A web of confusion

If any company should be happy with the SEC’s recent guidance on web disclosure of material information, it’s Sun Microsystems. After all, CEO Jonathan Schwartz’s October 2006 letter was widely seen as a catalyst for the action.

‘The internet is certainly in our view a very important means of communicating with our investors, our shareholders and our various other constituents,’ comments Craig Norris, Sun’s vice president of corporate law. ‘Our CEO blogs; our general counsel blogs. With that degree of discourse and information, you clearly run into Regulation Fair Disclosure (Reg FD) concerns up front.’ So long as material on a company’s website would not count as official distribution of the information, there was always the chance of a fire drill should someone accidentally note something material in a post.

The move toward being able to officially release information on a corporate website is a welcome change as far as Sun is concerned, even if it isn’t as extensive as the company wants. ‘In my view it’s not like [the SEC gave] us this bright-line case,’ Norris says. ‘But I think it does provide helpful guidance to figure out if you are complying with Reg FD. It’s better than nothing at all, which is where we were.’

Since the inception of Reg FD in 2000, public companies have had to release material information in such a way as to ensure that everyone has simultaneous access. When information is materially important, a company has the choice of posting an 8K on the SEC’s EDGAR site or putting a press release on a major newswire. Ironically, Reg FD’s development occurred at the time of the internet’s explosive growth, but the commissioners felt that too few people had ready online access for it to be an official distribution vehicle.

Fuzzy logic

Although the new guidance has been eight years coming, it doesn’t provide a revolution so much as a fuzzy evolution. Corporations won’t find a set of rules that will let them quickly move disclosures to their own websites rather than posting everything in an 8K on EDGAR. Instead, they’ll find outlines of a path that might get them there. Eventually.

The web guidance fits into a larger context that includes the SEC’s interactive data electronic applications (IDEA) system, the new disclosure repository site meant to someday replace EDGAR, and extensible business reporting language (XBRL), the computer language that lets investors efficiently examine financial details of public companies. Though the SEC pushes for more transparency for investors, there is another dynamic at work.

‘It’s no secret that SEC chairman Christopher Cox has loved internet disclosure [and] website disclosure, because no one’s against it,’ says Roel Campos, a former SEC commissioner and now a partner at Cooley Godward Kronish. ‘He came in at a time when there were a lot of major difficult issues that the commissioners had divided views about. So he’s gone big on [things like] XBRL where there is great potential and no one can really be against it.’

Corporations may also support web disclosure as it could act as a ‘cover your rear’ tool. ‘The SEC has said that you now have another avenue for communicating with investors that investors will probably welcome, and you can probably be covered by doing that,’ says Michael Kolar, a partner with Oppenheimer Wolff & Donnelly.

Putting information on the web seems to support ending selective disclosure, the underlying principle of Reg FD. Yet the unclear guidance offers no ‘bright-line test’ to know when a company might be in compliance or not, according to Gordon Kaiser, partner at Squire, Sanders & Dempsey. ‘What they’re now saying is at least some companies’ websites have sufficient impact on the market that website disclosure would suffice for public dissemination of information,’ he says. But they haven’t identified any websites that meet their criteria.

That leaves companies floundering as they try to understand exactly what it would take to create a website that would satisfy the SEC. First off, a corporation has to meet these conditions: the website would have to be well-trafficked by investors; the company would have to have enough relevant information; and website organization, structure and navigation would have to provide ease of use to the investors.

That all seems like common sense. You couldn’t have broad dissemination if investors didn’t go to a company’s website and information does little good if people cannot find it. Such a principles-based approach, though, is not one that US companies are comfortable with yet, and this opens many questions. Just how much of a given company’s investor base would have to travel to the website for it to be a valid form of dissemination? What are the standards of usability and what website design practices might be considered acceptable? If something was released over EDGAR or a wire service, would it also have to be put onto the corporate website? Once posted, how long must a company wait to comment on information?

Common sense is all well and good, but it doesn’t offer much new information on a subject many companies struggle to understand. Teresa Johnson, a partner at Howard Rice Nemerovski Canady Falk & Rabkin, concurs: ‘Everyone has been waiting a long time for the SEC to come out with official guidance on website disclosures. When it finally came out [it was] really confirming the existing facts and circumstances test.’ In other words, no one really learned much out of it.

