June 16, 2000
VIA E-MAIL AND FEDERAL EXPRESS
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File Number S7-11-00; Release Nos. 33-7856, 34-42728 and IC-24426
Ladies and Gentlemen:
We appreciate the Securities and Exchange Commission's (the "Commission") ongoing efforts to provide guidance in the rapidly evolving world of electronic disclosure. As one of the most active bond and underwriter's counsel firms in the country, our public finance attorneys are daily dealing with novel nuances in this area, often with only the basic disclosure principles as guidance.
We believe the use of electronic media presents a unique opportunity to disseminate disclosure information, both in the primary and secondary market, on a more timely and complete basis than ever before, and in that vein we offer the following comments on your Release effective May 4, 2000 concerning the Use of Electronic Media, Release Nos. 33-7856, 34-42728 and IC-24426, File No. S7-11-00 (the "Release").
If properly facilitated, the internet and other Electronic Media represent technology that could act as the information equalizer of the modern investment era. Through access to wire services and other subscription information providers, institutional and sophisticated investors have previously and currently enjoy a distinct advantage over retail investors with regard to the timeliness, quality and volume of and ease of access to investing information. The internet has the potential to significantly narrow this advantage, or to eliminate this two-tier system completely, to the extent disclosure through Electronic Media is properly encouraged and regulated.
We fully endorse the use of Electronic Media for disclosure purposes. The growth and usage of Electronic Media is pervasive in our society, particularly by investors. More and more of our issuer clients are creating web sites to provide on-going information and using the internet to sell bonds. And more and more underwriters want to use electronic means to market bonds-for example an investment banker client recently set up a restricted access web site for a conduit bond sale which included a video presentation by the CEO and CFO of the borrower and the ability to download the preliminary official statement. Often the greatest challenge is understanding the technical aspects, for they significantly impact the legal disclosure analysis (e.g., as the Release suggests, we recommended to the underwriter that they include, for free, the software necessary to download and utilize the preliminary official statement).
As a general matter, we strongly support the positions taken in the Release, other than the Commission's position on access to historical information (Section II.D.5 of the Release). The remainder of this letter provides our specific responses which are captioned to correspond to similarly titled discussions contained within the Release.
A. Electronic Delivery. With one exception, we agree with the guidance provided in Section II.A. of the Release. Under the subheading "Global Consent," the Release indicates that an investor should be advised of their right to revoke a global consent and goes on to state that, to avoid confusion, an intermediary may require that any such revocation be on an "all-or-none" basis. However, the Release suggests (at Section II.A.2) that an intermediary's ability to require an "all-or-none" revocation would be subject to such intermediary's disclosure of such policy prior to obtaining the global consent.
We believe that the better standard would be to require only that the right to revoke be disclosed prior to obtaining consent, and that any such "all-or-none" revocation policy be adequately disclosed at or prior to the time the investor proposes to revoke a portion of its global consent. As a practical matter, it may not be possible for an issuer to anticipate either the volume and scope of information that may be transmitted in the future or the capabilities of the technology that will be used for such transmission. An issuer that has understandably failed to anticipate such changes and, accordingly, did not anticipate the need to develop or disclose an "all-or-none" policy may be left in a difficult position. Moreover, we are unable to determine what additional protection an investor would obtain by requiring that the issuer disclose this policy at the time consent is obtained.
B. Web Site Content. We also concur generally with the positions presented in the Release with regard to website content, including responsibility for information linked thereto. We do believe, however, that the Release presents two issues that merit comment. First, in addressing the "adoption theory" Section II. B.1.b. of the Release states that the "adoption" of linked information based on a risk of an investor's confusion might be minimized to the extent the investor is "presented with an intermediate screen that clearly and prominently indicates that the visitor is leaving the issuer's website and that the information subsequently viewed is not the issuer's." We concur that the use of such an intermediate screen would minimize the risk of confusion. However, we also believe that the use of such an intermediate screen, clearly indicating that the visitor is leaving the issuer's website and that the issuer is not adopting information contained on the linked website, should eliminate any argument that the issuer has adopted the linked information, at least to the extent such adoption is implied merely by the issuer's silence with respect to the link and has made no affirmative statements that would imply adoption.
