82 Devonshire Street
Boston, MA 02109
June 16, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Use of Electronic Media (File No. S7-11-00)
Dear Mr. Katz:
Fidelity Investments1 appreciates the opportunity to comment on the Securities and Exchange Commission's (SEC) Interpretive Release on the Use of Electronic Media ("Release").2
The brokerage and investment management industries have been leaders in developing Internet-based communications systems and adopting innovative electronic technologies. Fidelity is a diversified financial services company that is at the forefront of using electronic media.
Fidelity has actively used electronic media in the distribution of financial products and services for many years. We believe that our use of technology has assisted in the broad and rapid adoption of electronic communications by our retail and institutional clients. To date, we have established over 4 million online accounts for retail investors and 1.5 million online accounts for retirement plan participants.
In 1995, Fidelity launched a public web site that primarily provided investors with information concerning our financial products and services. Since that time, the web site has expanded in a number of important respects in response to investors' needs. First, a comprehensive online service center has been established that allows investors to obtain account information and conduct transactions in a secure online environment. Second, electronic delivery programs have been established, which allow Fidelity investors to sign up for electronic delivery of Fidelity fund prospectuses and shareholder reports, account statements and confirmations. Third, various interactive tools and calculators have been added, which allow self-directed investors to learn more about investing principles and concepts. Finally, and in response to investor demand, research reports, market news and general information from third-party sources have been made available to investors through the Fidelity web site.
Since the mid-1990s, Fidelity has been a leader in providing electronic retirement products and services to retirement plan sponsors and participants. The firm introduced NetBenefits in 1996, an innovative web-based program for delivering retirement plan products to plan participants. NetBenefits allows for online account management and trading, in addition to providing innovative investment tools and news and research. In 1999, Fidelity introduced "e401k," an automated web-based 401(k) plan for businesses.3 Fidelity has also actively developed web-based communications systems in the investment professional market. AdvisorXpress, a comprehensive web site for investment professionals and intermediaries who distribute the Fidelity Advisor Funds, was first introduced in 1997. This web site offers investment professionals important product and service information concerning the Fidelity funds and related news and financial information.
Finally, Fidelity is a leader in adopting new means of electronic media to communicate with investors, including wireless technologies. Presently, Fidelity has introduced to investors wireless online trading and account information services for use with personal digital assistants, telephones and pagers.
II. Summary of Recommendations
Fidelity strongly supports the SEC's continuing efforts to modernize and simplify the federal securities laws surrounding the use of electronic media by regulated entities. We believe that the Release provides some useful clarifications and updates from the SEC's early pronouncements. However, for the most part, the Release provides a confusing discussion of a number of important and emerging electronic media issues.
Unlike the SEC's 1995 and 1996 interpretive guidance, the Release does not clearly distinguish the various regulatory differences among regulated entities, including broker-dealers, mutual fund companies and investment advisers. As a result, the discussion is confusing and difficult to follow and apply in the context of each of these types of regulated entities. Moreover, the Release fails to provide clear standards for applying the securities laws to one of the most innovative aspects of electronic media, the hyperlink. The lack of objective standards results in a regulatory framework that is confusing to administer and may potentially chill the use of new and emerging technologies by regulated entities.
As discussed in detail below, Fidelity recommends that the SEC (1) rethink its position related to hyperlinks used in marketing materials and prospectuses; (2) consider providing more flexibility in the area of access to documents and developing a framework for access to historical documents posted on a web site; (3) consider allowing for implied consent; provide more flexibility for global consent; and generally streamline the requirements for consent; (4) consider providing guidance on how trade confirmations and prospectuses may be delivered together; (5) clarify its position on the regulation of interactive discussion forums; and (6) allow for electronic only offerings without paper backup. Finally, we suggest several other comments related to the regulation of online initial public offerings ("IPOs").
III. Use of Hyperlinks
The Release attempts to provide guidance on issuers' responsibility for hyperlinked information under the anti-fraud provisions of the federal securities laws. Hyperlinks are perhaps the Internet's most unique component. In many respects, hyperlinks do not have an analogy in the paper world, and they have helped to shape the structure and development of the World Wide Web.
Although the Release may have sought to clarify the SEC's position on this important area, Fidelity believes that it has instead created more ambiguity and confusion. As a preliminary matter, the Release appears, on the one hand, to say that issuers who use hyperlinks within documents required to be filed under the federal securities laws should always be deemed to be adopting the hyperlinked information.4 On the other hand, the Release attempts to provide subjective guidance on how issuers can use hyperlinks in marketing materials, without adopting the linked information. This approach is difficult to put into practice for mutual fund companies, since they must file most marketing materials under the federal securities laws with either the SEC or a self-regulatory organization. Assuming a literal reading of the Release's language, if electronic marketing material is required to be filed and contains a hyperlink, the content that is linked might be deemed to be adopted.
