NASDAQ pushes firms to flout SEC web privacy rules

NASDAQ is pushing its listed companies to flout recently approved rules that bar them from tracking investors’ personal activity on websites hosting annual meeting materials under the e-proxy provisions.

In a controversial proposal awaiting regulatory approval, the NASDAQ Stock Market, Inc. wants to bundle a number of shareholder communication services into the annual listing fees it charges its listed companies.

One of those services is converting listed companies’ annual reports and proxy statements into so-called electronic “Dynamic Documents,” a service provided by NASDAQ subsidiary Shareholder.com

However, companies should avoid using NASDAQ’s Dynamic Documents because the product’s investor tracking features conflict with the U.S. Securities and Exchange Commission’s (SEC) recently approved e-proxy rules. The product, and similar ones provided by many other vendors, also suffer from severe usability flaws that have been criticized by usability experts.

Conflict with SEC rules on electronic anonymity

According to a promotion for its Dynamic Annual Report on its website (see screenshot below), Shareholder.com is pitching its product as a way for companies to “get new intelligence about shareholders as they research your company!”

The promotion further states that its Dynamic Annual Reports allow companies to “monitor and report exactly, page-by-page, the topics that are most important to your shareholders as well as which keywords and phrases investors and analysts are researching.”

Shareholder.com further states that its product will help companies “identify investors and their interests.”

This is the promotion for Shareholder.com’s Dynamic Annual Report service as it appeared on the company’s website on January 14, 2007.

On the same page, the company provides an example “individual website activity” page from its Pinpoint Intelligence web tracking product (see screenshot below). This shows the website activity for a single analyst — Bradley Flynn of Morgan Stanley, presumably fictitious.

However, under its e-proxy rule, approved by the commissioners on December 13, 2006, the SEC explicitly bars companies from tracking the personal website activity of investors. And while the e-proxy rule is voluntary and only takes effect after July 1, 2007, there is no disputing where the SEC stands on web tracking that infringes on investors’ anonymity.

This is an example report on an individual analyst’s website activity using Shareholder.com’s Pinpoint Intelligence and Web Centre/360 content management system. It shows activity — date, time and pages viewed — for a presumably fictitious Morgan Stanley analyst. This example was provided on Shareholder.com’s website on January 14, 2007.

At the open meeting where commissioners adopted the rule, Commissioner Roel C. Campos said the new rules “explicitly state that companies and their intermediaries must maintain websites in a manner that does not infringe on the anonymity of shareholders who visit the website.”

In her remarks, Commissioner Annette L. Nazareth also drew attention to the privacy provisions of the e-proxy rules. She said the rules “will require that the website posting the proxy material be maintained in a way that does not infringe on the anonymity of any shareholder accessing the website.”

Over 100 firms secretly logging investors’ movements

Now we should point out that personalized tracking is probably only possible on company websites hosted by Shareholder.com’s Web Center/360 platform. According to a company news release over 100 companies use that platform. They include companies like JPMorgan Chase & Co, Palm Inc., Verisign Inc., QUALCOMM Inc., The Western Union Co., Zimmer Holdings, Questar, Netflix inc. and NASDAQ itself.

These sites employ an advanced tracking system that uses cookies to secretly keep track of investors by name after they register for any of several services on companies’ websites, including webcasts of conference calls. Once they register, the user’s name is captured in a cookie, which is then used to log their movements on the company’s site.

Companies can call up any site user’s profile in future to see exactly what they have done on companies’ sites. None of the tracking is typically disclosed to investors. However, such tracking on websites hosting proxy materials is illegal under the SEC’s e-proxy rule.

A multitude of usability flaws

The problems with Shareholder.com’s Dynamic Documents extend far beyond the breaching of shareholder anonymity. Their documents and similar ones provided by a wide range of vendors — Thomson Financial, PrecisionIR, Investis, IR Solutions, ADP and others — are unfit for investor disclosure due to a multitude of usability flaws.

They have long been criticized by usability experts, including the world’s foremost authority on web usability, Dr. Jakob Nielsen, who the New York Times once labeled the “guru of web page usability.” We at IR Web Report have chronicled 10 problems with Shareholder.com’s product and others similar to it starting as far back as 2003.