Second, the Release indicates (at Section II.B.1.c, first paragraph) that "[w]here a wealth of information as to a particular matter is available, and where the information accessed by the hyperlink is not representative of the available information, an issuer's creation and maintenance of the hyperlink could be an endorsement of the selected information." We agree that there is often likely to exist a wealth of information available with regard to an issuer, on the internet and otherwise. This fact alone will make it virtually impossible for an issuer to determine whether websites to which it has established links contain information that is "representative of the available information." Accordingly, we believe that the use of an intermediate screen advising the visitor that other information, which may contradict the linked information, may be available and encouraging the visitor to seek out such information through standard internet search (the intermediate screen might even provide a link to one or more of the available internet search engines) and other techniques, should protect an issuer from arguments that it has adopted the linked information.
C. Access Equals Delivery. We agree that it would not be appropriate at this time to adopt an "access-equals-delivery" model, albeit for reasons somewhat different than those stated in the Release. It is our belief that internet access among investors has attained a level that may justify adoption of this model. However, and more importantly, at this point we do not believe that the public at large has fully adopted the use of the internet as its primary source for correspondence and information. Rather, print media, broadcast media and regular mail services remain the day to day source of such information for the majority. As in the past, it often takes a period of time for society to fully adopt new technology. We believe it likely that such a shift will occur at some point and that the investing public will come to rely on the traditional sources of communication as tools that are secondary to the internet and other Electronic Media, but that shift has yet to occur.
Several points made in the Release on this issue also merit comment. The Release suggests that the access-equals-delivery model is not appropriate at this time because "even investors who are online are unlikely to rely on the Internet as their sole means of obtaining information from issuers or intermediaries with delivery obligations." It is our belief that investors have always and will continue to use multiple outlets for obtaining such information and the adoption of a new model should not be based on such a "sole means" standard. Perhaps the appropriate standard should be whether the typical investor uses electronic access more often than written access.
The Release also indicates that certain investors decline electronic delivery because they "do not wish to review a large document on their computer screens" and because "of the time that it takes to download and print a document." All delivery methods, including the internet, the regular mail and broadcast media, among others, suffer shortcomings and there will always be significant portions of the population who prefer one method over another. Indeed, it may be that there never will be a technology that is universally accepted. But it is also true that each delivery method provides unique benefits. For while lengthy download times and viewing preferences may annoy some, electronic transmission of a document allows the recipient to permanently store and access the document in a convenient fashion, reproduce it easily, search the document, and to receive communications from multiple locations. However, we also believe that such preference factors should not be determinative and that it is the fundamental adoption of the internet as the primary means of communicating by the investing public at large that should be considered.
The Release also queries whether the adoption of the access-equals delivery model would be creating a system that requires ownership of state-of-the-art computer equipment to participate in the securities market. To the contrary, we believe that there currently exists a broad disparity between the level and quality of information available to institutional investors and that available to retail investors, and Electronic Media presents a unique opportunity to significantly narrow or eliminate this gap by allowing easy access to the type of information previously accessible only to institutional and sophisticated investors. Further, it is our informal observation that while late-model, state-of-the-art computer equipment may make access to information slightly more efficient, such technology is not essential and that personal computers that some may consider obsolete nonetheless allow access to the internet and other Electronic Media.
D. Electronic Notice. We agree that notice of the availability of electronically delivered disclosure documents should continue to be delivered directly to investors. Our position is independent of technology issues, in that we believe existing technology and access to the internet has already achieved a level that would justify such a shift. However, as the release indicates, this change would shift the burden to the investor to search for material information, a shift that could also have been made independent of the existence of the internet.
While we believe that existing access and technology would justify a shift of such burden, at this point it is our belief that the majority of investors continue to rely primarily on traditional means to obtain investment information and use the internet and other Electronic Media merely as a secondary tool in obtaining such information. Accordingly, at this time we do not support a shift of the burden to the investor to locate and access disclosure information without the provision of notice from the issuer. Rather, we believe that any such shifting of the burden should instead follow a fundamental change in the primary means used by investors to access information - to the internet.
