With e-proxy, SEC signals it gets the Web

THE US Securities and Exchange Commission (SEC) today voted to let companies move to default Internet delivery of annual shareholder documents.

Stressing that investors can still ask for free paper documents under its voluntary “e-proxy” process, commissioners voted 5-0 to allow companies to ditch bulk mailings of proxy materials and move to a “notice and access” Internet delivery model.

According to some estimates, default electronic delivery could save companies a combined $1 billion in printing and mailing costs each year. It could also reduce landfill waste, save fuel and prevent 800,000 trees being cut down.

While the rule is voluntary for companies, the commissioners also voted unanimously to propose making it mandatory for all companies. That would start with large companies as early as the 2008 proxy season and smaller companies a year later.

Under the voluntary rule approved today, companies can publish their proxy statements and annual reports on their websites and then send a plain English notice to shareholders telling them how to access the information online.

The notice, which must be sent at least 40 days before the meeting, also has to explain to shareholders how to order paper versions if they want them. The company must mail the materials within three business days after receiving a request from a shareholder.

Shareholders will only have to indicate their preference for printed reports once rather than for each mailing as initially proposed. Many shareholders will be able to opt in once to receive printed materials indefinitely for all of their holdings.

The strong emphasis on making it easy for investors to continue receiving print mailings is a response to seniors and civil rights groups who complained that the plan would disadvantage older, rural and minority investors who are less likely to have Internet access.

Formats, privacy and hyperlinks

The SEC has yet to post the full release on its website, but remarks made by the commissioners and Chairman Christopher Cox indicate that the SEC is paying attention to the usability and communication challenges of online disclosure.

In thinking that goes against current convention, Chairman Cox said today that one of the benefits of Internet disclosure was the ability for companies to link their disclosure to third-party websites that can help interpret the information for retail investors.

We’ve been saying that for a long time, but it’s a surprising statement coming from the SEC chairman given that regulators have previously discouraged companies from linking to third-party websites by placing all manner of complicated requirements on them. The SEC’s guidance for hyperlinks does not specifically outlaw them, but it doesn’t encourage them either.

Today’s meeting also suggested that the SEC will require companies to meet specific format and privacy standards when posting their shareholder materials online.

That would appear to be a significant step forward and the first acknowledgement by a regulator that Web usability and privacy are important regulatory issues to consider as corporate disclosure moves into the digital age. IR Web Report’s research has repeatedly found that most companies are failing to take advantage of the Internet’s interactivity to enhance communication with their shareholders.

The references to safeguarding investor privacy are interesting because they come at a time when vendors and companies are increasingly using web surveillance techniques to keep tabs on what investors are doing on their websites. The information collected includes personally identifiable information that shareholders may provide without fully understanding how it will be used.

The Nasdaq-owned corporate website developer Shareholder.com is the most prominent user of investor relations website surveillance technology. More than 100 companies are currently using Shareholder.com’s platform.

During the open meeting, at least two commissioners struck a note of caution saying the SEC should monitor the voluntary rule’s impact on shareholder participation in annual meetings and on issuer costs.

The voluntary e-proxy rule will only come into effect after July 1, 2007 to allow intermediaries like brokerage firms, transfer agents and fulfillment firms to prepare to handle the new requirements.

Related: SEC’s press release on the e-proxy rule

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