The main problem with these annual report and proxy conversions stem from the fact that the pages, including the text, are rendered online as photographs or images. This results in several major usability problems for investors, analysts and journalists.

The problems include fuzzy text that is hard to read and an inability to copy and paste text from the documents, something many people, including the growing ranks of bloggers, have reason to do almost every day.

Companies, which often are drawn to image-based documents because they are cheap and easy to produce, need to realize that there are no shortcuts to producing usable online annual reports and proxy statements.

The right thing to do is to convert your document to a navigable, searchable custom HTML annual report. That takes proper planning and a bit more money. But the benefits far outweigh the effort for both investors and companies, particularly as new rules enable firms to cut their printing costs by moving to default web delivery.

Fooled by marketing spin

So why are companies still so confused about this? Why do they continue to post reports with such poor usability on their websites?

Aggressive marketing by vendors is a major reason. Companies are often fooled into thinking that the products they are buying are actually HTML documents.

Let’s be clear about this. Dynamic Documents and other image-based products are not HTML annual reports. I see quite a few companies labeling them as such and that’s wrong. Image-based documents are low-rent rubbish compared to proper HTML, and no investor deserves to be served them.

Image-based report vendors often trumpet a variety of features of their image-based documents. Shareholder.com, for instance, has the following “features” listed:

• Easy navigation including keyword search and sectional Table-of-Contents

Actually, navigation is pathetic. Often it’s via a drop-down menu, “forward” and “back” arrows, or it’s crammed into a tiny frame on the left of the page that you have to scroll down to see all your options. The Table-of-Contents is fine, but you can do the same thing in a proper HTML document.

• Maintains your printed report’s aesthetics and brand continuity while adding many new capabilities

This is not a good thing. Web pages and printed pages require different designs and layouts. Anyone with any web experience knows this. Since the image-based document is an exact replica of the printed document, you end up with pages filled with useless marketing images, oversized pages that require horizontal scrolling or blurry multi-column text that you can’t read with a single scroll.

• Small file size for Internet distribution

Actually, all they’re doing in most cases is sending you the front cover via email. Sometimes the entire report is compressed and delivered where it can be saved to a user’s desktop. Now I ask you, how many people do you know who keep companies’ annual reports on their computers when they can just go online for them? I thought so. This is not a meaningful feature.

• Easy navigation including keyword search and drop-down table of contents

We’ve dealt with this already, but they repeat it, so once again I’ll reiterate that navigation on these things is pathetic.

• Flexible printing by page, section or entire report

This is not a feature exclusive to image-based documents. You can do this with HTML annual report and even PDF documents.

• Download Excel spreadsheets

Again, not a feature exclusive to image-based documents. A proper HTML document would have Excel downloads.

• “Go live” in just 5 business days!

Ah, but that’s five days later than if you produce a proper HTML annual report. You see, with image-based reports, you design the printed report and when that’s done you provide Shareholder.com with a PDF. It’s five business days more from there.

With properly produced HTML annual reports, you design the HTML report and the printed report at the same time. The online report is ready at the same time as the printed document. It’s just takes a slightly different approach. This is important to think about when reporting deadlines are shrinking.

And one more thing…

I am sick of writing about why image-based reports are bad. It’s frustrating to do it one, two, three, four, five, six, seven, eight, nine times over the past few years and still see vendors pushing them and companies using them.

I’m equally frustrated with writing about the wrongs of personal tracking on IR websites, which I’ve done 13, 14, 15 times since March 2006.

There comes a time when something that is wrong in your profession needs to be called out. It doesn’t matter who is doing wrong, how many, or who stands to lose the most. What matters is that when we recognize something is wrong, we don’t just turn a blind eye — we do something about it.

Violating investors’ anonymity on IR websites is wrong. We didn’t need the SEC to say so, but the IR profession in the form of its associations and even the trade media have been silent about it.

Image-based documents are an abomination that have no place on IR websites of IR practitioners who care about transparency. It’s high time the IR profession denounced them and did the right thing and produced online documents that investors can easily use.

You can help by refusing to buy these products and by informing others why they should follow your example. Give them this article or email it to them using the “save/share it” link below.

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