When Arthur Levitt speaks on fair disclosure, the investor relations world had better sit up and listen. And Arthur’s been banging on about it quite a bit of late. Those who haven’t heard the head of the US Securities & Exchange Commission talk about selective disclosure issues over the past year or so have likely had their heads buried in the sand.
But now he’s got really serious and it’s time to clear your ears out. One of the latest missives from the SEC – announced in mid-December – is intended to settle the issue once and for all. Entitled Regulation Fair Disclosure, the proposals will attempt to outlaw US companies from releasing detailed information to the professional investment community if they do not make it available to retail investors at the same time. It’s the by now somewhat familiar ‘levelling the playing field’ argument being given solid, regulatory backing. And the key is the internet. Get this from Levitt: ‘I strongly urge corporate America to open up your conference calls to all investors. Place them on the internet. The basic principle of fairness deserves no less.’
Creaking under the strain
Now readers outside of the US may not give two hoots what Mr Levitt and his pals at the SEC currently have up their sleeves. But they would be extremely naive to ignore the SEC diktat (as, of course, would US issuers). Regulators the world over are struggling desperately to cope with this sort of issue as out-of-date legislation creaks away under the new-found force of the internet.
To tell the truth, the US regulatory atmosphere remains hopelessly riddled with inconsistencies thrown up by the internet. That being said, the SEC is way ahead of many other markets; and you can bet that bottom dollar of yours that other regulators will soon be following the moves made by the SEC to date. Regulation Fair Disclosure clears up a lot of questions but a whole lot more remain. The regulators are all playing catch-up and they are having to invent the rules as they go along.
The trouble is, investor relations officers in most markets are left somewhere in the middle by all these legal inconsistencies. On the one hand they have legal counsel taking a very conservative line because certain situations, particularly relating to offerings, have not yet been clarified. On the other hand IROs know that the web is a great disseminator of information and a path favored by the SEC.
Lawyers, too, remain in a quandary. Bring the internet into play and many leading legal advisors can only see a whole lot of holes in the regulations. And where there are holes it is best to tread carefully. Yet they are also well aware that the regulatory wind is blowing in the direction of wider dissemination over the internet, which means that restricting disclosure may also be dangerous.
Disclosure risk
Blake Bell, senior knowledge management counsel at Simpson Thacher & Bartlett in New York, is probably more aware of the issues than most. Bell’s home page (www.cybersecuritieslaw.com) is packed full of legal debate relating to these and similar internet-related problems. He agrees that the SEC has made it very clear where it stands on selective disclosure issues but says he is duty bound to advise his clients if and when a disclosure risk exists.
Bell argues that until the SEC speaks conclusively on a whole range of outstanding issues the risks can be too great. ‘There is that tension with the SEC pushing down one road but not being definitive.’
While Bell makes it quite clear that he is not being critical of the SEC, he does point out that there are a lot of outstanding issues to clarify because of the changing nature of communication brought about by the internet. A recent precedent-setting SEC no-action letter to Charles Schwab is a typical example. The SEC makes it clear that Schwab can offer internet roadshows to certain types of retail customers wanting to participate in IPOs. Crucially, however, it also makes it clear that its position is subject to change because it has not yet had a chance to deal with all the ‘issues arising from the use of electronic communications in capital-raising transactions.’
One of the issues arising concerns whether internet communications related to stock offerings should be treated as ‘written’ or ‘oral’. The SEC has previously decreed that traditional roadshow communication – including slides – can be considered oral communication, which would make it subject to less stringent legal strictures. But it remains undecided as to whether internet communication, the bulk of which is still in text form, falls under the same ruling.
Blake Bell knows the power of web disclosure better than most in the legal fraternity yet points out that his recent advice to a UK client would have had the net effect of reducing the information available online. The UK company was interested in looking at the impact US securities law might have on its web site. ‘We had to take a conservative tack because the US SEC has remained silent on very important issues relating to the web sites of public issuers.’
Equal and opposite reaction
In this uncertain environment, lawyers are continuing to give conservative internet communications advice – ironically, scaring companies away from the route the SEC is actively encouraging. The greatest confusion – and consequent fear – relates to putting information relating to offerings up on the net. But that approach is being extended into normal disclosure practices too, hampering the ability of companies to distribute information online. Unfortunately, it is not just conservatively-advised US companies that are being held back in this regard. Many non-US companies have been even more timid at making the internet a mainstay of their disclosure plans, often as a result of legal advice.
