March 12, 2001
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20459
E-mail address: rule-comments@sec.gov
Re: Use of Electronic Media; Release Nos. 33-7856 and 34-42728, File No. S7-11-00
Dear Mr. Katz:
The Corporate and Securities Law Committee of the American Corporate Counsel Association ("ACCA") is pleased to address some of the questions raised in the Commission's April 2000 Interpretative release on the use of electronic media ("Release"). ACCA is a national bar association exclusively for in-house corporate counsel. ACCA has more than 11,000 individual members who act as in-house counsel to more than 4,400 business entities. The Corporate and Securities Law Committee is the largest of ACCA's national committees and includes attorneys in its membership from hundreds of corporations subject to SEC disclosure requirements.
We appreciate the opportunity to participate in the process of addressing the challenging issues raised by new technology. We understand that the Commission is contemplating rulemaking regarding some of these issues and hope that our comments will be considered in the applicable rulemaking projects. We have addressed the questions raised in the Release that are the most relevant for our members, and have commented on several issues that were not directly raised in the Release as well.
Access Equals Delivery
The Release raises the question whether there are circumstances in which, consistent with investor protection, an "access-equals-delivery" model for delivery might be appropriate. Although more and more investors are using electronic media to both make investment decisions and complete investment transactions, we agree with the Commission's conclusion that the time has not come for a complete regulatory shift from the present delivery model to an "access-equals-delivery" model.
We do encourage the Commission, however, to consider adopting such a shift for the satisfaction of delivery obligations to investors who we feel can be presumed to have access to electronic media. We believe that companies should be able to presume that investors have online access if they have indicated that they do in some demonstrable fashion (e.g. bought products through the company's Web site). We believe that the penetration of Internet use now encompasses a broad base of investors - and these investors know about and frequently visit corporate Web sites. According to a year-old member survey by the National Association of Investment Clubs, 75% of individual investors visit a company's Web site before making their investment.1 This percentage likely has gone up in the wake of Regulation FD and the related widespread publicity about the growth of online communications from companies to investors.
Issuer Communication during Registration
We believe that corporate Web sites are dynamic and not static parts of an issuer's business. It is common for an issuer's Web site to consist of hundreds - or even thousands - of constantly changing separate pages as well as a greater number of hyperlinks, many to third party Web pages. Most companies have more than one Web site and have at least one intranet. Some companies also have strategic alliances with other Web sites, so that "ownership" of a Web site is not entirely clear-cut. It is quite difficult for any one person or department to keep apprised of a company's activities online.
We believe that the Commission's positions regarding issuer and third party Web sites as part of an issuer's "public communications" has imposed too great a burden on issuers. For example, we feel that it is too difficult for issuers in registration to continually review/revise/republish the entirety of their Web sites as well as review the information on third party Web sites to ensure compliance with regulatory publicity restrictions. This obligation creates either an unreasonable burden for issuers or an undue level of potential liability. As more business is conducted on the Web, it appears unrealistic for an issuer to momentarily change its business strategy and revise its Web site until an offering is complete.
Instead of the Commission's current broad-brush approach, we urge the Commission to provide guidance to allow issuers to:
The Commission should allow issuers regardless of the type of registration (i.e. single, multiple shelf or continuous offerings) the flexibility to choose among these approaches and others which the current and future technology will allow, all of which provide protection for the investor without placing undue burden on the issuer. These safe harbors should also apply regardless of the timing of the securities offering relative to the establishment of the issuer's Web site and whether the issuer has at the time of the offering "established a history" of business communications through its web site. We believe these procedures are consistent with investor protection, facilitate investor research and will foster an informed investing public.
Liability for Web Site Content
We appreciate the Commission's guidance regarding how the antifraud rules may apply to issuers who provide hyperlinks to third party content and understand the SEC's desire not to draw bright lines. One of the factors that the SEC includes in its analysis is the presence or absence of prominent disclaimers and "exit notices." At the same time the SEC makes clear that these devices alone will not insulate issuers from liability.
We agree that the presence or absence of disclaimers or exit notices should be a relevant factor, but are concerned about future interpretations that may place more emphasis on these techniques. We encourage the Commission to not provide additional guidance that effectively requires the use of these techniques. Issuers should be able to continue to rely on a commonsense determination of whether a reasonable investor would deem the relevant information to be adopted by the issuer, in light of relevant facts and circumstances.
We believe that regular and routine use of these techniques would be distracting to investors and largely ineffective for their purposes. Companies spend a significant amount of resources to design and produce their Web site pages and disclaimers or exit notices often are either unnecessary or inappropriate. It would be unfortunate if the required use of these techniques significantly reduced the utility of corporate Web sites, which serve multiple functions, only one of which has to do with investor relations.
If the Commission was to provide additional guidance, we believe whether disclaimers or exit notices are required should depend on the type of third party content to which an issuer links. For example, an issuer might provide a hyperlink to one or more analyst reports2 or other material describing the issuer or its products and services. If an issuer links to all known analysts covering the issuer in alphabetical order, accompanied by a statement to the effect that the page includes links to all known analysts, the issuer should not necessarily be deemed to have adopted the reports.
However, there could be many variants on this theme - what if the issuer provides links only to major analyst reports accompanied by a disclaimer? In this situation, a disclaimer may be more important because not all reports are included. The same may be true if the issuer characterizes one or more of the reports in a certain way, but includes a disclaimer. An issuer might also provide links to third party sites in press releases announcing strategic alliances or in marketing portions of its Web site leading customers to jointly offered products. The third parties may have something to say about the issuer, the partnership or the product.
