Thomas J. Friedmann
Boston +1 617 728 7120
The Securities and Exchange Commission (the “SEC”) recently published an interpretive release (the “Release”) to provide additional guidance on the use of company websites1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and the antifraud provisions of the federal securities laws2. The SEC believed it to be an appropriate time to publish additional guidance on the use of company3 websites “given the development and proliferation of company websites, and their expectation that continued technological advances will further enhance the quality, not just the quantity, of information available to investors on such websites.”4 The Release’s use of the term “company” includes investment companies and mutual funds, except for the section on the applicability of Regulation FD which only applies to closed-end funds and not other investment companies.
The Commission has requested comments on the guidance. The comment period will end on November 5, 2008. The effective date of interpretation for the Release was August 7, 2008.
The guidance in the Release is intended to enhance investor protection as investors turn increasingly to electronic media and websites as sources of information; particularly because many types of investment-related company information are available only in electronic form.
The SEC focuses its guidance on the following:
In February 2008, the Federal Advisory Committee on Improvements to Financial Reporting recommended that the SEC provide more guidance as to how companies can use their websites to provide information to investors in compliance with the federal securities laws, particularly with respect to the Exchange Act5. The SEC last provided guidance on these issues in 2005 on the topic of certain discrete Internet issues relating to the Securities Act of 1933 (the “Securities Act”)6, and in 2000 on the issue of the electronic delivery of disclosure documents, company liability for website content and other matters7.
The SEC has taken a number of steps to encourage the dissemination of information electronically via the Internet, as it believes that “widespread access to company information is a key component of [the] integrated disclosure scheme, the efficient functioning of the markets, and investor protection.” For example, the SEC has mandated that companies must make their SEC filings electronically through the Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) system; and it provides free access to EDGAR on a real-time basis through its Internet website8.
In an effort to promote the use of interactive data, the SEC has encouraged, and recently proposed requiring9, companies to provide financial information on EDGAR in interactive data files, which would make financial information easier for investors to analyze, as well as help automate regulatory filings and business information processing10. The SEC has also proposed rule amendments requiring mutual funds to provide certain key information from their prospectuses in interactive data format11. The SEC believes that “interactive data has the potential to increase the speed, accuracy and usability of financial and other disclosure, and eventually to reduce costs.”12 Furthermore, the SEC has continually encouraged companies to make their filings and other company information available on their websites in order to provide greater access to investors and in some cases has required companies to use their websites to make such disclosures13.
The SEC recognizes that allowing companies to present information in different formats or by using more technologically advanced programs than EDGAR may be beneficial to investors. As such, it continues to encourage companies to develop their websites in compliance with the federal securities laws so that they can serve as effective information and analytical tools for investors.
Overview of Exchange Act Rules on the Use of Company Websites
The SEC has issued a number of interpretive releases and rules that promote the use of company websites as a means for companies to provide information to investors under the Securities Act and the Exchange Act14. The basic principle underlying these interpretations and rules is that, “where access is freely available to all, use of electronic media is at least equalto other methods of delivering information or making it available to investors and the market.”15 In some cases, the SEC has recognized that there are advantages in allowing companies to provide information on their websites as compared to disclosed through EDGAR16. Thus, the SEC encourages the delivery of documents in electronic format when delivery of documents is required under the federal securities laws (e.g., prospectuses or proxy materials)17.
With respect to proxy materials, certain companies are required to post these materials on a specific, publicly accessible Internet website (otherthanEDGAR) and to provide record holders with a notice that informs them about the location of the materials and explains how to access them. It has also allowed companies to make information available on their websites where disclosure is required under the Exchange Act as either a supplement, alternative or stand-alone method independent to EDGAR, depending on the circumstance. In very limited circumstances, the SEC has allowed a company’s website to serve as a standalone method of providing information to investors wholly independent of EDGAR. This has been permitted, under certain circumstances, to some foreign private issuers as a basis for maintaining an exemption from Exchange Act registration and reporting requirements18.
When a company website serves as a supplement to EDGAR, the SEC has promoted the use of websites by requiring, for example, that:
In addition, the SEC has proposed in its Interactive Data Proposing Releases that companies post their interactive data files on their websites24. In some situations, the SEC has allowed companies to use their websites as an alternative to EDGAR by giving them the choice of satisfying an Exchange Act disclosure requirement either by filing the disclosure on EDGAR or by making it available on the company’s website. For example, a company may post the following on its website:
Application of Certain Provisions of the Federal Securities Laws to Information Presented on Company (and Closed-End Fund) Websites
Evaluation of “Public” Nature of Information on Company Websites under Regulation FD
In the Release, the SEC provides guidance as to the circumstances under which information posted on a company website would be considered “public” for purposes of evaluating: (1) the applicability of Regulation FD to subsequent private discussions or disclosure of the posted information; and (2) satisfaction of Regulation FD’s “public disclosure” requirement. As previously mentioned, Regulation FD applies to closed-end investment companies, but does not apply to other investment companies31. Thus, the discussion and references to "companies" in this section with respect to the applicability of Regulation FD, will include closed-end funds, but exclude other investment companies.
