation of communications in the context of these offerings, a further benefit in the case of "seasoned" issuers would be the creation of a framework permitting increased information to flow to the markets and existing security holders. |
| 45 | If the SEC determines that additional safeguards would be necessary, it could require prominent legends urging recipients to read the full prospectus when available. |
| 46 | If the SEC were to impose such filing requirements, the Association would recommend that it exempt from such requirements proprietary broker-dealer materials, road show materials (including presentation "slides", "power point" presentations and electronic road shows), e-mails, computational materials, transaction information and computer models, and business information (e.g., regularly released forward-looking information and factual business communications). In no event should communications relating to exempt offerings, including municipal debt, be subject to any filing requirements. In addition, if filing is required, such filing should not be required to occur before the end of the first business day following the first day of use (but in any event not later than 24 hours before pricing of the securities). |
| 47 | If the Commission were to subject communications to Section 12(a)(2) liability, the Association would propose that materials not required to be filed, and any computational materials and other ABS transactional information, not be subject to Section 12(a)(2) liability. |
| 48 | See Wit Capital Corporation, SEC No-Action Letter (avail. July 14, 1999). See also IPONET, SEC No-Action Letter (avail. July 26, 1996), in the private placement context. |
| 49 | See, e.g., Private Financial Network, SEC No-Action Letter (avail. Mar. 12, 1997); Net Roadshow, Inc., SEC No-Action Letter (avail. Sept. 8, 1997); Bloomberg L.P., SEC No-Action Letter (avail. Dec. 1, 1997); Thomson Financial Services, Inc., SEC No-Action Letter (avail. Sept. 4, 1998); Activate.net Corporation, SEC No-Action Letter (avail. Sept. 21, 1999); Charles Schwab & Co., Inc., SEC No-Action Letters (avail. Nov. 15, 1999 and Feb. 9, 2000). |
| 50 | See, e.g., Charles Schwab & Co. Inc., SEC No-Action Letter (avail. Nov. 15, 1999). |
| 51 | The Commission should avoid regulatory guidance based on a particular model of how a web site is organized, and instead provide flexibility for web site structures to evolve along with changes in technology and investor demand, at least when those structures do not create confusion for investors. |
| 52 | The Association also urges the Commission to expand the information permitted by Rule 135 to be disclosed regarding a private placement (subject to the use of a prominent legend specifying who will be eligible to participate in the offering). |
| 53 | As noted in the Release, "general solicitation or general advertising" is prohibited by Regulation D (and that prohibition is generally considered to be applicable to other private offerings of securities and resales of securities pursuant to Rule 144A). |
| 54 | The Association urges the Commission to permit "self-accreditation," at least in the case of online offerings. At a minimum, however, the Commission should permit issuers or underwriters to rely on online questionnaires by investors that establish a factual basis for concluding that such investors satisfy applicable offering restrictions. |