There are various ways that issuers may establish these links, including a simple link to a page on the third party's site, a link to a co-branded page on the third party's site or a separate site or a link that keeps the customer on the issuer's site but opens up a new framed window. Because the different ways give varying impressions of who is responsible for the content, the factors that bear on whether the issuer has adopted the material may be different or carry different weight in each case.
Our concern to avoid undue emphasis on disclaimers and exit notices applies to liability for statements within sites to which an issuer links. If an issuer provides a hyperlink to a home page of a third party, an issuer should not be responsible for material contained deeper in the third party site, unless the issuer affirmatively directs viewers to that material, and even that case would need to be evaluated to see if the issuer has done something more to adopt the material. Similarly, if an issuer provides a hyperlink to a third party page containing further links, the issuer should not necessarily be deemed to have adopted material accessible through these other links.
Access to Historical Information
We feel that access to historical information on the Internet is important for several reasons, including:
However, the risk that the historical information would be deemed to be republished is a significant concern. We believe that issuers should not be deemed to be republishing historical information if they provide a reasonably clear indication of the date the material was first released (such as the date of a press release) or a disclaimer stating the information is accurate of its release date. If an issuer has undertaken to provide this information, we believe that the Commission should provide a safe harbor that it does not have a duty to update the information.
Perhaps a safe harbor could be created so that a statement made on initial Web page that an investor visits in an "Investor Relations" section would preclude any claim that the information had been republished. Regardless if a disclaimer is used, in determining whether an issuer may be liable for dated content on a Web site, it is important to recognize that simply failing to remove information from a site does not involve the same intent as affirmatively posting misleading information. The notion of "republication" implies a deliberate act that did not necessarily take place - and assumes that a reasonable investor could not be expected to discern the difference. While companies should attempt to keep their sites updated, they will not always succeed in purging earlier disclosures due to the sheer volume of information on the Web today.
Timing of Availability of Electronic Annual Reports and Proxy Materials
Many companies use special design firms to create an electronic version of their annual reports and proxy materials. They do so regardless if they are creating the electronic version for their Web sites or to electronically deliver these documents. Companies use design firms to create electronic document that are more investor-friendly and aesthetically pleasing. The goal is to design electronic documents that conveys the same information as the print version, but in a format that is optimal for users of the electronic version. Unfortunately, this process raises an issue relating to the timing of the availability of the electronic versions.
Since these documents typically contain material non-public information - such as the financial statements - companies are protective of sharing this information before delivery. Some issuers have security concerns about the firewalls of their design firms, so this sensitive information is not inserted into the electronic version until the information is filed or submitted to the Commission. This practice means that an electronic version is not available for about a day or two after the print copy is finalized.
Other companies do not have adequate staff to proof both versions simultaneously. Many must give priority to the print version in order to stay on schedule. This is because the process of printing massive quantities and stuffing them into envelopes, or shrink-wrapping them, for mailing is a lengthy process. It is often difficult to predict with accuracy exactly when these documents will be ready for final printing as unanticipated changes do occur - this means that even companies who plan a cushion into their schedules sometimes barely make their deadlines for use of the printing and mailing facilities.
These issues typically result in a slight delay in the availability of electronic versions of proxy materials and annual reports. We urge the Commission or its staff to provide guidance that electronic versions can be posted several days after print versions are first dropped into the postal mail and still can be used for electronic delivery purposes.
This would reflect what already happens - not all shareholders receive their print materials at the same time. For companies with large numbers of shareholders, the stuffing and mailing process can take up to a week, with the envelopes being mailed in batches as soon as they are completed. And shareholders receive their materials on different days even if they are deposited in the U.S. mail on the same day. Moreover, electronic versions of the required disclosure materials are available on the Web almost instantaneously.
Internet Discussion Forums
We agree that online discussion forums present unique and difficult problems for issuers. In particular, message board and chat room discussions can unduly impact an issuer's stock price in some case. We believe that issuers should not be liable for information - or required to monitor such information - posted on these discussion forums. We also believe that the Commission should limit liability for issuers if they participate in these discussion forums to address unfounded rumors that are not material, including clarifying that this would not impose a duty to update or prevent an issuer from relying on a "no comment" policy. We also urge the Commission to encourage the self-regulatory organizations to propose rules that allow issuers to address online rumors without having to issue a press release.
* * *
In conclusion, we believe that our suggestions reflect the practical issues that most companies face in the challenging online environment today. We recognize that some of our members could have different views on some of these issues - or that our views could change as technology changes. The Commission should continue to be cautious and not impose a new regulatory scheme that unduly and unfairly burdens issuers and their compliance systems and sanctions good faith attempts by responsible corporate citizens.
Sincerely yours,
____________________________
Gregory H. Mathews, Chair
Corporate and Securities Law Committee
| cc: | The Honorable Arthur Levitt, Chairman The Honorable Isaac C. Hunt, Jr., Commissioner The Honorable Paul R. Carey, Commissioner The Honorable Laura S. Unger, Commissioner David Becker, General Counsel, Office of General Counsel David B.H. Martin, Director, Division of Corporation Finance Michael Roster, Board Chair, American Corporate Counsel Association John H. McGuckin, Jr., Advocacy Committee Chair, American Corporate Counsel Association Frederick J. Krebs, President, American Corporate Counsel Association |
| 1 | Michael J. Reilly, "Investor Relations on the Internet Takes on a New Face," Wallstreetlawyer.com, vol. 3, No. 9, February 2000, at 20. |
| 2 | We do not see many widely-followed issuers engaging in this practice because of the significant risk arising from possible adoption of that kind of material; however, we understand that less widely-followed companies may rely more greatly in making well-known the analyst coverage they receive. |