Whether and When Information Is “Public” for Purposes of the Applicability of Regulation FD
In evaluating whether information is public for purposes of SEC guidance, companies must consider whether and when: (1) a company website is a recognized channel of distribution; (2) the posting of information on a company website disseminates the information in a manner making it available to the securities marketplace in general; and (3) there has been a reasonable waiting period for investors and the market to react to the posted information32.
First, whether a company’s website is a recognized channel of distribution of information will depend on the steps that the company takes to alert the market of its website, the company’s disclosure practices, the website’s use by investors, and the specific market of the company’s website. Second, the Release discusses the meaning of “dissemination” in the context of website disclosure and recognizes that news is now disseminated in an electronic format.
Hence, the Release advises that the appropriate approach to analyze whether information has been “disseminated” would be to focus on: (1) the manner in which information is posted on a company website; and (2) the timely and ready accessibility of such information to investors and the markets33. Some factors, for companies to consider in evaluating whether their company website is a recognized channel of distribution and whether the company information on such a site is therefore “disseminated,” include34:
The third element in evaluating whether and when information posted on a company’s website would be “public” for purposes of the applicability of Regulation FD, as explained in the Release, is whether investors and the market are given a reasonable waiting period to react to the information. Companies must look at the particular facts and circumstances in order to determine whether the reasonable waiting period element is satisfied. A reasonable waiting period after posting information on one company website may not be reasonable for another company or other types of information. If the information is important, companies should take additional steps to alert investors and the market to the fact that the important information will be posted on the website prior to such posting by filing orfurnishing such information to the SEC or by issuing a press release36.
Elements of what constitutes a reasonable waiting period depend on the circumstances of the dissemination, which, in the context of company websites, may include37:
Satisfaction of Public Disclosure Requirement of Regulation FD
The Release also notes that Rule 101(e) of Regulation FD requires that once a selective disclosure has been made, the company must file or furnish a Form 8-K or use an alternative method of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public. Companies must do this simultaneously, in the case of an intentional disclosure, or promptly, in the case of an unintentional disclosure39. The Release states that the SEC now believes that technology has evolved and the use of the Internet has grown to the point that the posting of the information on the company’s website, 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 postings on their websites are designed to be a broad enough distribution of information to the public40. To do so, companies can look to the previously discussed factors of: (1) whether the company website is a recognized channel of distribution; and (2) whether the information is “posted and accessible” and, therefore, “disseminated.”41 As part of that evaluation companies also will need to consider their websites’ capability to meet the simultaneous or prompt timing requirements for public disclosure once a selective disclosure has been made 42. Companies should keep in mind that it remains their responsibility to evaluate whether a posting on its website would satisfy the alternative pubic disclosure provision of Regulation FD43.
Antifraud and Other Exchange Act Provisions
The Release also discusses how the antifraud provisions of the federal securities laws apply to company statements made on the Internet44. This includes postings on and hyperlinks from company websites45. Referring back to the 2000 Electronics Release, the Release reminds companies, including non-closed-end funds, that they are responsible for the accuracy of their statements that can reasonably be expected to reach investors or the securities markets regardless of the medium through which the statements are made, including the Internet46. Thus, a company should keep in mind the applicability of the antifraud provisions of the federal securities laws to the content of its website47. These anti-fraud provisions contain a general prohibition on making material misstatements and omissions of fact in connection with the purchase or sale of securities48. Whether information posted on a company’s website is considered part of the “total mix” for purposes of analyzing materiality is a facts and circumstances determination. Companies can take certain steps that affect whether information located on or hyperlinked from a company’s website is part of such “total mix” of information49.
Effect of Accessing Previously Posted Materials or Statements on Company Websites
The Release acknowledges that some companies are concerned 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 securities law liability50. Companies are concerned that they may have a duty to update the previously posted materials or statements if they are considered to be a new statement by being “republished” each time the materials or statements are accessed on the website51. While the SEC addressed this issue in the context of registered offerings under the Securities Act in an earlier release52, the Release provides clarity with respect to the treatment of previously posted materials or statements under the antifraud provisions of the federal securities laws.