On a related point, we also believe that it would be appropriate at this time for the Commission to update certain guidelines contained within Securities and Exchange Commission Release No. 33-7233; 34-36345; I.C. 21399 (the "1995 Release") regarding the adequacy of notice given to investors in connection the electronic transmission of disclosure information. More specifically, Examples 1 and 23 contained within the 1995 Release suggest that the delivery by mail to an investor of a post card indicating that disclosure information is available at a website and that the investor is also entitled to delivery of paper copies of such information does not satisfy the notice requirement. While we do not at this time support a full shift of the burden to the investor to locate and access disclosure information, we do believe that the acceptance of the internet and electronic media as any analytical tool has achieved a level that would justify notifying investors of the availability of disclosure information and providing options with regard to delivery methods. Accordingly, we believe that a postcard, delivered to an investor at or prior to the time disclosure information is posted to a website, which clearly indicates the website address at which disclosure information is available, notifies the investor of the option to receive paper versions of such information and provides a telephone number at which the investor can request the delivery of such paper documents, should act as sufficient notice of the availability of such information and request additional clarification from the Commission on this point.
E. Implied Consent. For the reasons stated in the Release, we agree that the use of implied consent at this point is not warranted. We would, however, like to respond to the two questions posed at the end of the second paragraph of Section II.D.3. First, we believe that where an investor provides an e-mail address and indicates that they are willing to receive information electronically, consent may be implied. The investor would be free to revoke such consent at any later date if desired.
Second, we believe that the fact that investors may from time to time change e-mail addresses does not pose a significant problem. We believe that investors may be equally likely to change their postal address. In either case, the issuer should have an obligation to use other means to contact recipients (including through the use of the telephone or regular mail) to maintain current contact information.
F. Electronic-Only Offerings. We believe that a very limited paper back-up system should be required for electronic-only offerings. Based on the existing delivery requirements of Rule 15c2-12, electronic-only offerings would be appropriate only for small offerings and those that involve short-term variable-rate securities or those that are otherwise exempt from the delivery requirements of Rule 15c2-12. These offerings typically involve only institutional and other sophisticated investors, a larger percentage of whom are likely to have internet access than the general public. For these offerings, we believe that electronic-only participation is appropriate. Further, having agreed to participate with the understanding that disclosure information is to be distributed by electronic means only, we believe that investors should not have the ability to revoke their consent and request paper copies. However, because the possibility of technological difficulties is likely to exist for some time, we also believe that a paper back-up system should remain in place so that an issuer has the ability to comply with its delivery obligations in the event of such difficulties. Delivery of paper documents in such event should not be unduly burdensome or expensive in that it should always be the case that such documents are stored as electronic files that can be easily printed and delivered if necessary.
H. Access to Historical Information. We are deeply concerned, and quite disappointed, that the Release states that "a statement [on a web site] may be considered to be `republished' each time that it is accessed by an investor or, for that matter, each day that it appears on the web site." (Section II.D.5, first paragraph.) A written release speaks as of its date of release, and if received days later by an investor still speaks as of its (dated) release date. We see no reason why a dated release on a web site should not be treated the same as a written release - the only difference is the delivery medium. In either case, if the information becomes outdated or needs to be updated, the issuer should be under the same obligation to correct or update. The statement in the Release would purport to apply to web information a standard virtually incapable of being met; at least in the written release context a grace period is provided to permit correction or updating. The Release would provide none for web statements.
Unlike institutional investors, retail investors are not likely to have broad access to wire service information. By allowing for the establishment of easily-accessed repositories for this type of information, through the establishment of issuer (and other) websites, the internet provides a means to eliminate this disparity. However, the position stated in the Release can be expected to restrict significantly the scope of information posted to websites and is therefor likely to ensure that the gap between the quality and volume of information available to institutional investors and that available to retail investors remains significant.
A number of our clients are very concerned about this particular Release position, and have discussed removing any financial or operating information from their web sites. We are dismayed that the Commission would consciously endorse a position that creates an impossible updating standard which results in less timely and complete disclosure. We strongly urge that you modify that position so to treat dated website statements the same as (dated) written releases.
In conclusion, we complement the Commission on the practical approach it has taken in the Release to the use of Electronic Media in a disclosure context, and encourage you to extend that to the "web site access equals republishing" issue by applying the same well-developed and practical rules applicable to written disclosures. If you have questions or comments please contact John Wagner or Greg Dietrich at the above address or phone number.
Very truly yours,