But not everyone agrees the guidance is foggy. ‘Frankly, I think the SEC has not done a great job of explaining publicly where it intends to go, and whether this is an interim step, which it seems to be,’ says Campos.

From the inside out

There’s also the question of who exactly would benefit. ‘The impact sounds really minor from an investor point of view,’ says Patrick Kelly, assistant professor in the department of finance at the University of South Florida. ‘The distinction between a press release and a company releasing it on its website is that the press release is pushed. But you still have to be monitoring the newswires. It’s hard for me to believe that an analyst or institution monitoring a company wouldn’t be checking the website anyway.’ However, Kelly does agree that having a single source for information on a given company would be ‘valuable to anyone paying close attention.’

The direct corporate benefit can be even harder to see. On one hand, there might be a savings by reducing the expense of wire fees that can run thousands of dollars a quarter, according to Maureen Wolff-Reid, president of investor relations agency Sharon Merrill Associates. But those savings could be offset by the cost of redesigning investor websites, even outsourcing them. ‘Look at Thomson and Shareholder.com,’ Wolff-Reid says. ‘It’s going to be great for them because they’re doing the websites for so many public companies now.’

Companies could decide to do their investor websites in-house, but there are a lot of considerations. For example, many companies find it difficult to keep websites updated on a timely and predictable basis. If the corporation cannot ensure that it doesn’t feature old news on the web, will it have the business processes and staff to keep compliant with Reg FD? A company might find that it has to hire a usability-consulting firm to vet its investor website navigation so that if someone challenges the ability of people to find relevant information, it will have a reasonable answer.

This is an area the SEC mostly covered in its guidance, according to Michael Kirwan, of counsel at Foley & Lardner. ‘A lot of the items appear to be common sense,’ he says. ‘One such item was being sure that the information posted is dated. They encourage people when they disclose summary information [to emphasize] that it is indeed summary information and to provide hyperlinks to more detailed information.’ As obvious as that advice may seem, over the last five to 10 years many companies have designed their websites primarily as sales and marketing tools. Communicating with investors takes a different approach.

Although a company could move its public disclosure to its own website, that would also give up some good opportunities for promoting the stock. When news goes out over a newswire, there’s at least the chance that journalists will pick it up and provide some coverage. But editors and reporters are unlikely to regularly go to a given company’s website, so the chance of publications picking up news when it’s still fresh drops.

What’s my liability?

Furthermore, website disclosure will not completely eliminate the need for filing with the SEC. ‘When your chief executive officer resigns unexpectedly and you have two days to file an 8K, that’s not going to change,’ Kaiser says. ‘There’s no indication that the SEC or anyone else is moving away from the 8K for that kind of event.’

The SEC’s view is also not the only one that comes into play. ‘Right now, the New York Stock Exchange requires that any material information be disseminated by a press release or an 8K,’ says Laurie Green, a partner at Holland & Knight.

Understanding how liability works becomes a big issue. Normally there are two broad types of liability for information under Rule 10b-5, according to Colin Diamond, a partner with White & Case. ‘In broad strokes, when you post something on your website, you’re subject only to anti-fraud liability. An investor has to prove reckless disregard.’ But a document filed with the SEC is subject to a modified negligence standard, providing investors a higher level of protection. ‘How will they handle liability for documents posted on a website as opposed to filing with them?’ he asks.

All companies feel the effect of these issues to some degree or another, but they weigh most heavily on smaller companies. ‘It’s the larger companies that are more focused on their websites and able to spend the time and resources to allow their websites to be informative and user friendly,’ says Kirwan. Smaller companies are also less likely to have the audience draw that the SEC would want to see – and more in need of the additional attention.

As a result, there is no sudden rush to be first in line. ‘I think there’s probably a lot of discomfort with companies putting into effect material information onto their websites for the first time,’ says William Simpson, a special director with consulting firm LECG. ‘Companies are very comfortable doing the following: here’s our 10Q, here’s our last five years of data and click here to get our 8Ks. But providing information on the website is a developing kind of field.’ Get things wrong, and it’s unlikely that the argument of not having enough guidance is going to pull a lot of weight.

For the near future, the best approach is for a company to determine how much investors value a strong web experience. If it proves a major concern, companies should certainly start developing the look and feel, building their audience over time by referring to the website in every IR communication. Immediately after issuing a release or 8K, put the same information on the website. Until the SEC collects public comments and issues something more definitive, it’s the belt and suspenders approach that will be necessary.