The SEC states that it does “not believe that companies maintaining previously posted materials or statements on their websites are reissuing or republishing such materials or information for purposes of the antifraud provisions of the federal securities laws just because the materials or statements remain accessible to the public.” However, the antifraud provisions would apply to statements contained in posted materials when such statements were initially made. Likewise, if a company affirmatively restates or reissues a statement, the antifraud provisions would apply to such statements when the company restates or reissues the statement. An affirmative restatement or reissuance by a company, however, would likely create a duty to update the statement so that it is accurate as of the date it is restated or reissued53.
In circumstances where it is not apparent to a reasonable person that posted materials or statements on a company's website speak as of a certain date or earlier period, then posted materials or statements that have been put on a company’s website should be: (1) separately identified as historical or previously posted materials or statements, including, for example, by dating the posted materials or statements; and (2) located in a separate section of the company’s website containing previously posted materials or statements54.
Hyperlinks to Third-Party Information
The Release also addresses the use of hyperlinks to third-party information in the context of the antifraud provisions. It clarifies that its guidance does not alter its interpretation regarding the use of hyperlinks to third- party information in the context of offers and sales of securities under the Securities Act55.
Under the so called “adoption” theory regarding third- party information to which a company provides a hyperlink, the Release states that the focus should be on whether a company has explicitly or implicitly approved or endorsed the third-party information 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 information56?
To avoid potential confusion or misunderstanding about what the company’s view or opinion is with respect to the information to which the company has provided a hyperlink, the company should consider explicitly explaining the context for the hyperlink and why the hyperlink is being provided. For example, a company might explicitly endorse the hyperlinked information or suggest that the hyperlinked information supports a particular claim or view on the company’s website. Alternatively, a company might simply note that a third-party website contains information that may be of interest or of use to the reader57.
The nature and content of the hyperlinked information should also be considered in deciding how to explain the context for the hyperlink. 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. The Release provides various examples involving hyperlinks. For example, a company including a hyperlink to a news article that praises management should consider explanatory language about the source and why the company is providing the hyperlink in order to avoid the inference that the company is commenting on or even approving its accuracy, or was involved in its preparation. Conversely, the more general or broad- based the hyperlinked information is, the company may consider providing a more general explanation. For instance, if a company has a media page and simply provides hyperlinks to recent news articles, both positive and negative, about the company, the risk that a company may have liability regarding a particular article or that it endorses or approves of each one of them may be reduced. In this case, the Release advises, a title such as “Recent News Articles” may be all the explanation that a company may determine is needed to avoid being considered to have adopted the materials58.
A company may also use “exit notices” or “intermediate screens” to highlight that the hyperlink is to third-party information. While the use of “exit notices” or “intermediate screens” helps 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 information59. The Release also cautions that a disclaimer alone would be insufficient to insulate a company from responsibility for information that it makes available to investors whether through a hyperlink or otherwise. Thus, 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 hyperlink60.
The Release acknowledges 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 investors61. However, summaries or overviews which a reasonable person would not perceive as summary, and which do not provide additional information as to where more detailed information is located, could confuse or mislead investors into not realizing that such information is summarized.
In presenting information in a summary format or as part of an overview, companies should consider the context in which such information is presented. Just as with hyperlinks to third-party information, companies should consider using appropriate explanatory language to identify summary or overview information. The Release encourages companies to use the following techniques to highlight the nature of summary or overview information: (1) use of appropriate titles; (2) use of additional explanatory language; (3) use of placement of hyperlinks; and (4) use of “layered” or “tiered” format62.
Interactive Website Features
The Release also provides guidance for companies hosting or participating in blogs or electronic shareholder forums. The Release advises that since all communications made by or on behalf of a company are subject to the antifraud provisions of the federal securities laws, companies should consider implementing controls and procedures to monitor such statements on these types of electronic forums, including third party websites. Employees acting as representatives of a company should be made aware of their responsibilities in these forums, which they cannot avoid by claiming to speak in their “individual” capacities63. Furthermore, the Release reminds companies that they cannot request or require that investors waive protections under the federal securities laws as a condition to enter into or to participate in a blog or form64.
Disclosure Controls and Procedures
Postings on a company’s website may also implicate Exchange Act rules governing certification requirements relating to disclosure controls and procedures65. Under these Exchange Act rules, a company’s principal executive officer and principal financial officer must certify that: (1) they are responsible for establishing and maintaining disclosure controls and procedures; (2) that such controls and procedures have been designed to ensure that material information relating to the company is made known to them; (3) that they have evaluated the effectiveness of the disclosure controls and procedures as of the end of a reporting period; and (4) that they have disclosed in the company’s periodic report for that reporting period their conclusions about the effectiveness of those controls and procedures66.
