Risk & Compliance

Put Up or Shut Up

To comply with Regulation FD, corporate officers are starting to post company news on the Web. But Reg FD has so spooked some corporate officers th...
Randy MyersApril 15, 2001

In theory, it is possible for managers at a public company to ignore the Internet and still comply with the Securities and Exchange Commission’s (www.sec.gov) new standards for disclosing corporate information. It’s also possible that Bob Denver will be named patron saint of Uzbekistan, but it’s not likely.

Regulation Fair Disclosure, which took effect in October, works like this: Companies are forbidden to selectively disclose material nonpublic information to investment professionals or to shareholders who might reasonably be expected to trade on that information. Reg FD makes it illegal, for instance, for companies to give an individual analyst guidance on earnings estimates or to share sales trends with institutional shareholders in a closed quarterly conference call.

Certainly, the idea behind Reg FD is noble: Encourage an open airing of corporate information, and thereby reduce the influence analysts and portfolio managers exert on share prices. But a funny thing’s happened on the way to the forum. Reg FD has so spooked some corporate officers that they’ve shied away from practically any informal contact with analysts.

Says George Zouvelos, managing principal of the New York office of media, marketing, and branding specialist The Weiser Group (www.weisergroup.com): “Reg FD has made it impossible for a company to have a meaningful private conversation with an analyst or institutional investor about matters that have not previously been disclosed publicly.”

Indeed, managers at more than half the companies polled in a recent survey indicated they’re now funneling less information to buy- and sell- side analysts or being more cautious in their dealings with those analysts. Moreover, a number of the respondents in the study, which was conducted by Thomson Financial/Carson Global Consulting (www.thomsonfinancialcarson .com) said they would decline to participate in analyst conferences if they weren’t allowed to beam the proceedings over the Internet.

They’re not alone. With the coming of Reg FD, Webcasting is fast becoming SOP at many corporations. Thomson Financial/Carson Global reports that more than one-third of the 81 publicly traded corporations it surveyed began broadcasting their earnings conference calls over the Net following the adoption of the SEC’s new disclosure requirement. More than 30 percent of the companies have also implemented live Webcasting of their presentations at investment banking conferences.

Here’s the kicker. This increasing IR reliance on IP technology worries some IT experts. The Internet is a wonderful medium, they grant, but conducting investor relations in cyberspace can be nettlesome. Posting corporate information on a home page, for example, may help satisfy certain requirements of Reg FD, but it also makes for a whole lot of editing, updating, and reviewing of content. The more material information that goes up on a site, the tougher the task becomes. Even veteran operators of online news sites — sites that specialize in managing content, mind you — admit the difficulties of keeping Web data current and consistent.

The cold truth is that venturing into space in the name of better corporate disclosure opens up businesses to a whole new world of risk. A simple hyperlink on a home page can extend a company’s liability clear across cyberspace. Says Bill Paulson, vice president of strategic consulting at Trigent Software Inc. (www.trigent.com), a Web-site content management specialist: “The SEC indicates that — depending on the content of the link — the risk of investor confusion and the presentation of the hyperlinked information is in your [company’s] jurisdiction.”

Gun Jumpers

Ironically, in their final ruling on Reg FD, officials at the SEC made it crystal clear that posting investor information on a company Web site is not in itself an acceptable method of public disclosure. Instead, the commission included Webcasting as one option in a three-step model for complying with the new standard.

The model calls for a company to first issue a press release disclosing material information. Then the company must provide notice, either by press release or Net posting, that management will hold a traditional conference call to discuss the announcement. When the call is actually held, investors must be invited to listen in, either by telephone or through simultaneous Webcast.

Given this time line, securities lawyers are advising corporate clients to post breaking news on their Web sites only after disseminating the information by other SEC-approved methods, which includes filing Form 8- K with the commission or issuing a widely disseminated, nonexclusionary press release.

Frank Forward, CFO at BJ’s Wholesale Club Inc. (www.bjswholesale.com), an operator of membership warehouse clubs, says the company began Webcasting its quarterly conference calls well before Reg FD was rolled out. But Forward notes that with the implementation of the new standard, BJ’s management decided to ratchet up the publicizing of its conference calls.

The Natick, Massachusetts-based company now includes notice of the date and time of a conference call in monthly sales press releases immediately prior to a call. The retailer also continues to send out advance E- mail notices of its Webcasts to anybody who asks to receive them, and it posts notices of upcoming conference calls on the company Web site.

