April 28, 2000
Jonathan G. Katz
Securities and Exchange Commission 450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Proposed Regulation FD, File No. S7-31-99
Dear Mr. Katz:
Dow Jones & Company, Inc. appreciates the opportunity to comment on the Securities and Exchange Commission's proposed Regulation FD (the "Proposed Rule"). Dow Jones is a global provider of business news and information. As the publisher of The Wall Street Journal, Barron's, Dow Jones Newswires, WSJ.com and other print and electronic news products, Dow Jones has a vital interest in the dissemination of corporate information.
We are concerned about the Proposed Rule because we believe it will inhibit companies from communicating frequently and effectively with the financial press and therefore will limit the flow of information to the investing public. We believe that this result is unintended because it conflicts directly with the laudable goal of the Proposed Rule: Encouraging the widest possible dissemination of accurate information in the marketplace. The bona fide press is perhaps the critical outlet through which information on companies is distributed. Fortunately, we believe these concerns can be addressed quite easily by adding to Rule 100 of Regulation FD an exclusion for disclosures to bona fide news organizations.
The Role of the Press in Disseminating Financial Information
The news media, and in particular the bona fide financial press,1 serve an invaluable role in advancing the Commission's objective of full and fair disclosure of financial information. The business newspapers and online services offered by Dow Jones and other bona fide publishers disseminate material information to a vast public audience. Unlike analysts' reports, which analysts prepare for their clients for the express purpose of recommending trades of securities, Dow Jones' publications and services are aimed at the general public and are widely and easily available for relatively little cost. Any business day, in virtually every American city and most towns, anyone can purchase that day's edition of The Wall Street Journal for 75 cents; at any moment anyone with an internet connection can subscribe to WSJ.com for at most $59 per year and have unlimited access to the Journal and many other Dow Jones news products through a computer. The articles and information published by Dow Jones and other members of the financial press provide informative, objective analyses of noteworthy business developments in concise, readable form.
An obvious and important role of the financial press is to analyze and publish the information companies disseminate in press releases. But one of the virtues of the American free press is that no matter how a company spins the news in a press release, different news organizations may well see and report different stories to their readers. A press release announcing a company's earnings results may appear to one news organization to be solid evidence that the company is in recovery, while that same release may be seen by another reporter as the final nail in the company's coffin. Diverse interpretations of corporate developments by different news organizations provide a rich mix of information to the marketplace far superior to the mere verbatim republication of press releases. Even with stories as mundane as those triggered by a general issue press release, individual reporters frequently have follow-up questions that can be answered quickly and most effectively in brief interviews over the telephone or next to a podium at a conference, and which will provide context, perspective or analysis to the resulting press account.
The investing public also derives substantial benefits from in-depth stories the news organizations prepare on companies and industries. These stories are not prompted by companies' carefully orchestrated disclosure of developments to all news organizations in press releases designed to put their businesses in the best possible light, but instead are the product of a reporter's own insights into a company's business or industry. Almost invariably in reporting such a story, a reporter will seek one-on-one interviews with managers and executives of a company, seeking information about the company and, critically, giving the company an opportunity to comment on what others are saying about it and what the news organization intends to print or broadcast. Sometimes such stories are even initiated by a company itself in the hope that it will obtain greater coverage of a new product or initiative. Exclusive interviews help companies by ensuring that reporters will have the time and the access needed to fully understand what is happening and therefore write a better, more informative story.
In short, whether a story is prepared in short order following a press release or is the product of enterprise reporting, it is vital to timely, penetrating coverage of business news that reporters be able to talk freely with knowledgeable inside sources.
Both follow-up questions triggered by a press release and exclusive interviews for enterprise reporting can be viewed as prohibited communications by the company under the Proposed Rule. Importantly, however, such "selective" disclosures to the financial press present no threat of unfair trading. Dow Jones and other members of the bona fide financial press forbid their employees from using non-public information obtained in newsgathering for personal profit. Reporters who trade on or assist others to trade on such information are subject to immediate dismissal; the incidents in which reporters have violated these trading restrictions are rare. And the bona fide press has every incentive to maintain this policy: As one court has noted, "a reputable newspaper, even if it could lawfully do so, would be unlikely to undermine its own valued asset, its reputation, which it surely would do by trading on the basis of its knowledge of forthcoming publications." United States v. Carpenter, 791 F.2d 1024, 1033 (2d Cir. 1986), aff'd, 484 U.S. 19 (1987).