Fidelity believes that the Release's guidance in this area is misplaced. As the SEC must be aware, for a number of years, mutual fund companies have used web sites, to provide extensive content to investors. These web sites are generally treated as advertising or sales literature under the NASD Conduct Rules and are subject to filing requirements.5 At a minimum, the SEC should clarify that this result is not the intent of its guidance and that third-party hyperlinks in mutual fund advertising and marketing materials are not always presumed to be adopted by the fund company.
A. Hyperlinks Used in Marketing Materials
Mutual fund companies and broker-dealers have been using hyperlinks to third-party web sites as an integral part of their web sites for a number of years. This activity has been based solidly on guidance issued by the staff of NASD Regulation, Inc. ("NASDR") in 1997. That guidance was a result of the mutual fund industry seeking clarity on how hyperlinks to third-party web sites could be appropriately used within fund company web sites while complying with the NASD's Conduct Rules relating to advertising and sales literature. In working with the industry, the NASD staff adopted a reasonable and objective approach, which has worked effectively for the fund and brokerage industry for a number of years. The approach, which allows for the use of "ongoing hyperlinks"6 and "educational hyperlinks,"7 is easy to administer, simple in design and effective in use. It was the result of careful thought by the mutual fund industry and NASDR staff.
The Release does not acknowledge or cite the NASD's approach and instead creates yet another standard for analyzing hyperlinks in marketing material. The SEC's standard appears to be quite subjective, relying on elements of the "entanglement" and "adoption" theories developed by federal courts in the context of issuer liability for statements by analysts.8 Although we appreciate the SEC analogizing electronic media to the paper context, we believe that hyperlinks, by their nature, are unique and without clear analogy in the print or off-line world.
The Release attempts to provide a series of factors-"context of the hyperlink"; "risk of confusion"; and "presentation of hyperlinked information"-that are not supposed to be "bright line" tests of the entanglement and adoption theories, but rather areas of concern for those who may use hyperlinks. Each of these factors contains a series of subjective and conditional elements that should be considered by issuers before creating a hyperlink. We believe that uncertainty or ambiguity in this area will have a chilling effect on the use of this new medium and may stifle innovation.
The following example highlights the ambiguities evident in the SEC's new standards:
A broker-dealer or fund company determines that its investors who use its web site would benefit from receiving current news stories related to the financial markets throughout the day. The investors would be able to access the web site and see an area that is dedicated to real time news stories. The news story area would be clearly framed as part of the fund company's or broker-dealer's web site. The information would be clearly identified as coming from an independent third-party source. The news stories would be published as received from the third-party source and no attempt would be made to change or modify the stories or participate in their creation.
In a number of important respects, this example would be similar to a broker-dealer or fund company providing a television, tuned to a news station, in one of its investor centers for viewing by the public. In this example, Fidelity believes that this type of hyperlink, or perhaps more appropriately "inverse hyperlink," clearly should be permitted under the federal securities laws, without obligating the broker-dealer or fund company to adopt the information provided through the hyperlink, as long as certain objective conditions are met.
These conditions would require that the broker-dealer or fund company: (1) clearly identify the third-party information; (2) put investors on notice that the broker-dealer or fund company is not responsible for the content of the information; (3) ensure that the information is continuously available to investors who visit the web site; (4) ensure that the broker-dealer or fund company has no discretion to alter the third-party information; (5) ensure that investors will have access to the information whether or not it contains favorable material about the broker-dealer or fund company; and (6) provide that the information can be updated or changed by the third-party, and investors may nonetheless have access to it through the inverse hyperlink.9 These conditions, which are straightforward and easy to administer, are designed to protect investors from receiving unbiased or misleading information.
Applying the SEC's guidance to this example would lead to a strange and anomalous result. First, with respect to the context of the hyperlink, given the fact that the third-party content is framed within the fund company's site, it would appear that the SEC might conclude that the information is being implicitly endorsed. In addition, from the guidance, it is unclear what the broker-dealer or fund company might say about the hyperlink that would not unduly draw attention to it and risk endorsement. The framed material may not at all be endorsed, but provided in response to investors' request that they be able to obtain streaming market news in order to inform them of events as they trade securities. Second, with respect to risk of confusion, the Release states that "the risk of investor confusion is higher when information on a third-party web site is framed or inlined."10 Here, it is difficult to determine whether the SEC believes that framing or inlining is tantamount to endorsement and what standards might be used to dispel potential investor confusion.