Michael Reilly, president of Hally Enterprises, believes that the attitude among many US investor relations practitioners is to now move quite aggressively in putting information up on the net. But their plans are often frustrated by the legal department. ‘It becomes a contest between the IRO and the legal department which will ultimately get settled by the chief executive. I point out that what we’re really talking about is marketing the company’s stock in an atmosphere where investors have many, many choices. You sure as hell can’t do it well by being quiet. As an IR advisor, sometimes you win, sometimes you lose. In a lot of companies the lawyer has got there first but then you may find an enlightened CEO who is a cheerleader for disclosure.’
The National Investor Relations Institute in the US has become so concerned by the impact of legal advice upon wide, transparent disclosure that it has unofficially asked its senior practitioners to seek every means possible to help explain the IR viewpoint to the legal fraternity. The situation, it believes, warrants a proactive stance by its most senior members.
But follow the advice of Cary Klafter, director of corporate affairs in the legal department at Intel, and wide dissemination of corporate information over the net is no problem at all. ‘You’ve just got to use common sense policies and effective disclaimers,’ he says, adding that the internet and traditional communications methods should be viewed as inseparable and integrated into a company’s disclsoure plan. Sure, says Klafter, there are issues of concern; but most IR material on the web is not related to the offering of securities – ‘It’s informational’ – and the SEC has made it clear it is very supportive of such an approach. Klafter’s key advice is this: ‘Whatever you do on the web, don’t put your fate in the hands of other people. That’s simple enough by limiting the number of links to other sites.’
Sink or swim
Sounds easy doesn’t it? And it may well be for the US market now that the SEC has formally clarified its internet disclosure position. The trouble is that many non-US companies are working under very different regulatory systems yet trying to compete for capital with their peers in the US.
Take BP Amoco. The multinational oil giant has been at the cutting edge of IR in the UK for many years and obviously wants to compete with the largest companies in the world – many of them located in the US. Peter Hall, IRO at BP Amoco, has run into an issue which could hamper his company from moving in the web disclosure fast lane.
According to section 57 of the UK’s Financial Services Act, any investment advertisement has got to be issued or approved by a regulated, authorized body, such as a broker or investment bank. Unfortunately, the term ‘investment advertisement’ is drawn very widely and can include anything which might be deemed to be encouraging the buying or selling of shares.
So, if a company wants to put, say, an analyst slideshow up on the corporate web site it may be treading on dangerous ground and should seek approval. Many UK companies are not even aware of the extent of the legislation; or when they do try to seek approval, they find advisors reluctant to give the thumbs-up on an area which regulators are still to clarify.
Hall believes it is a real problem which holds UK companies back from truly adopting the web as an IR medium. He is helping the UK’s IR Society lobby the authorities to get it changed. He points out that if he wants to put a web cast or conference call up on the web, he has to get independent approval from a regulated entity. That in itself might delay the release over the web, leading to a situation of selective disclosure where the professional investment community has access to information yet retail investors remain out in the cold.
‘The rules as they currently stand don’t naturally lend themselves to the electronic medium,’ comments one in-house lawyer at a City institution who wished to remain anonymous. He notes that any investment advertisement – or material construed as such – has to be kept as a matter of record for three years. ‘That might mean that every time you change material on a web site you have to keep a record of it for three years. You have to be aware that there is an issue here and take note of it. If there is any doubt then get approval and check against the regulations. It’s not an ideal situation given the SEC’s move in the US against selective disclosure. There is a problem here.’
‘The legislation is struggling to catch up,’ says Hall, adding that BP Amoco wants to maintain its position at the forefront of IR practice – and that means following the direction laid down by the SEC in the States. He likens the UK situation to having a car but not being able to drive off because you have not been given the keys. ‘The US situation is much, much more relaxed. There isn’t an equivalent to section 57 although you’re still obliged not to promote your own shares. The US situation is more like being able to get in your car, start it up and drive it off – as long as you keep a watch out for cops and speed cameras.’
