On Aug. 1, 2008, the SEC issued an Interpretive Release to provide additional guidance on the use of company websites with respect to application of the antifraud provisions of the federal securities laws, and compliance with certain provisions of the Securities Exchange Act of 1934. Release Nos. 34-58288, IC- 28351; available at http://www.sec.gov/rules/interp/2008/34-58288.pdf.
The guidance focuses principally on:
- When information posted on a company website is “public” for purposes of Regulation FD
- Company liability for information on company websites – including previously posted information, hyperlinks to third-party information, summary information, and the content of interactive websites
- The types of controls and procedures advisable with respect to such information
- The format of information presented on a company website, with the focus on readability, not printability
Highlights of the Release are summarized below.
The guidance is effective upon publication of the Release in the Federal Register (expected within the coming week). Although the guidance is thus "final," the SEC is inviting interested parties to submit written comments "on any other approaches or issues involved in facilitating the use of electronic media, including as a result of technological developments, to further the disclosure purposes of the federal securities laws." Such comments should be submitted within 90 days of publication of the Release in the Federal Register.
By issuing this Interpretive Release, the SEC hopes to "encourage the continued development of company web sites as a significant vehicle for the dissemination to investors of important company information." The SEC is also responding to a recommendation by the Federal Advisory Committee on Improvements to Financial Reporting, in its February 2008 Progress Report, that the SEC provide more guidance "as to how companies can use their web sites to provide information to investors in compliance with the federal securities laws, particularly with respect to the Securities Exchange Act of 1934 (the 'Exchange Act')." The Release goes on to review briefly a series of interpretive releases and rules, going back at least to 1995, wherein the SEC addressed the use of company websites to provide information to investors, and it makes recurring references particularly to Use of Electronic Media, Release No. 33–7856 (April 28, 2000) [65 FR 25843] (the "2000 Electronics Release"). It also discusses "the vital role of the Internet and electronic communications in modernizing the disclosure system under the federal securities laws and in promoting transparency, liquidity and efficiency in our trading markets," and recent trends in this area.
Particularly with regard to Exchange Act disclosure requirements, the Release reviews areas where the SEC has allowed companies to make information available to investors on their websites, with their websites serving, depending on the circumstances, as a supplement to the SEC's EDGAR database, as an alternative to EDGAR, or as a stand-alone method of providing information to investors independent of EDGAR.
The Interpretive Release
The Release concerns posting of information to companies' public (Internet) websites (as distinguished from private - intranet - sites). "A company website is maintained by or for the company and contains information about the company." In addition, for purposes of this Release generally, the SEC uses the term “company” to refer to entities that are registrants subject to the periodic reporting and antifraud provisions of the Exchange Act, including registered investment companies. Thus, although Regulation FD applies to closed-end investment companies but does not apply to other investment companies, it appears that the guidance set forth in the Release would be relevant to all such companies.
Evaluation of “Public” Nature of Information on Company Websites
Regulation FD was adopted to address the problem of selective disclosure of material non-public information by companies. In the most general terms, it established a clear rule prohibiting unfair selective disclosure, and encouraged broad public disclosure. However, the SEC has not previously addressed the question of whether and when information on a company’s website would be considered "public" for purposes of determining if a subsequent selective disclosure of the information may implicate Regulation FD. If information on a company’s website is public, then subsequent selective disclosure of that information – such as to an analyst in a private conversation – would not trigger Regulation FD (because such information, even if material, would not be non-public). However, while posting information on a company’s website (in a location and format readily accessible to the general public) would not be “selective” disclosure, the Release points out that the information may nevertheless not be “public” for purposes of determining whether a subsequent selective disclosure implicates Regulation FD.
The Release notes that when Regulation FD was adopted in 2000, the SEC "stopped short of concluding that disclosure on a company web site would, itself, be an acceptable method of 'public disclosure' of material non-public information for purposes of compliance with Regulation FD." The Release states that the SEC "now believe[s] that technology has evolved and the use of the Internet has grown such that, for some companies in certain circumstances, posting of the information on the company’s web site, in and of itself, may be a sufficient method of public disclosure under Rule 101(e) of Regulation FD. Companies will need to consider whether and when postings on their web sites are 'reasonably designed to provide broad, non-exclusionary distribution of the information to the public.' "
According to the Release, in evaluating whether information is public for these purposes, companies must consider whether and when:
(1) A company website is a "recognized channel" of information distribution
(2) Posting of information on a company website "disseminates the information in a manner making it available to the securities marketplace in general"
(3) There has been a reasonable waiting period for investors and the market to react to the posted information
With respect to (1), whether a company’s website is a recognized channel "will depend on the steps that the company has taken to alert the market to its web site and its disclosure practices, as well as the use by investors and the market of the company’s web site."
With respect to (2), the Release states the SEC's current belief that, in the context of a company website that is known by investors as a location of company information, the appropriate approach to analyzing the concept of “dissemination” for purposes of the “public” test as it relates to the applicability of Regulation FD to a subsequent disclosure should be to focus on the manner in which information is posted on a company website, and the timely and ready accessibility of such information to investors and the markets.