Finally, with respect to presentation of the hyperlinked information, the Release creates a subjective standard that will be very difficult to follow. For example, it states that "an issuer's efforts to direct an investor's attention to particular information by selectively providing hyperlinks is a relevant consideration in determining whether the information is adopted by the issuer." In the context of streaming news information via an inverse hyperlink, it is not clear whether, by selecting a particular news source for investors, the fund company is implicitly endorsing that service's approach or information. Moreover, the guidance discusses the importance of screen layout, typeface size and colors. This level of scrutiny will be chilling and counterproductive to web development and innovation in electronic media.
Accordingly, Fidelity believes that the SEC should take a fresh look at this area, with an eye toward creating certainty in its regulatory pronouncements. In developing an approach in this area, the SEC should work closely with the NASD to develop a framework that is objectively reasonable and straightforward in design.
B. Hyperlinks Used in Prospectuses
The Release includes a discussion of the use of hyperlinks in conjunction with prospectuses. Specifically, the SEC states that "if an issuer includes a hyperlink within a Section 10 prospectus, the hyperlinked information would become part of the prospectus." Further, the Release states that "because written offers must be made exclusively through a Section 10 prospectus, when an issuer includes a hyperlink to an external web site or document within a Section 10 prospectus, the issuer expresses its intent to have the hyperlinked information treated as part of this exclusive means of offering its securities."11
The SEC appears to believe that practically any type of hyperlink provided in a prospectus would indicate an attempt by an issuer to include the content of the hyperlink in the prospectus. Mutual funds often use Securities Act Section 10(b) "omitting prospectuses" to advertise their products and services. These advertisements, deemed to be a prospectus under Rule 482 of the Securities Act of 1933, usually contain performance and other relevant information about a particular mutual fund. Fidelity believes that the statements in the Release related to hyperlinks from Section 10 prospectuses should not apply in the context of Rule 482 advertisements used by mutual fund companies. A hyperlink from a Rule 482 advertisement should be treated differently because of the nature of the communication as an advertisement, as opposed to a prospectus document filed with the SEC. Accordingly, hyperlinks for these types of advertisements should be treated the same as hyperlinks from other marketing material and subject to those standards described above in this letter.
With respect to Section 10(a) prospectuses for mutual funds, Fidelity understands the SEC's concern that hyperlinks from these documents be carefully circumscribed under the federal securities laws. However, we recommend that the SEC clarify that a reference to a hyperlink in a Section 10(a) prospectus, which is not an active link, would not result in the third-party content being adopted in the prospectus. This would be similar to the approach taken in the paper context, where a mere reference of third-party material, without specific incorporation by reference, would not result in the material being adopted in the paper prospectus.12 Accordingly, under this standard, if an issuer is determined to include a hyperlink as part of its prospectus, it could do so through explicit incorporation by reference to the link and through an active URL.
C. Hyperlinked Documents: The Envelope Theory
The Release attempts to provide further guidance on the "envelope theory," which was developed in previous interpretive releases and relates to when documents that are linked to each other can be considered to be delivered together under the federal securities laws. In this area, the Release indicates that if a prospectus and sales material are linked together, the sales material must be filed as part of the prospectus and may be subject to prospectus liability under the Securities Act of 1933.13
Fidelity believes that the SEC should confirm that the existing exception for mutual fund advertising from being part of a filed prospectus continues to apply in the hyperlink context. Under the federal securities laws, fund companies may distribute supplemental sales literature that is not part of a prospectus as long as the sales literature is proceeded or accompanied by a prospectus. Fund companies may include, for example, a reprint of a magazine article in an envelope containing a fund prospectus. The article is considered supplemental sales literature, which is not part of the prospectus which it precedes or accompanies.14
IV. Electronic Delivery of Documents
The Release requests comment on "whether there are circumstances in which, consistent with investor protection, an `access-equals-delivery' model might be appropriate."15 According to the SEC, this model of delivery assumes that investors 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."16 The Release concludes "that the time for an `access-equals-delivery' model has not arrived yet."17
Fidelity believes that although the time for this model may not generally have arrived, we can envision certain circumstances in which access may be assumed for certain classes or groups of investors. Presently, there are various situations in which all investors in a group have access to the Internet. For example, certain academic communities or corporations may provide all of their employees with access to the Internet. If access of a group can be confirmed, we believe that an access-equals-delivery model might be feasible. Accordingly, we believe that the SEC should develop certain standards in which an issuer might use this model. If an issuer, for example, were able to prove that all constituents to an offering have access to the Intranet through a particular source (e.g., employer, community or grouping), the issuer should be permitted to construct a delivery program that is based on posting of required delivery documents on the Internet, without obtaining a consent or other evidence of delivery from each investor in the group.18
2. Access and Format of Documents
In its 1995 interpretive guidance, the SEC first articulated the concept that software used for electronic delivery should not be so burdensome that investors cannot effectively access the information. The SEC also indicated that when two documents are being delivered together, such as an electronic prospectus and a piece of supplemental sales literature, the two documents must be "comparably accessible" (i.e., in similarly accessible software formats) by the investor. The Release indicates that many issuers decided to format their prospectuses in hypertext market language ("HTML"), instead of in portable document format ("PDF"), because PDF format requires special software and might be considered to be more burdensome to use.19
The Release attempts to provide more flexibility in this area by stating that documents may be delivered electronically in PDF format as long as an issuer (1) informs investors of the requirements necessary to download PDF when obtaining consent to electronic delivery, and (2) provide investors with any necessary software and technical assistance at no cost. Fidelity supports this added flexibility in the SEC's standards, but would clarify it in two respects.