The Impact of the Proposed Rule on the Newsgathering Process
We believe that the Proposed Rule could have a devastating impact on the financial newsgathering process, and therefore on the dissemination of timely and accurate information to the investing public.
The Proposed Rule contemplates that corporate insiders, as defined in the Proposed Rule, could not disclose material nonpublic information without making universal public disclosure, except where "disclosure is made to a person who owes a duty of trust or confidence to the issuer" or "to a person who has expressly agreed to maintain such information in confidence." As the Commission recognizes, "materiality judgments can be difficult," so "corporate officials may therefore become more cautious in communicating with analysts or selected investors, or may feel compelled to consult with counsel more frequently." Imposing the heavy baggage of consultation on the fast-moving business of reporting and publishing financial news would have disastrous effects. Candor, informality and speed, all important to the interviewing and newsgathering process, would be buried under legal caution and timidity. Stories that are distributed widely to the investing public in the Journal, Barron's, Dow Jones Newswires and their competitors' publications would become substantially less informative.
Forcing on companies simultaneous disclosure to all media as the price of talking candidly to a single financial reporter would further undermine the flow of information to the financial press and the public. In effect, the Proposed Rule seems to tell business sources that they may not speak to one financial media outlet unless and until they are prepared to make formal disclosure to all. Aside from the serious constitutional issues this aspect of the Proposed Rule presents (discussed below), the practical effect on the flow of financial news would be severe. Sources surely would resist the cumbersome requirement of universal disclosure in many instances where they now elect to speak with a chosen representative of the financial press either to initiate a story or to respond to a reporter's questions. Thus, the Proposed Rule, if adopted, would tend to constrict the flow of valuable contextual and analytic information to the public.
It would not matter whether the stories are reports of corporate announcements or news organizations' enterprise investigations of a company: The Proposed Rule would create a world in which a simple follow-up question from a Journal or Dow Jones Newswires reporter could not be answered without convening a press conference or releasing another (fully reviewed and approved) press release. But news organizations do not and will not delay the publication of a story indefinitely while a company's executives coordinate their response to questions or consult with counsel on questions of materiality. Newswires and newspapers would publish reams of stories that would include the phrase, "The company was unable to respond to questions about . . . ." Only the follow-up stories the next day would include the company's comments, and perhaps even corrections that the company ultimately was able to circulate in a press release after the first stories were published. Such "artichoke" disclosure, with a new layer of the story peeled off only the day after the news breaks, simply cannot be to the benefit of the investing public.
The Proposed Rule's exception for selective disclosure to those with whom a company has explicit confidentiality agreements or understandings provides no help to the financial press or the investing public that relies upon it. Although the Supreme Court has held that, as a matter of state law, a journalist's pledge of confidentiality to a source may, in some circumstances, be enforceable,2 journalists do not lightly or routinely make such pledges and most often do not make them at all. (The avoidance of confidentiality agreements benefits the investing public because readers of articles can far better weigh the value of information when they know the identity of the source and whatever bias he or she might have.) Absent such a pledge, there is no authority supporting an innate, enforceable legal obligation of confidentiality and considerable authority exists making clear that no such obligation exists.3 Nor does the Proposed Rule's alternative exception for a person "who has expressly agreed to maintain such information in confidence" provide any help, for it would impose upon reporter and source the unworkable and intrusive requirement of a government-mandated confidentiality agreement when none otherwise might exist. The requirement of a written agreement embodying a reporter's pledge of confidentiality would be even more intrusive and would hopelessly complicate and delay reporting.
Thus, the Proposed Rule would seriously curtail communications by securities issuers to the investing public because executives and employees would become cautious and tentative sources for business news reports. The financial press would be forced to rely on less reliable sources and on the more limited press releases that companies will issue to comply with the Proposed Rule. The end result would be less informative, less objective, and less timely reporting. Despite the Commission's hope that "it is unlikely, given the robust, active, capital market, that the flow of information to the market will be significantly chilled," (Section B2), the Proposed Rule actually would have the unintended opposite effect of choking the flow of information to the public.