Other companies appear to be following suit. According to Rob Gruner, president of IR communications services consultant Shareholder.com (www.shareholder.com), the volume of E-mail transmissions made by the company’s clients to disseminate corporate information has tripled since mid-year 2000.

Of course, sending out E-mails is relatively straightforward. Managing the swell of material information put up on a company’s Web site is a fair bit trickier. Trigent’s Paulson says that corporate officers must make sure investor news posted on the company Web page does not contradict data found elsewhere on the site. That involves a ton of content management. In addition, Paulson warns that any press release that remains in cyberspace too long may become outdated — and thus misleading. The SEC tends to take a dim view of misleading.

IR experts also worry that, in the zeal to satisfy Reg FD, some IR employees may jump the gun completely. Unsettling scenario #1: Eager to comply with the new rule, an IR staffer hand-posts breaking news on a Web site before sending out press releases and 8-Ks. Unsettling scenario #2: Due to a miscommunication, an outside PR firm accidentally posts confidential corporate information on the client’s Web site, for all the world to see.

Unfettered Vetters

Unlikely? Last year, one E-tailer mistakenly E- mailed customer credit card numbers to a competitor. To avoid Reg FD snafus, consultants recommend that corporate managers develop a cohesive strategy for disclosing material information.

Some are already headed in that direction. According to the Thomson Financial/Carson Global survey of publicly traded companies, nearly a quarter of the respondents said they had instituted a formal disclosure policy with the coming of Reg FD. Investor relations specialists believe such a policy should include establishing unfettered communications among the vetters of corporate information (lawyers and senior managers) and the generators of the information (finance employees, IR managers, and outside public relations specialists).

Amit Kothari knows all about this web of Web disclosers. Kothari, interim CFO and vice president-corporate controller at car E-tailer Autobytel.com (www.autobytel.com), says the SEC’s new standard has reinforced the importance of a rigorous protocol for disseminating material corporate news. “We have developed a very close and tight process with our investor relations staff and our outside public relations firm,” explains Kothari. “We need to ensure that when they push the button to disseminate a press release for us, we are prepared to put it on our Web site.”

Some attorneys suggest that once the button is pushed, companies keep all investor- relations materials in a single designated area on a Web site. Scattering IR information across a company’s various pages, they note, makes content management exponentially harder.

Jonathan Wolfman, a partner in the Boston office of law firm Hale & Dorr (www.haledorr.com), also counsels corporate clients to perform technical reviews of their home pages to make sure the sites are capable of handling increased levels of access by the investment community. If a business relies on an outside firm to oversee its virtual IR, Wolfman still suggests the company maintain an in-house system for posting materials to the Web. The backup, he says, could come in handy if the outside firm experiences technical problems.

Autobytel.com has drawn up a very detailed blueprint for posting corporate information. The process starts with one of two employees — either the company’s investor relations manager or the director of public relations. When one of the executives decides (in consultation with other senior managers and legal counsel) that information must be posted or updated, he or she sends it to members of the company’s Web Council. The 10-member council includes top executives charged with ensuring the accuracy and functionality of the site. Any release pertaining to financial matters is also looked at by the company’s accounting department and reviewed by Kothari.

After receiving approval by the Web Council, one Autobytel.com worker — and only one — is authorized to post information to the company’s Web page (and then only upon final authorization from the company’s in- house legal counsel). The employee charged with this responsibility sits on the Web Council. In the event that the authorized employee is not at work, Autobytel.com’s Webmaster assumes the responsibility for putting up new information.

Hot Links

Autobytel.com’s managers have good reason for such attention to detail. According to corporate securities attorney David Washburn, a partner in the Dallas office of Arter & Hadden (www.arterhadden.com), failure to comply with Reg FD on a Web site carries the same potential liability as failure to comply in other types of communications activities.

Reg FD does not, however, create a new duty for purposes of Rule 10b-5, which prohibits companies and their officers and directors from making untrue statements, omitting material information in their disclosures, or engaging in other fraudulent activities. Most shareholder lawsuits stem from allegations that companies have failed to comply with Rule 10b-5.

Nevertheless, violators of Reg FD could be subject to an SEC enforcement action, an SEC administrative action seeking a cease and desist order, or even an SEC civil action seeking an injunction and/or civil penalties. What’s more, the commission has warned that if a company Web page contains hyperlinks to other sites, especially in SEC documents, the company may be liable for information contained in those outside sites.