First, the guidance appears only to cover situations in which an investor may consent to electronic delivery of a single PDF document. The guidance does not mention the "comparable access" standard and the possibility of an issuer delivering two documents; for example, a PDF prospectus along with sales literature that is in HTML format. We believe that with appropriate disclosure issuers should be able to provide more than one document to investors in different formats. The disclosure, similar to that required in the consent to delivery, would allow for the documents to be deemed comparably accessible. Fidelity believes that this flexibility would allow for the broader use of supplemental sales literature on web sites.
Second, we do not believe that the SEC's guidance should require issuers to provide investors with necessary software and technical assistance. Instead, it should allow issuers to direct investors to a site where the software and technical assistance can be obtained free of charge. Many of today's Internet browsers contain the Adobe Acrobat Reader software plug-in needed to access PDF documents. For those users in need of downloading the software, Adobe offers software that may be downloaded free of charge at its web site.20
3. Access to Historical Information
The Release mentions that one of the unique characteristics of the Internet is the fact that information may be continuously available once it is posted. An example is given of a press release that may be issued once in the paper context, but in the Internet context may have a longer life if it remains posted on a web site; it might even be thought to be "republished" each time it is accessed. Comment is sought on how to facilitate the availability of such historical information on the Internet under the federal securities laws.
Fidelity recommends that the SEC adopt a practical standard for the use of historical information. We believe that as long as historical information is clearly dated and identified as such, it should not be treated as "republished" each time it is accessed through a web site. As recognized by the SEC, the Internet provides a unique opportunity for investors to obtain both present and historical information. The posting of historical information allows investors to obtain access to information that, in the paper context, might have been difficult or impossible to obtain. Historical information serves useful purposes to investors, including, among other things, providing a record of an issuer's statements in context to the time in which they were issued. For example, a question and answer transcript with a particular portfolio manager of a mutual fund, as of a specific date, might provide insight on how the manager approached the market at that time.
In order to provide clear guidance in this area, the SEC might promulgate a "safe harbor" rule under the Securities Act. The rule would include specific disclosures that should accompany historical information. Information complying with the rule would not be held liable because it is stale. This might be particularly helpful with respect to historical information that contains performance data.21
B. Evidence of Delivery: Consent
1. Implied Consent
The Release acknowledges that obtaining investor consent to electronic delivery poses the most significant barrier to the use of electronic delivery by issuers and market intermediaries.22 It discusses the possibility of allowing issuers and market intermediaries to use "implied consent" for electronic delivery. Under an implied consent model, the SEC states, "an issuer could rely on electronic delivery if investors do not affirmatively object when notified of the issuer's or intermediary's intention to deliver documents in an electronic format."23 The SEC appears to be skeptical of an implied consent model when it states "[w]e are concerned that investors would be significantly and adversely affected by implied consent through their inadvertent failure to object."24
Fidelity believes that an implied consent model can be an effective means of electronic delivery, if structured appropriately. As the Release intimates, electronic mail has become an important means of communication for the public. Each day, millions of e-mail messages are sent through the Internet, including between businesses, between businesses and consumers and among consumers. E-mail addresses have become the electronic equivalent of a postal mail address; and in many cases, e-mail has become a preferred means of communication, replacing postal letters.
