SEC takes a step backward on disclosure

In a move that has received scant public attention, the SEC this month put into place changes that could harm investors. Specifically, an SEC interpretive release on Regulation FD now permits corporations to use their websites to make material disclosures under certain conditions. Traditionally, when public corporations release earnings and other news, they send press releases to major news organizations for widespread dissemination to market participants. Corporations typically use specialized wire services — Business Wire, PR Newswire and others — to ensure that news organizations and the public receive the news simultaneously.

Through this distribution method, news is “pushed” to the public by the traditional news media and is also available to those who “pull” it in through Google, Yahoo and other Internet search engines.

In its interpretive release, however, the Securities and Exchange Commission said that it now believes “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 website, in and of itself, may be a sufficient method of public disclosure under … Regulation FD.”

Companies will need to consider “whether and when postings on their websites are ‘reasonably designed to provide broad, non-exclusionary distribution of the information to the public.’”

The SEC leaves to each company the responsibility for evaluating whether posting information to its own website would satisfy Reg FD.

Since few companies want to risk running afoul of the law, securities attorneys are likely to advise sticking with current disclosure methods.

That’s sound counsel and good public policy.

If ever there were a time for greater transparency and public disclosure, this is it. Public confidence in the markets has been battered, and any reason for investors to assume that companies are not being forthcoming — whether grounded in fact or not — will only delay their return to the markets.

The thinking behind the SEC’s direction is curious, because it assumes investor behavior that is nowhere borne out by practice. Holders of XYZ shares, for instance, may seek out information about the company in various ways, including online searches, but few arise each day and rush to the XYZ website to learn of new developments. They rely on the news media for that.

Unless some provision is made for information disclosed on a company website to be made available to third-party providers, “investors will be required to regularly visit the sites of every company they own/follow for the purpose of reviewing any new disclosure,” wrote investor relations executive Ralph D. Allen of South Salem, N.Y., in a comment letter to the SEC.

The commission received only eight comments about the regulation change, three of them from commercial wire services, which have a clear business interest in maintaining the status quo.

Nevertheless, their comments are worth noting.

“Web-only disclosure options are fraught with unsettling and unnecessary risks that threaten to compromise the integrity of — and confidence in — our financial markets,” wrote Neil Hershberg, an executive at San Francisco-based Business Wire.

Corporate websites can be wonderful information tools. But because they are not where investors turn for news, the SEC should reconsider its actions.