If a company elects to satisfy such disclosure obligations by posting the information on its website, disclosure controls and procedures would apply to such information because it is information required to be disclosed by the company in Exchange Act reports. Failure to make those disclosures on the company’s website would result in an Exchange Act report being incomplete. Hence, companies must make sure that their disclosure controls and procedures are designed to address the disclosure of such information on their websites67.
Format of Information and Readability
The Release explains that the Commission does not think it necessary that information on websites should satisfy a printer friendly standard unless SEC rules explicitly require it68. For example, the Release cites the SEC’s notice and access model that requires that electronically posted proxy materials be presented in a format that is convenient for both reading and printing on paper69. All other information on a company’s website need not be available in a format comparable to paper-based information70.
This update was authored by Thomas J. Friedmann (+1 202 261 3313; email@example.com), Paul Huey-Burns (+1 202 261 3433; firstname.lastname@example.org), Robert A. Robertson (+1 949 442 6037; email@example.com), Alan Rosenblat (+1 202 261 3332; firstname.lastname@example.org), and Claudia de Alba (+1 212 649 8739; email@example.com).
1) In the Release “the term ‘company website’ and the use of the term ‘website’ in the context of companies refer to public (Internet) company sites, as distinguished from private (intranet) sites”; See Commission Guidance on the Use of Company Websites, Release No. 34-58288 (August 1, 2008); See Release at § I.A.
2) In addition to the Exchange Act, companies must also consider whether their websites may involve issues under the Securities Act, which the SEC discussed in the 2000 Electronics Release; See Use of Electronic Media, Release No. 33–7856 (Apr. 28, 2000)]. Release at § I.A.
3) The Release uses the term “company” to refer to entities that are corporations, partnerships and other types of registrants subject to the periodic reporting and antifraud provisions of the Exchange Act, including registered investment companies. See Release at § I.A.
4) Release at § I.A.
5) Progress Report of the SEC Advisory Committee on Improvements to Financial Reporting, Release No. 33- 8896 (Feb. 14, 2008) (“CIFiR Progress Report”), available at http://www.sec.gov/rules/other/2008/33-8896.pdf.
6) Securities Offering Reform, Release No. 33-8591 (Aug. 3, 2005) (“Securities Offering Reform Release”).
7) Use of Electronic Media, Release No. 33–7856 (Apr. 28, 2000) (“2000 Electronics Release”).
8) SEC Chairman Christopher Cox recently announced that the Commission is developing a successor to EDGAR, Interactive Data Electronics Applications (“IDEA”) based on a new architecture being built from the ground up, which will first supplement and then eventually replace EDGAR.. Chairman Cox stated that,. “Currently, most SEC filings are available only in government-prescribed forms through EDGAR. Investors looking for information must sift though one form at a time, and then re-keyboard the information . . . . With IDEA, investors will be able to instantly collate information from thousands of companies and forms, and create reports and analysis on the fly, in any way that they choose.” Release No. 2008-179 (Aug. 19, 2008).
9) Interactive Data to Improve Financial Reporting, Release No. 33-8924 (May 30, 2008) (“Interactive Data Proposing Release”).
10) Release at § I.A.
11) Interactive Data For Mutual Fund Risk/Return Summary, Release No. 33-8929 (June 10, 2008) (“Mutual Fund Interactive Data Proposing Release,” together with the Interactive Data Proposing Release supra note 8, the “Interactive Data Proposing Releases”); See Release at § I.A.
12) Release at § I.A.
13) Release at § I.B, infra; See also Exchange Act Section 16(a)(4)(C).
14) See 2000 Electronics Release, supra note 7; Use of Electronic Media for Delivery Purposes, Release No. 33-7233 (Oct. 6, 1995) (“1995 Electronics Release”); Use of Electronic Media by Broker-Dealers, Release No. 33-7288 (May 9, 1996) (“1996 Electronics Release”).
15) Release at § I.B.
16) Release at § I.B; e.g., Regulation G; Instruction 2 to Item 407(b)(2) of Regulation S-K; Exchange Act Rule 12d- 2(c)(2)(iii).
17) Release at § I.B; See also Securities Act Rule 172; Securities Offering Reform Release; Internet Availability of Proxy Materials, Release No. 34-55146 (Jan. 22, 2007) (“Internet Proxy Release”); Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, Release No. 33-8861 (Nov. 30, 2007).
18) Release at § I.B; See also Termination of a Foreign Private Issuer’s Registration of a Class of Securities under Section 12(g) and Duty to File Reports Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, Release No. 34-55540 (Mar. 27, 2007); See Exemption from Registration under Section 12(g) of the Securities Exchange Act of 1934 for Foreign Private Issuers, Release No. 34-57350 (Feb. 19, 2008).