We believe that, as described in the Release, if an investor had previously provided an e-mail address to an issuer or intermediary and had indicated that e-mail is one of his or her methods of communication for investing purposes, this could be sufficient to imply consent to electronic delivery. The e-mail address would be treated on equal terms as the postal address. For example, a broker-dealer or fund company might provide an application soliciting postal and e-mail addresses. The application might contain a check-off box that would allow the investor to choose the address to which he or she would like to receive information. If the investor checked off the e-mail address box, it would be implied that all communications would be sent to the e-mail, rather than the postal mail, address.
Thus, we believe that it should not be necessary to obtain consent from an investor who has indicated that he or she has an e-mail address and would like to do business electronically. The providing of the e-mail address along with appropriate disclosure by the issuer or intermediary should be sufficient to commence an electronic relationship, the same way the providing of a postal address is sufficient to commence a postal mailing relationship.25
2. Global Consent
The Release clarifies that an investor who holds shares in a brokerage, trust or other account through an intermediary may provide the intermediary with a global consent to electronic delivery of all documents of any issuer, as long as the consent is informed. The Release also clarifies that "a global consent to electronic delivery would not be an informed consent if the opening of a brokerage account were conditioned upon providing the consent."26 However, it also indicates that brokerage firms, which "require accounts to be opened online and all account transactions to be initiated and conducted online," may condition the opening of the account upon the receipt of global consent to electronic delivery.27
For a number of reasons, Fidelity believes that the exception_allowing online brokerage firms to condition account opening on consent to electronic delivery_is unduly restrictive and should be broadened. First, the interpretation appears to create a special exception for online brokerage firms, excluding registered investment companies, investment advisers and transfer agents. We can see no reason why these other regulated entities should not be included in the exception and recommend that the SEC revise the exception accordingly.
Second, the interpretation should clarify that periodic use of paper documents and/or telephone interactions would not erode an online-only firm's reliance on the exception.28 The mere existence of paper documents and/or telephone interaction at some point or points during the investment relationship should not be an impediment to opening an account conditioned upon the receipt of global consent or have the effect of revoking an otherwise valid global consent.
Third, although Fidelity supports a customer's right to revoke his or her global consent at any time, the current interpretation, which requires all covered paper documents to be sent, could create unnecessary administrative burdens. This will be the case if online-only firms are required to create and distribute paper versions of legally required documents during the period from which the revocation is received until the account relationship is terminated. It appears inconsistent to compel an otherwise online-only service to create and deliver paper versions of documents when the customer agreed to accept electronic delivery. Fidelity proposes that if a customer attempts to revoke his or her global consent, the service provider (issuer, broker-dealer or registered investment adviser) should be allowed to wind up the customer relationship promptly while continuing to deliver electronic documents during this interim period. Notice of the revocation policy would be disclosed when the consent is obtained.
Finally, although we are generally supportive of the global consent concepts in the release, Fidelity believes that the exception for online-only firms creates an unreasonable restraint on those firms that choose to deliver only some of their services electronically. A firm and its customers should be allowed to agree mutually to use electronic delivery to open and maintain an otherwise traditional or "offline" account in whichever way is most convenient and efficient for them. Since electronic media is quickly becoming universally accessible and accepted, firms and their customers should not be restrained from agreeing to conduct their investment business online, either completely or partially.
3. Discussion of Costs and Risks in Consent
The SEC's 1995 and 1996 interpretive guidance describes the elements of an "informed consent" that can be used as a means of evidencing delivery. In the present Release, the SEC continues to describe the informed consent and, in particular, mentions that the consent should describe online costs and risks associated with a document's delivery over the Internet.29 Online risks appear to be a new consent element that was not mentioned previously by the SEC.
Fidelity believes that SEC's focus on including a discussion of online costs and risks is misplaced. Since the SEC's first release in this area in 1995, the use of the Internet by investors has greatly increased, and it is reasonable to expect that most, if not all, investors who use the Internet for investing purposes are aware of possible Internet access and transmission costs. The introduction of the concept of risks in the consent process is unclear and vague, and we believe that any type of disclosure in this area would not be helpful for investors.
Online costs and risks language also would take up valuable space on a consent form (for example, if the consent is included within an application form or used over the telephone). The space taken up by this language would be better used to describe the mechanics of the delivery process (e.g., the notification and revocation process and program exclusions). Accordingly, we believe that adding disclosures of this nature to the consent encumbers the consent in an unnecessary way, making it less likely to be read by investors.
