June 24, 2008

My Ten Cents: The SEC’s Coming Guidance on IR Web Pages

At the NIRI Annual Conference, as appropriate for his audience, Corp Fin Director John White devoted a fair portion of his remarks talking broadly about the SEC’s upcoming guidance on the use of corporate websites (here are notes about John’s remarks). The SEC intends to update its interpretive guidance – last issued in 2000 – sometime in the near future. This is a project recommended as part of the CIFiR report (see page 55).

After hearing John’s remarks, I went back to refresh my memory of what the SEC said in 2000. I was pleasantly surprised in that I don’t think much of that old guidance needs updating. The SEC was fairly flexible about what companies can do on their IR web pages; yet, the guidance was inflexible where there might be temptation for mischief. As a result, it’s hard to see how the SEC’s existing guidance has acted as a barrier that has prevented companies from leveraging their IR web pages to communicate with shareholders.

Clearly, companies can’t blame their decisions to not provide shareholder-friendly proxy materials on their IR web pages on the SEC’s existing guidance – since these online materials are not really impacted by the SEC’s parameters much at all. Instead, the SEC’s guidance relates to when companies get “fancy” and build out their IR web pages with other types of information and tools. Even creating annual meeting web pages that campaign are not limited by the SEC’s current guidance.

So where does this leave me? I think the SEC’s upcoming updated guidance should reinforce many of the principles that it already has set forth – along with filling in a few holes and making some tweaks – but the real need is to push companies to start treating their IR web pages as a place where shareholders want to visit to learn about the company and trust it. In fact, I think it makes sense for the SEC to engage in rulemaking that forces companies to post some minimum level of usable documents and other information on their IR web pages.

In recent rulemakings, the SEC has recognized IR web pages as a place for shareholders to go – the latest being the XBRL proposals, which would require companies to post XBRL documents on the same day as they are filed with the SEC – and this seems to be a logical next step. Below I delve more specifically into some of the SEC’s options:

Corporate Website Use: Can the Industry Fix Itself?

I get worried about the recommendation in the CIFiR report that “industry participants” develop uniform best practices. Which industry participants have shown any leadership in this area? None that I can think of. What we do know is that many IR web pages are rudimentary in this country, with a fair number of companies outsourcing them to vendors who also show minimal vision.

In his IR Web Report, Dominic Jones recently provided startling statistics from this past proxy season: almost 90% of US companies chose formats for their online proxy materials that were essentially garbage; compare that to the large companies in the United Kingdom where 46% provided dynamic HTML documents.

US companies have a long road to hoe here – but it’s easily fixable. Plough your e-proxy savings back into usable documents and the IR web page in general – listen to what Doug Stewart of Intel said on last week’s e-proxy webcast. Make your IR web page a desired destination spot that investors are programmed to think of first when they want to conduct research about your company.

Corporate Website Use: What the SEC Should Do

With a hat tip to Dominic Jones, here are a few items that I hope to see the SEC tackle in its updated guidance:

1. Recognize Sufficient Internet Penetration for Regulation FD Purposes – Back in 2000, the SEC requested comments about what is considered sufficient Internet penetration to begin allowing companies to rely on the Web for delivery of information purposes. Some commentators noted way back then that surveys showed that there was sufficient support for the Web as an adequate disclosure medium. This is obviously much more true today and the SEC already has adopted rules that implicitly recognize this. The guidance should address whether information posted only on a corporate site meets Regulation FD’s requirements, etc.

2. Give Smaller Companies a Break from Newswire Fees – The SEC should provide guidance on news releases per se. Can a company meet the requirements by issuing a summary and a link – or even just a notice – advising that it has posted it earnings release on its website and filed it on Edgar? Small companies are hurting from newswire fees. To cut costs, companies shouldn’t have to use press releases to announce an upcoming earnings call or presentation because there are so many alternatives now that are just as good. Another way to cut costs is to allow companies to use summaries and links to reduce their word count in their press releases.

3. Liberalize the Link Liability Standard – One primary concern expressed by some is that the SEC’s current liability approach for linking to other content is too restrictive. For linking to third-party content, in 2000, the SEC came up with a non-exclusive six-factor approach that is a principles-based regulation. When linking from one company document to another – in the delivery context – the SEC invoked the “envelope theory.” [For more on the SEC’s existing link regulatory framework, see these FAQs that I drafted long ago on my old site, but that are still relevant today.]

Even though the SEC’s approach still seems reasonable today, it is too complex and companies uniformly don’t provide access to outside perspectives as a result. Since one of the primary benefits of the Web is the ability to link to related content, I think the SEC should morph its approach and encourage companies to provide insights from multiple sources within certain reasonable limits.

Too often, companies use the existing regulatory framework as an excuse not to link to useful sources of information. Yet, it is hardly ever in an investors’ best interests to have less information or fewer opinions about that topic. For example, companies should provide access to analyst research reports. I recogize that this brings risks – such as selectively linking to only favorable analyst reports – but there are many more ill-informed investors than there are crooked companies and dishonest analysts.

So we shouldn’t punish all investors for the sake of a few bad apples. I believe we are better off allowing companies to leverage the Web and create comprehensive IR web pages – and the SEC can use its enforcement authority to chase the outliers who choose to abuse the freedom.

By the way, it’s not just that the SEC needs to tweak its rules, the NYSE is in the dark ages as Dominic blogged about last year.

Corporate Website Use: What the SEC Should Not Do

In particular, there are two things that I think the SEC should not do when it issues its updated guidance:

1. Don’t Impose Unnecessary “Hoops” on Links – I dislike the notion of using exit notices and click-through disclaimers in the linking context. I don’t think they really warn shareholders and I doubt a court would give them much more weight than a standard disclaimer that sits at the bottom of the page and is not intrusive. And these “hoops” run counter to the purpose of links in the first place – getting folks easily from one place to the next. [And there is sparse caselaw so that its unclear if a court would really distinguish between these types of disclaimers anyways.]

If the SEC is really concerned about content “out of context,” it should focus on the fact that under its XBRL proposal, numbers from the financials will be far removed from the all-important footnotes. And these footnotes will take on much greater importance under IFRS, a principles-based regulatory framework with a much greater level of discretion than under US GAAP.

2. Don’t Try to Specifically Address Evolving Technology – So much of our technology today is still evolving that I don’t think the SEC should try to set standards around specific online functionalities. For example, it’s too early to tell how RSS feeds and IRO blogs will really evolve (I’ll be blogging more about IROs as bloggers later this week). For these, it’s best for the SEC to merely broadly state the obvious about not doing stupid things and allowing these technologies to continue to naturally evolve.

– Broc Romanek