To mitigate the risk, Hale & Dorr’s Wolfman suggests that a company include a clear and prominent statement on its Web page indicating that any third- party information found on a linked site is not provided by the company. For maximum wallop, he advises that such a disclaimer be placed on an intermediate screen that viewers see en route to an external, hyperlinked site.

As of press time, the SEC had not taken action against any company for violating Regulation Fair Disclosure. But officials at the commission appear to be acutely aware of the Net’s burgeoning role in investor relations. The SEC’s Office of Internet Enforcement, formed in July 1998, now employs more than 200 attorneys, accountants, and investigators — all devoted to Internet surveillance. And while Reg FD concerns itself with the timing and reach of corporate disclosure rather than the content itself, it clearly places large new responsibilities on corporate use of the Internet.

Despite the potential snares and pitfalls, some investor relations experts believe the opportunities of virtual IR far outweigh the risks. “The best way for CFOs to provide guidance to the market,” insists The Weiser Group’s Zouvelos, “is to proactively put the information out there themselves. That means on their Web sites.”

Randy Myers is a contributing editor at eCFO.

Things to Do in Space

eCFO asked investor relations experts, public relations consultants, and attorneys what advice they give corporate clients eager to comply with SEC standards for virtual disclosure. Here’s what they said.

  • Army of One. Appoint exactly one employee to review and approve all materials before posting. Make sure that employee is well versed in company policy, as well as in the legal rules regarding public disclosure.
  • Short Shelf Life. Date all materials posted. Routinely update or delete outdated information. If you save older information in a Web archive, post a disclaimer about the timeliness and accuracy of those documents.
  • No State Secrets. Refrain from placing confidential information on your Web site. Make sure your PR firm refrains, too.
  • Keep a Lid On. Avoid hyperbole or excessively optimistic statements on your site — just as you would in a press release.
  • Full Safe Harbor. If you virtually publish the transcript of a conference call or other oral presentation, be sure the transcript is preceded by the appropriate safe-harbor language in its entirety. Referring visitors to a place where they can read the warning in full won’t cut it.
  • Safe Harbor Redux. Some attorneys have taken an even more conservative approach to this issue. They advise clients to record their conference calls, to post an audio copy on their Web sites — and to forget about transcripts.
  • Cell Side. In Europe, where wireless is all the rage, consider making all your material information accessible via wireless application protocol-enabled browsers.
  • Fair Is Very Good. If you list securities analysts who publish reports on your company, show no favoritism. List them in alphabetical order, using the same font, size, and color for each. Reserving 64-point type for analysts who have issued glowing comments about your company is both childish and chicken — and could draw the ire of the SEC.


Vim Vendors

Officially, the SEC has stated that the Internet is just one part of an overall corporate disclosure program. But considering the wholesale embracing of the Net by IR departments, it’s pretty easy to imagine the day when almost all investor relations are conducted over the Internet.

This is not to say that virtual IR is easy. For many companies, running a Web-based investor relations program is terra incognita. Not surprisingly, a number of consultants and vendors now offer products and services to help companies cope with cyber-disclosure.

Trigent Software, an application developer and integrator, helps businesses manage IR protocols and Web-site content. Toward that end, the Southborough, Massachusetts-based company deploys programs developed by several content management vendors, including Intranet Solutions (www.intranetsol.com) and Eprise Corp. (www.eprise.com). One nifty feature of the Eprise application: templates that help authors of Web-bound materials create Web pages, or modify them, without being versed in HTML (hypertext markup language). This frees the company’s Web developers from wasting time translating the work of those authors into HTML. This, in turn, reduces the possibility of introducing errors into the material.

Other vendors offer a range of Web-enabled IR packages. Shareholder.com, for one, provides full-service investor relations outsourcing. The cost of using Shareholder.com’s services is relatively cheap. For a small to midsize company, in which the CFO provides IR functions directly, the total package — including E-mail, Webcasting, and the creation of a complete IR Web site — typically runs from about $800 to $3,000 per month. Rob Gruner, president of Shareholder.com, claims costs for larger companies aren’t dramatically higher, since the services are scalable.

Scalable is good. In fact, even with the risks, Net-based disclosure has plenty of pluses. “The beauty of using the Web rather than the telephone is that you can have many more people listening at a much lower cost,” says Jeff Zilka, managing principal for the mergers and acquisitions practice at The Weiser Group. “You can also simultaneously post visuals on your Web site, such as a slide show. That’s something you couldn’t make available over the telephone.” —RM