19) Release at § I.B; See also Item 101(e) of Regulation S-K.
20) Release at § I.B; See Item 1(b) of Form N-1A. See also Item 1.1.d. of Form N-2 (providing a similar requirement for closed-end funds).
21) Release at § I.B; See also Form S-1, General Instruction VII.F; Form S-11, General Instruction H.6; See also Revisions to Form S-11 to Permit Historical Incorporation by Reference, Release No. 33-8909, at Section I.B.1(a) (Apr. 10, 2008).
22) Release at § I.B; See Exchange Act Section 16(a)(4)(C) and Rule 16a-3(k). See also Mandated Electronic Filing and Website Posting for Forms 3, 4 and 5, Release No. 33- 8230 (May 7, 2003).
23) Release at § I.B; See also Exchange Act Rule 12d2-2(c)(2)(iii). See also Exchange Act Rule 12d2-2(c)(3).
24) Release at § I.B; See also supra note 10.
25) Release at § I.B; See Conditions for Use of Non-GAAP Financial Measures, Release No. 33-8176 (Jan. 22, 2003).
26) Release at § I.B;See also Instruction 2 to Item 407(b)(2) of Regulation S-K.
27) Release at § I.B; See also Instruction 2 to Item 407(b)(2) of Regulation S-K.
28) Release at § I.B; See also Item 406(d) of Regulation S-K; Item 5.05(c) of Form 8-K.
29)Release at § I.B; See also Instruction to Item 407(b)(2) of Regulation S-K.
30) Release at § I.B.
31) “Regulation FD applies to closed-end investment companies but does not apply to other investment companies. Exchange Act Rule 101(b) (definition of issuer for purposes of Regulation FD)”; See Release at § II.A.
32) Release at § II.A.1.
35) According to the Release, “Push technology, or server push, describes a type of Internet-based communication where the request for the transmission of information originates with the publisher or central server. It is contrasted with pull technology, where the request for the transmission of information originates with the receiver or client”; See Release at § II.A.1.
36) Release at § II.A.1.
38) Release at § II.A.1; See also Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2d 833, 854 (2d Cir. 1968).
39) Release at § II.A.2; See also Rules 100(a) and 101(e) of Regulation FD.
40) Release at § II.A.2; See also Rule 101(e)(2) of Regulation FD.
41) Release at § 11.A.2.
42) For purposes of Regulation FD, the Release cautions that “a posting on a blog, by or on behalf of the company, would be treated the same as any other posting on a company's website. The company would have to consider the factors outlined above to determine if the blog posting could be considered ‘public,’” See Release at § II.A.2.
43) Release at § II.A.2.
44) Release at § II.B; See also 1995 Electronics Release, supra note 12; 1996 Electronics Release, supra note 12; 2000 Electronics Release, supra note 12.
45) Release at § II.B; See also 2000 Electronics Release, supra note 7. 46) Release at § II.B; See also 2000 Electronics Release, supra note 7.
47) Release at § II.B; See also 2000 Electronics Release, supra note 7.
48) Release at § II.B
50) Release at § II.B.1; See also 2000 Electronics Release, supra note 7.
51) Release at § II.B.1
52) Release at § II.B.1; See also Securities Offering Reform Release, supra note 6.
53) Release at § II.B.1.
55) Release at § II.B.2; See also 2000 Electronics Release,supra note 7.
56) Release at § II.B.2
58) Release at § II.B.2; See also Section 206(4) of the Advisers Act; Rule 206(4)-1(a)(1).
59) Release at § II.B.2
60) Release at § II.B.2
61) Release at § II.B.3
62) Release at § II.B.4
63) Release at § II.B.4
64) Release at § II.B.4; See also Securities Act Section 14; Exchange Act Section 29(a); Section 47(a) of the Investment Company Act of 1940 (“Investment Company Act”) and Section 215(a) of the Advisers Act.
65) Release at § II.C; See also Exchange Act Rules 13a-15(e) and 15d-15(e) and Investment Company Act Rule 30a- 3(c).
66) Release at § II.C; See also Exchange Act Rules 13a-15(e) and 15d-14(a); Item 601(b)(31)(i) of Regulation S-K; and Investment Company Act Rule 30a-2(a).
67) Release at § II.C
68) Release at § II.D
69) Release at § II.D; See also Exchanger Act Rule 14a-16(c); Intranet Proxy Release, supra note 16.
70) Release at § II.D; See also 1996 Electronic Release, supra note 13; Interactive Data Proposing Releases, supra note 10.