First Amendment Concerns
Information conveyed by issuer representatives to members of the press constitutes fully protected speech. Business and economic news is fully protected by the First Amendment, see, e.g., SEC v. Wall Street Publishing Institute, 851 F.2d 365 (D.C. Cir. 1988), cert. denied, 489 U.S. 1066 (1989); Commodity Trend Service, Inc. v. Commodity Futures Trading Commission, 149 F.3d 679, 684 (7th Cir. 1998).4 In addition, the Supreme Court has explicitly recognized "a First Amendment right to `receive information and ideas'" and a right to receive speech protected by the First Amendment. Virginia State Bd. of Pharmacy v. Virginia Citizens' Consumer Counsel, 425 U.S. 748, 756-57 (1976) ("[W]here a speaker exists . . ., the protection afforded is to the communication, to its source and to its recipients both. . . . [W]e acknowledge that this Court has referred to a First Amendment right to `receive information and ideas,' and that freedom of speech `necessarily protects the right to receive.'") The Court also has recognized that newsgathering activity itself qualifies for "First Amendment protection." Branzburg v. Hayes, 408 U.S. 665, 681 (1972). As stated by the Court, "without some protection for seeking out the news, freedom of the press could be eviscerated." Id.5 If the Proposed Rule were to be adopted in its present form and applied to newsgathering by the bona fide financial press, it would raise a number of serious First Amendment issues.
The Proposed Rule would impose a direct prohibition on protected speech unless the speaker - an issuer representative - undertook additional, required speech - universal disclosure - as a condition of speaking. This prohibition would very likely be considered a prior restraint "bearing a heavy presumption against its constitutional validity," New York Times v. United States, 403 U.S. 713, 714 (1971). Courts allow "this `most extraordinary remedy' only where the evil that would result from the speech is both great and certain and cannot be mitigated by less intrusive measures." CBS, Inc. v. Davis, 510 U.S. 1315, 1317 (1994).
Requiring an issuer representative to refrain from disclosure at all or disclose non-public information to the financial press by disclosing the information in a press release to the entire world simultaneously does not save the Proposed Rule. Such a requirement, in effect, coerces disclosure and specifies the manner of disclosure and is thus a form of coerced speech which itself would raise fundamental First Amendment questions.6
Even if prior restraint analysis did not apply, the Proposed Rule would be analyzed as a regulation of protected speech and a direct interference with other First Amendment protected activity. The Proposed Rule would be valid "only if the government can show that the regulation is a precisely drawn means of serving a compelling state interest." Consolidated Edison Co. v. Public Service Comm'n of New York, 447 U.S. 530, 540 (1980). We do not believe that the requisite showing could possibly be made if the Proposed Rule were applied to issuer disclosures to the financial press. The Proposed Rule's announced purpose is to "further the full and fair public disclosure of material information, and thereby promote fair dealing in the securities of covered issuers." (emphasis added) The disclosure of material nonpublic information to representatives of the financial press, who are obligated to make no use of the information until it is published to the world, presents no threat to "fair dealing in the securities of covered issuers"; indeed, disclosure to the financial press adds to the store of information available to the public and increases the efficiency of the securities markets. Thus, not only would the Proposed Rule sweep too broadly and actually curtail the flow of useful information to the investing public were it applied to the financial press, but it almost certainly could not be applied to the financial press consistent with the First Amendment.
It is not an answer to the First Amendment problems with the Proposed Rule to say that they can be ameliorated by careful enforcement judgments. The assumption that future enforcement officials will make measured prosecutorial judgments is not a sound basis for leaving in place an unconstitutionally overbroad or vague rule. Company sources would "steer far wider of the unlawful zone," New York Times Co. v. Sullivan, 376 U.S. 254, 279 (1964), and a wealth of valuable information would be lost to the financial press and investing public alike. Indeed, it is axiomatic, as recently stated by the Supreme Court, that the "burden [of a regulation] on protected speech cannot be justified if it could be avoided by a more carefully drafted [one.]" Reno v. American Civil Liberties Union, 521 U.S. 844, 874 (1997). See also Gentile v. State Bar of Nevada, 501 U.S. 1030, 1051 (1991) (Kennedy, J.) ("The prohibition against vague regulations of speech is based in part on the need to eliminate the impermissible risk of discriminatory enforcement.").
Proposed News Organization Exclusion from Regulation FD
To address these concerns, Dow Jones urges that the Commission add an exception to the Proposed Rule making the Proposed Rule inapplicable to disclosures to bona fide news organizations. This could be done by adding a subparagraph (c) to Section 243.100 reading as follows:
(c) Paragraph (a) of this section shall not apply when a disclosure is made to a person who is employed by a bona fide news organization, newspaper, news magazine or business or financial publication of general and regular circulation, and who is acting in the course and scope of his or her employment with such a news organization, newspaper, news magazine or business or financial publication of general and regular circulation.