C. Electronic Delivery of Trade Confirmations and Prospectuses
In certain circumstances, it may be necessary for an issuer to deliver two documents together or concurrently. In the area of online trading, for example, brokerage firms might wish to deliver to an investor a trade confirmation for the purchase of a mutual fund and a corresponding prospectus for the fund. In the 1995 and 1996 interpretive releases, the SEC appears to imply that if a trade confirmation is to be delivered to an investor electronically, the corresponding prospectus must be delivered prior to or concurrent with delivery of the confirmation and in electronic or an equally prominent format.30
The SEC's statements in this area effectively preclude the use of electronic trade confirmations in fund supermarket programs. Most supermarket programs distribute several thousand mutual funds representing hundreds of fund companies. It is very difficult and costly for the distributor of the supermarket to obtain electronic prospectuses for each of the distributed funds.31 Thus, fund supermarkets may be able to deliver confirmations electronically, but they are not able to correspondingly deliver prospectuses for funds in their program.
Fidelity recommends that the SEC allow distributors of fund supermarkets the ability to use "mixed media" when delivering trade confirmations and prospectuses together. Accordingly, the distributor should be allowed to deliver a trade confirmation electronically, while simultaneously sending the corresponding prospectus through the postal mail. The following is an example of this approach:
ABC Brokerage firm operates a mutual fund supermarket program through which investors may purchase various mutual funds, including those not affiliated with ABC. ABC has on its web site prospectuses for some, but not all of the mutual funds that it makes available. An investor consents to electronic delivery of trade confirmations for her ABC brokerage account. The investor places an order for 100 shares of a fund for which ABC does not have an electronic prospectus available. ABC e-mails the investor notification at the same time that it sends in the postal mail a paper fund prospectus. The e-mail notice informs the investor of the availability of the electronic confirmation, includes a hyperlink to the web site where the trade confirmation is located and discloses that the prospectus has been sent by postal mail.
ABC meets its prospectus delivery requirements because the prospectus is deemed to be sent at the same time or prior to the sending of the electronic confirmation.
V. Internet Discussion Forums
The Release invites comment on issues relating to Internet discussion forums. As the SEC is aware, interactive discussion forums are a unique feature of the Internet.32 They provide opportunities for many individuals to interact as a group via the web. Discussion forums generally fall into three well-known categories: chat rooms, auditoriums/webcasts and bulletin boards.33
Fidelity recommends that the SEC use the Release as an opportunity to confirm that online auditoriums and webcasts are deemed oral communications under the federal securities laws. Broker-dealers and mutual fund companies have become increasingly active in sponsoring auditoriums and webcasts for investors. These events are usually open to the public and typically provide investors with real-time access to industry experts and portfolio managers. The events might otherwise be held at investor centers or through live satellite broadcasts. The SEC has provided no-action relief to similar "live" Internet events related to securities roadshows.34 In these letters, however, the SEC has not explicitly clarified that live, interactive Internet forums are considered to be oral, rather than written communication, by sponsors under the federal securities laws.
Fidelity also requests clarification on the use of bulletin boards by broker-dealers and mutual fund companies. We recommend that the SEC clarify that a broker-dealer or fund company who sponsors a bulletin board would not be liable under the federal securities laws for postings by third-parties on the bulletin board. Postings by third-parties are not communications by the broker-dealer or fund company and should not necessarily be attributed to the sponsor for purposes of securities law liability.
In order to absolve the bulletin board sponsor of liability, we recommend that the SEC require that certain steps be taken regarding the bulletin board, including: (1) the sponsor will not post its own messages on the bulletin board; (2) the sponsor will not control which messages are posted on the bulletin board35; and (3) disclosure will be made that the sponsor does not control who participates in the bulletin board, has no liability for the content or accuracy of the posted information and does not edit the material. Given these appropriate steps, we believe that a brokerage firm or fund company should not be liable for the content of the bulletin board under the federal securities laws.
VI. Electronic Only Offerings
The Release requests comment on electronic-only offerings. Specifically, the Release asks whether the SEC should drop the requirement that these types of offering provide for back-up paper delivery.36 Fidelity believes that, in offerings where participation is limited to those investors who consent to electronic delivery of all disclosure documents, no paper backup should be required. These offerings by their nature and definition would involve investors who have affirmatively consented to electronic delivery and understand that no paper backup will be provided. Requiring paper backup in this situation may serve to drive up the cost of issuing securities, which would run counter to the purpose of the electronic offering in the first place.
The Release also asks whether there would be any adverse effects of limiting electronic-only offerings to investors who provide an irrevocable consent to electronic delivery of all future disclosure documents. We believe that, as long as an investor is clearly informed of the restrictions within the consent, there should be no adverse effects of providing a limitation on the offering. Investors who choose the offering would understand that the product that they have purchased has certain restrictions and would redeem their shares if they are not satisfied with the investment or its terms.
