June 27, 1996 By Mail and E-mail (rule-comments@sec.gov) Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Mail Stop 6-9 Washington, D.C. 20549 Re: Release No. 33-7288 File Number: S7-13-96 Ladies and Gentlemen: This letter is submitted in response to the Commission's May 9, 1996 release providing interpretive guidance with respect to the use of electronic media by broker-dealers, transfer agents and investment advisers to deliver required information to customers. (Rel. No. 33-7288) These comments have been prepared by members of the Subcommittee on Disclosure Technology (the "Subcommittee") of the Federal Regulation of Securities Committee (the "Committee") of the Section of Business Law (the "Section") of the American Bar Association. A draft of this letter has been circulated for comment among members of the Subcommittee, the Chairs and Vice Chairs of the other Subcommittees and Task Forces of the Committee, the officers of the Committee, the members of the Advisory Committee of the Committee and the officers of the Section. A substantial majority of those who reviewed the letter in draft form have indicated agreement with the views expressed. This letter, however, does not represent the official position of the American Bar Association, the Section, the Committee or the Subcommittee, nor does it necessarily reflect the views of all the individuals who reviewed it or commented on it. We appreciate this opportunity to submit comments on the Commission's views with respect to the use of electronic media in delivering required disclosure information. We believe that the Commission continues to demonstrate a sensible and forward-looking approach in permitting the use of new technology and media of communication in the delivery of required disclosure to investors and customers. In particular, recognizing that continued rapid technological change is inevitable, we approve of the Commission's use of general or abstract principles (illuminated with examples), rather than specific technical requirements, in articulating how delivery requirements may be satisfied through electronic media. With the limited exceptions noted below, we endorse the guidance offered with respect to the use of electronic media by broker-dealers, transfer agents and investment advisors, as well as the additional examples of registrants' use of electronic media. We respectfully offer the following specific comments that we hope will assist the Commission in establishing policy in this area. 1. In keeping with our general approval of the Commission's broad approach, we have reservations as to the disparate treatment accorded the use of electronic media in satisfaction of the penny stock rules. The release properly requires a recipient's consent prior to electronic delivery of information, and recognizes that for most transactions such consent may be given either manually or via electronic means. However, in footnote 50 the Commission prohibits broker-dealers from satisfying Rule 15g-9's signature requirement electronically. We understand the Commission's desire for special procedural and other safeguards relating to transactions in penny stocks. However, we do not believe that use of electronic media is related to an investor's ability to make an "informed, deliberate decision" without "high pressure sales tactics." Moreover, we are concerned about the precedential impact of the appearance of withholding access to new and advantageous technology as a means of achieving substantive regulation. We note the Commission's mention of the possible use of a"cooling off" period as an alternative to requiring a manual consent. Without expressing a view as to investors' need for this sort of protection, we believe that a cooling off period would be a more appropriate means of regulation than withholding access to modern means of communication. 2. The release notes that recipients ought to have the ability to retain information disseminated electronically in a manner equivalent to retention of a paper copy. Footnote 22 elaborates that the recipient's ability to download or print would allow such retention. Clearly, then, the information must be disseminated in a medium that permits downloading or printing with generally available technology. The release does not appear to require that a sender verify that a consenting recipient has the downloading or printing capabilities necessary to preserve access to the information. To the extent this point is addressed more directly in the future, we believe that the Commission should be explicit that such verification of the recipient's technical and equipment capabilities is not required. The sender should be free to rely on informed consent, or evidence of actual receipt. 3. With respect to Example 3 in the release and Example 29 of the Commission's October 6, 1995 interpretive release (Rel. No. 33-7233), we believe further guidance, and perhaps technical rule amendments, are necessary with respect to use of electronic means of delivery by registrants, broker-dealers and banks in the context of proxy contests. We believe that if a registrant, and/or broker-dealers and banks that are record holders, use electronic delivery of materials to certain record or beneficial holders, the same medium of delivery should be available to security holders desiring to furnish soliciting material. The speed of electronic delivery is particularly well suited to proxy contests, and to permit one side this advantage without making it available to the other would significantly tilt the playing field. Rule 14a-7(a)(2) obligates a registrant either to mail a security holder's solicitating material, or furnish the security holder a list of security holders. A registrant meeting its obligations by "mailing" the security holder's soliciting material should (if requested to do so by the security holder) be required to do so by electronic means (such as by providing notice of a designated Web site) if the registrant uses electronic means in communicating with its security holders. Further, if a registrant satisfies its Rule 14a-7(a)(2) obligations by furnishing a list of record and beneficial security holders, the registrant should be required to indicate which holders have consented to the use of electronic delivery, and provide necessary information as to acceptable means of delivery and/or providing notice. Similarly, if a broker-dealer or bank fulfills through electronic means (such as by notifying its consenting customers of a Web site where the registrant's proxy material is available) its obligations under Rule 14b-1(b)(2) and 14b-2(b)(3) with respect to the registrant's proxy material, then it should do the same upon the request of a soliciting security holder. We appreciate the opportunity to comment on the Commission's views in this area, and we look forward to the continued integration of electronic media into the disclosure side of the securities markets. Members of the Subcommittee are available and would be pleased to review and discuss with the staff or the Commission the comments expressed in this letter, as well as the use of electronic media generally to deliver required disclosure. Respectfully submitted, John M. Liftin Chair, Committee on Federal Regulation of Securities Duane G. Henry Chair, Subcommittee on Disclosure Technology Drafting Committee Daniel S. Evans - Chair Duane G. Henry Denis T. Rice Bonnie Roe Kenneth L. Wagner 3133428.02