The proposed exclusion is based upon the exclusion for bona fide publications set forth in Section 202(11)(D) of the Investment Advisers Act of 1940,7 as interpreted by the Supreme Court in Lowe v. SEC.8 Applying Lowe, the Commission has consistently interpreted the statutory exclusion as applying where the publication "(1) offer[s] only general and impersonalized advice, i.e., advice not tailored to the individual needs of a specific client or group of clients; (2) [is] bona fide or genuine (in the sense that it contains disinterested commentary and analysis as opposed to promotional material); and (3) [is] of general and regular circulation, i.e., not timed to specific market activity or to events affecting or having the ability to affect the securities industry."9
With the development of the internet, it might be useful to reexamine the meaning of the third prong of the Commission's interpretation of the exclusion. The internet now permits and encourages both the creation of on-line publications that are narrowly focused on specific markets or areas of interest and the real-time publication of articles in response to, and arguably "timed to," specific market activities or events. For example, a bona fide financial publisher might have a central website that includes all of its news stories and separate websites that focus on mergers and acquisitions, on corporate earnings, and on news about specific industries. Those subsidiary websites might be updated sporadically, as the news requires. Such narrow-casting and event-driven publication provide enormous benefits to the investing public who can quickly find the news they want when it happens. In the print world, printing stories only when events warrant - as opposed to putting out a newspaper each day - might be interpreted as "irregular" circulation, although plainly in the internet world circulation is not "irregular" when one looks at the whole host of websites that a bona fide news organization would be offering. We suggest that the adopting release accompanying a revised Regulation FD make clear that internet reporting by bona fide news organizations is fully covered by the proposed exclusion.
Dow Jones believes that this exclusion from Regulation FD is essential to ensure the greatest possible flow of timely and accurate information to the investing public. The exclusion also will avoid adoption of a regulation that impermissibly interferes with First Amendment-protected newsgathering activity.
We would be happy to discuss these issues with you further.
Very truly yours,
Peter G. Skinner
Executive Vice President and General Counsel
cc: Chairman Arthur Levitt
Commissioner Norman S. Johnson
Commissioner Isaac C. Hunt, Jr.
Commissioner Paul R. Carey
Commissioner Laura S. Unger
David M. Becker, General Counsel
David B. H. Martin, Jr., Director, Division of Corporation Finance
1 Whatever may be the outer boundaries of the bona fide financial press, see Lowe v. SEC, 472 U.S. 181 (1985), there is no question that the offerings of Dow Jones fall within those boundaries.
2 See, e.g., Cohen v. Cowles Publishing Co., 501 U.S. 663 (1991).
3 See, e.g., Deteresa v. American Broadcasting Cos., Inc., 121 F.3d 460 (9th Cir. 1997), cert. denied, 523 U.S. 1137 (1998).
4 Courts have recognized that "[t]he value to society of financial reporting and analysis is beyond question." In re Scott Paper Co. Securities Litigation, 145 F.R.D. 366, 369 (E.D. Pa. 1992). Given that "[e]conomic and scientific information . . . has as great a claim to First Amendment protection as does political discourse," the court in Scott Paper saw "no reason why disseminators of corporate financial information should not have as strong a claim to First Amendment protection as do disseminators of other kinds of information." Id.
5 See also Zerilli v. Smith, 656 F.2d 705, 710-11 (D.C. Cir. 1981) (quoting Grosjean v. American Press. Co., 297 U.S. 233, 250 (1936)) ("The First Amendment guarantees a free press primarily because of the important role it can play as `a vital source of information.'... Without an unfettered press, citizens would be far less able to make informed political, social, and economic choices. But the press' function as a vital source of information is weakened whenever the ability of journalists to gather news is impaired.") (emphasis added).
6 It is axiomatic that the government cannot coerce speech. See, e.g., Miami Herald Publ'g Co. v. Tornillo, 418 U.S. 241, 258 (1974) ("The choice of material to go into a newspaper . . . constitute[s] the exercise of editorial control and judgment. It has yet to be demonstrated how governmental regulation of this crucial process can be exercised consistent with the First Amendment."); West Virginia Board of Education v. Barnette, 319 U.S. 624 (1943) (school may not force students to "salute" the flag); Wooley v. Maynard, 430 U.S. 705 (1977) (State of New Hampshire may not require persons to display the state motto, "Live Free or Die" on their vehicle license plates).
7 15 U.S.C § 80b-2(a)(11)(D).
8 472 U.S. 181 (1985).
9 InTouch Global, LLC, SEC No-Action Letter, Fed. Sec. L. Rep. ¶ 77,209 (Nov. 14, 1995); see also Mr. Russell H. Smith, SEC No-Action Letter, 1996 WL 282564 (May 2, 1996) (stating same standard).