VII. Online Initial Public Offerings
Fidelity applauds the SEC's efforts to date in providing additional permissible procedures for on line IPOs.37 We strongly believe, however, that additional regulatory accommodations are necessary in facilitating online offerings. A more flexible regulatory process would allow firms to respond to investor demand for access to IPOs, would recognize advancements in technology and would recognize one of the SEC's stated objectives of increasing retail investor participation in new issue distributions.
Retail investors have requested more flexibility with the current requirement to re-confirm when an offering prices outside the expected price range. The SEC's current policy is to require all investors to reconfirm their indications of interest or conditional offers to buy if the offering prices outside the expected price range as previously disclosed in the prospectus. We believe that it is appropriate to allow customers to use limit priced orders with IPOs. The use of a limit price empowers the customer to determine the price that they are willing to pay for the offering shares. This process would alleviate the need to reconfirm if the offering prices is at or within the customer's limit price. Otherwise, by requiring re-confirmation, some customers fail to reconfirm and are excluded from the offering. This occurs due to the short notice of the price change and the relatively short period of time permitted to reconfirm (i.e., generally two hours or less) with the increasing number of retail customers participating. The result is that more retail customers are squeezed out of the offering to the benefit of institutional customers.
Finally, we recommend that the SEC reconsider one aspect of Rule 134 of the Securities Act as it applies to new issues. Currently, Rule 134(d), among other things, prohibits the receipt of customer funds for IPO purchases prior to the effectiveness of the offering. Since the industry is gradually moving towards a T+1 settlement process, it would be appropriate to allow brokerage firms to collect funds, under limited conditions, in order to permit timely and efficient settlement processes.
* * *
We appreciate the opportunity to comment on this important initiative, and hope that the SEC will decide to issue further guidance in order to provide greater certainty on the matters discussed above. If we may be of further assistance or answer any questions, please contact either the undersigned at (617) 563-6308 or Scott Maylander at (617) 563-7369.
Alexander C. Gavis
Assistant General Counsel
|1||Fidelity Investments is the nation's largest mutual fund company and a leading provider of financial services. Fidelity offers investment management, retirement, brokerage and shareholder services directly to individuals and institutions and through financial intermediaries. The firm also is the number one provider of 401(k) retirement savings plans, the second largest discount brokerage firm and the third largest provider of 403(b) retirement plans for not-for-profit institutions in the United States. As of April 30, 2000, Fidelity had total managed assets of $952.5 billion.|
|2||SEC Release Nos. 33-7856, 34-42728, IC-24426, www.sec.gov/rules/concept/34-42728.htm (Apr. 28, 2000) [hereinafter Release].|
|3||With e401k, businesses can design and introduce retirement plans for employees through the Internet. The product allows for electronic enrollment and account handling and processing.|
|4||The Release states that "[i]n the context of a document required to be filed or delivered under the federal securities laws, we believe that when an issuer embeds a hyperlink to a web site within the document, the issuer should always be deemed to be adopting the hyperlinked information." Release, at p.8. The Release also states that "[w]hen an issuer includes a hyperlink within a document required to be filed or delivered under the federal securities laws, we believe it is appropriate for the issuer to assume responsibility for the hyperlinked information as if it were part of the document." Release at n.41.|
|5||Section 24(b) of the Investment Company Act of 1940 requires registered mutual funds to file advertisements and sales literature with the SEC. Most fund companies satisfy this requirement by filing advertisements and sales literature with the NASD, pursuant to Rule 24b-3.|
|6||An "on-going hyperlink" is as follows: "(1) the hyperlink is continuously available to investors who visit the [issuer's] site; the [issuer] has no discretion to alter the information on the third-party site; investors have access to the hyperlinked site whether or not it contains favorable material about the [issuer]; and the linked site could be updated or changed by the third party and investors would nonetheless be able to use the hyperlink." Letter from Thomas M. Selman, Vice President, Investment Companies, NASD Regulation, Inc. to Craig Tyle, General Counsel, Investment Company Institute, dated Nov. 11, 1997.|
|7||An "educational hyperlink" is a link to an Internet site that is run by an independent third-party, that does not refer to the issuer or any of its affiliates and that is meant to educate investors about principles of investing or economic, tax or financial issues. Id.|