The Release then provides the following non-exclusive list of factors a company should consider in evaluating whether its web site is a recognized channel of distribution and whether the company information on such site is “posted and accessible” and therefore “disseminated”:
- Whether and how companies make it known that the company has a website and that the website should be reviewed for information (e.g., whether a company's reports, filings, etc. include its website address and indicate that the company posts important information on its website)
- The design of the company’s website (e.g., whether it leads users "efficiently" to information about the company, whether the information is prominently disclosed on the website "in the location known and routinely used for such disclosures," and whether the information is presented in a readily accessible format)
- The extent to which posted information is regularly picked up by the market and reported in readily available media, or the extent to which the company has advised newswires or the media about such information, and the size and market following of the company involved
- The steps the company has taken to make its website and the information accessible (such as the use of “push” technology)
- Whether the company keeps its website current and accurate
- Whether the company uses other methods in addition to its website posting to disseminate the information and whether and to what extent those other methods are the predominant methods the company uses to disseminate information
- The nature of the information
The third element in evaluating whether and when information posted on a company’s website would be public for purposes of evaluating whether a subsequent selective disclosure may implicate Regulation FD is "whether investors and the market have been afforded a reasonable waiting period to react to the information." What constitutes a reasonable waiting period depends on the circumstances of the dissemination, and what may be a reasonable waiting period after posting information for a particular company and a particular type of information may not be so for other companies or other types of information. As discussed in the Release, relevant factors may include:
- The size and market-following of the company
- The extent to which investor-oriented information on the company website is regularly accessed
- The steps the company has taken to make investors and the market aware that it uses its web site as a key source of important information about the company, including the location of the posted information
- Whether the company has taken steps to actively disseminate the information or the availability of the information posted on the web site, including using other channels of distribution of information
- The nature and complexity of the information
Company Liability for Information on Company Websites
The Release reminds issuers that "The antifraud provisions of the federal securities laws apply to company statements made on the Internet in the same way they would apply to any other statement made by, or attributable to, a company," and that this includes postings on, and hyperlinks from, company websites. It then goes on to focus on the following four areas of concern:
1. Effect of Accessing Previously Posted Materials or Statements on Company Websites – Citing statements in an earlier SEC release, the Release notes that some companies continue to be concerned about whether previously posted materials or statements on their website that are accessed at a later time will be considered “republished” at that later date, with attendant liability. In a welcome shift, the Release now clarifies that "As a general matter, we believe that the fact that investors can access previously posted materials or statements on a company’s web site does not in itself mean that such previously posted materials or statements have been reissued or republished for purposes of the antifraud provisions of the federal securities laws, that the company has made a new statement, or that the company has created a duty to update the materials or statements."
Of course, if a company affirmatively restates or reissues a previously posted statement, there may be a duty to update the statement. In circumstances where "it is not apparent to the reasonable person that the posted materials or statements speak as of a certain date or earlier period," companies should take steps to assure that investors understand that the posted materials or statements speak as of an earlier date or period. In this connection, the Release states that previously posted materials or statements that have been put on a company’s website should be: separately identified as historical or previously posted materials or statements (including, for example, by dating the posted materials or statements); and located in a separate section of the company’s website containing previously posted materials or statements.
2. Hyperlinks to Third-Party Information – The Release reviews, and reiterates, the guidance provided by the SEC in the 2000 Electronics Release, regarding the implications for the use of hyperlinks from company websites to third-party information in the context of both the Securities Act of 1933 and the antifraud provisions of the federal securities laws. As explained in the 2000 Electronics Release, whether third-party information is attributable to a company depends on whether the company has: (a) involved itself in the preparation of the information (the "entanglement" theory), or (b) explicitly or implicitly endorsed or approved the information (the "adoption" theory). The Release focuses its additional guidance on issues relating to the adoption theory.
"In evaluating the potential antifraud liability of a company under the adoption theory with respect to thirdparty information to which the company provides a hyperlink in the context of providing information about the company and its business, we believe the focus should be on whether a company has explicitly or implicitly approved or endorsed the statement of a third-party such that the company should be liable for that statement. * * * The key question in the hyperlinking context, therefore, is: Does the context of the hyperlink and the hyperlinked information together create a reasonable inference that the company has approved or endorsed the hyperlinked information?"
Thus, an important factor is what the company says, or can be taken to imply, about the hyperlink, and the Release suggests that, to avoid potential confusion or misunderstanding about what the company’s view or opinion is with respect to the hyperlinked information, the company should consider explaining the context for the hyperlink – and thereby make explicit why the hyperlink is being provided. For example, a company might explicitly endorse the hyperlinked information or, alternatively, simply note that the third-party website contains information that may be of interest or of use to the reader. Also, "The degree to which a company is making a selective choice to hyperlink to a specific piece of third-party information likely will indicate the extent to which the company has a positive view or opinion about that information," and the company's explanation for the hyperlink should be drafted accordingly.