|8||With respect to the "entanglement theory," the Release states that liability would depend upon an issuer's level of pre-publication involvement in the preparation of information. The "adoption" theory depends upon whether, after its publication, an issuer, explicitly or implicitly endorses or approves the hyperlinked information. Release, at p.8.|
|9||This approach was described in more detail in recent correspondence between the Investment Company Institute and the NASDR. See Letter from Doretha VanSlyke Zoronada, Assistant Counsel, Investment Company Institute, to Thomas M. Selman, Vice President, Investment Companies/Corporate Finance, NASD Regulation, Inc., dated Feb. 24, 2000.|
|10||Release, at p.9.|
|11||The Release continues on to state "[a]n issuer (or person acting on behalf of the issuer, including an intermediary with delivery obligations) must make it clear to investors where the document from which it is hyperlinked begins and where it ends." Release, at n.41.|
|12||Thus, Fidelity recommends that the SEC expand its analysis that an inactive URL would not be considered to be adopted if it is a link to the SEC's web site to include inactive references to other third-party sites. See Release, at n.47.|
|13||The Release states that "when embedded hyperlinks are used [linking two documents], the hyperlinked information must be filed as part of the prospectus in the effective registration statement and will be subject to liability under Section 11 of the Securities Act." Release, at p.6 (footnotes omitted).|
|14||See Section 2(a)(10)(a) of the Securities Act of 1933 (in which supplemental sales literature is not a prospectus, as long as it is preceded or accompanied by a Section 10(a) prospectus). In addition, under the SEC's Form N-1A general instructions, fund companies may include sales literature within their prospectuses assuming that the literature does not substantially lengthen or obscure information in the prospectus.|
|15||Release, at p.13.|
|18||We also believe that this also should be the case for web-only securities or fund offerings.|
|19||Release, at p.6.|
|20||Software providers are often in the best position to provide technical support for their product. Adobe, for example, currently provides technical assistance for users of Adobe Acrobat on its web site.|
|21||One possibility with respect to performance data might be to require that issuers provide a hyperlink to most recent performance information if a historical press release is to be continuously posted.|
|22||Release, at p.14.|
|25||The Release asks: "How would the fact that investors sometimes change their e-mail addresses affect an implied consent model?" We believe that a change in an e-mail address might be treated similarly from an administrative and procedural standpoint as a change in a postal address.|
|26||Release, at p.5.|
|27||Id., at n.27.|
|28||For example, some online-only services require paper documents for contractual or risk mitigation reasons. Certain letters of instruction must be in paper in order to affix a signature guarantee medallion. Some online-only firms require an original signature to open an account due to the uncertainty regarding the enforceability of electronic signatures. In addition, some online-only brokers permit customers to enter orders via the telephone, especially during times of market volatility or technical failures.|
|29||Examples (1) and (2) in the Release indicate that a telephonic consent should include "the manner, costs and risks of electronic delivery." Further, the Release states that "[b]efore obtaining Jane Doe's consent, Broker DEF advises Jane Doe that she may incur certain costs associated with delivery in this manner (for example, online time and printing) and possible risks (for example systems outages)." Release, at 17.|
|30||In footnote 38 of the 1996 interpretive release, the SEC indicated that "when a prospectus is required to be delivered, it should be delivered prior to, or concurrent with, delivery of the confirmation . . . [t]hus, if a confirmation is sent by facsimile, the prospectus also should be sent by facsimile or equally prominent means." Release Nos. 33-7288, 34-37182, IC-21945 (May 9, 1996).|
|31||The same issue also arises in the context of variable annuities, which incorporate mutual funds from a variety of providers, some of which may have prospectuses in electronic format, others which may not.|
|32||See Online Brokerage: Keeping Apace of Cyberspace, SEC Report, at http://www.sec.gov/news/studies/cybexsum.htm [Unger Report].|
|33||Chat rooms are generally conducted real-time and allow multiple computer users to interact and communicate with each other practically simultaneously. Auditoriums and webcasts provide a live forum, usually with a speaker or speakers (sometimes including a moderator) and an audience, who may ask questions and generally interact with the speakers. A bulletin board, the least interactive of the group, usually involves a static board in which computer users may post messages that can be seen by the public or other bulletin board users. Unger Report, at pp. 75-86.|
|34||See, e.g., Active.net Corporation (pub. avail. Sep. 21, 1999); Charles Schwab & Co., Inc. (pub. avail. Nov. 15, 1999).|
|35||This presumes that the brokerage firm and fund company might monitor and edit the contents of the board postings for legal compliance reasons (e.g., copyright infringement, defamation or obscenity).|
|36||Release, at p.15.|
|37||See, e.g., Wit Capital Corp. (pub. avail. July 14, 1999).|