In addition to an explanation of why a company is including particular hyperlinks on its website, a company may determine to use other methods, including “exit notices” or “intermediate screens,” to show that the hyperlink is to third-party information. The Release cautions, however, that while use of such techniques may help to avoid confusion as to the source of the third-party information, "no one type of 'exit notice' or 'intermediate screen' will absolve companies from antifraud liability for third-party hyperlinked information." More generally, the SEC reiterates its position in the 2000 Electronics Release that it does not view a disclaimer alone as sufficient to insulate a company from responsibility for information that it makes available to investors whether through a hyperlink or otherwise. "Accordingly, a company would not be shielded from antifraud liability for hyperlinking to information it knows, or is reckless in not knowing, is materially false or misleading. This would be the case even where the company uses a disclaimer and/or other features designed to indicate that it has not adopted the false or misleading information to which it has provided the hyperlink."
Note that the NASD (now FINRA) has also issued guidance on the application of NASD rules to thirdparty material that is hyperlinked from a member's website. See letter from Thomas Selman to Craig Tyle, Investment Company Institute, dated Nov. 11, 1997; available at http://www.finra.org/RulesRegulation/PublicationsGuidance/InterpretiveLetters/ConductRules/P002542.
3. Summary Information – The Release notes that the SEC has encouraged, and in some cases required, the inclusion of summaries or overviews in prospectuses and in Exchange Act reports to highlight important information for investors, and expresses continued support for the concept. (It also cautions that the instant guidance does not supersede more specific requirements covering the use of summaries or their content that are or may be contained in SEC rules or forms.) Nevertheless, "summaries or overviews standing alone and which a reasonable person would not perceive as summary, and which do not provide additional information to alert a reader as to where more detailed information is located, could result in investors not necessarily understanding that the statements should be read in the context of the information being summarized."
Thus, the Release suggests that when companies post summaries on websites, they should consider ways to alert readers to the location of the detailed disclosure on which the summary is based. Techniques to highlight the nature of summary or overview information might include use (and placement) of appropriate titles, explanations, "layered" or "tiered" formats, and/or hyperlinks to the more detailed underlying information.
4. Interactive Web Site Features – The guidance provided in the Release for companies hosting or participating in blogs or electronic shareholder forums is fairly straightforward: companies are responsible for statements made by the companies, or on their behalf, on their websites or on third-party websites; the antifraud provisions of the federal securities laws apply in the context of blogs and to electronic shareholder forums; companies cannot require investors to waive protections under the federal securities laws as a condition to entering or participating in a blog or forum; and a company is not responsible for the statements that third parties post on a website the company sponsors, nor is a company obligated to respond to or correct misstatements made by third parties. ("Of course, the company may be held responsible under the 'adoption theory' or 'entanglement theory' if the company adopts, endorses, or approves the statement.")
Disclosure Controls and Procedures
The Release discusses the fact that postings on a company’s website may also implicate Exchange Act rules relating to "disclosure controls and procedures," pursuant to which a company’s principal executive officer and principal financial officer must make certain certifications. Noting that SEC rules permit companies to satisfy certain Exchange Act disclosure obligations by posting information on their websites as an alternative to providing that information in an Exchange Act report, the Release cautions that, if a company elects to do so, disclosure controls and procedures would apply to such information (because it is information required to be disclosed by the company in Exchange Act reports). Thus, companies must make sure that their disclosure controls and procedures are designed to address the disclosure of such information on their websites. Failure to make those disclosures on the company’s website would result in an Exchange Act report being incomplete, and an action could be brought under the Exchange Act reporting provisions based on the company’s failure to file the report.
The Release also makes clear that disclosure controls and procedures do not apply to other disclosures of information on a company’s website (i.e., information that is not posted as an alternative to being provided in an Exchange Act report). "That said, other disclosures on a company’s web site are subject to antifraud liability, and companies also need to consider whether such disclosures are in compliance with Regulation FD, the Securities Act, and the federal proxy rules, among others."
Format of Information and Readability
The Release makes clear that it is not necessary that information appearing on company web sites satisfy a "printer-friendly" standard unless an SEC rule explicitly requires it. (For example, where the SEC requires electronically posted proxy materials to be presented in a format “convenient for both reading online and printing on paper.") Thus, as a general matter, "the inability to print a particular browser screen or presentation, particularly one designed for interactive viewing and not for reading outside the electronic context, is not inherently detrimental to its readability."
In this regard, the Release reiterates prior SEC guidance to the effect that, if special software is required in order to view information aimed at investors that a company puts on its website, the company should make a free, downloadable version of the software available on the website, or the site should direct readers to a location where they can download the software free of charge. However, in the case of "interactive data," the SEC has taken a different approach. Although it has proposed that companies post on their websites the same interactive data they would file or furnish with certain Exchange Act reports and Securities Act registration statements, it has not proposed that registrants also provide interactive data viewers (or information on how to obtain viewers) on their websites. "Instead, we have determined to allow third parties to develop viewers, anticipating that these viewers will, over time, become more readily accessible at a little or no cost to investors." The SEC does make several interactive data viewers available through its website.