Nasdaq’s IR services conflicts in the spotlight

By Dominic Jones

SIX weeks ago, I said Nasdaq should be forced to sell its press release and website hosting subsidiaries because they create an unacceptable conflict of interest between the exchange’s business interests and its role as a regulator.

You can see my original comments in Nasdaq should get out of press release, website business.

Interestingly, Nasdaq’s inherent conflict of interest has now become a central issue in the ongoing regulatory dust-up over the exchange’s plans to offer services that help issuers comply with listing requirements and SEC rules.

Buffett’s Business Wire calls for forced sale of PrimeNewsWire

Business Wire, owned by Warren Buffett’s Berkshire Hathaway, has told the SEC that it “strongly believes that Nasdaq can and should be required to sell PrimeNewsWire.”

Alternatively, it says, the exchange should “at minimum be ordered to operate PrimeNewsWire on a strict arms-length basis.”

Business Wire’s letter to the SEC came after Nasdaq amended its proposal to the SEC to remove reference to news releases, webcasts, SEC filings, document conversions and insurance services as being part of companies’ listing fees. The exchange also asked the SEC to hurry up its approval of the proposed fee increases.

In a letter to the SEC, Nasdaq’s General Counsel Edward S. Knight said the investor communication services “will not be offered in connection with a Nasdaq listing and do not serve as a justification for the proposed fee increase.”

However, in a footnote Nasdaq revealed that it will still offer the relevant services free to Nasdaq-listed companies “and companies listed on other U.S. securities exchanges that complete a registration process and meet with a Nasdaq representative.”

Nasdaq questions SEC’s jurisdiction

Did you get that? They’re still going to do what they all along said they would — only now they’re not asking for the SEC’s permission. Their argument seems to be that the investor communication services are from “businesses that are not regulated by the Commission” and so the SEC has no authority over them.

Not so, says Business Wire’s lawyers Holme Roberts & Ownen LLP and Baker Botts LLP. In a particularly strong argument, they say Nasdaq has shown “disregard for the Commission” and has “serially sought to avoid the Commission’s authority and scrutiny.”

They say Nasdaq should have consulted the SEC before buying PrimeZone newswire, but didn’t. And they accuse the exchange of now trying to keep the SEC from reviewing the issue of whether the exchange has any business owning a wire service in the first place.

“Insuperable conflict of interest”

Nasdaq’s request for expedited approval is “a further effort to avoid having the Commission consider the most fundamental issue of all — whether an SRO like Nasdaq can reasonably be permitted to use the self-regulatory power that it has over its listed companies in support of its efforts to sell them additional services.”

Business Wire says “allowing Nasdaq to sell ancillary services at all creates an insuperable conflict of interest between its role overseeing its listed companies and its role in selling them ancillary services.”

Nasdaq would have the ability and the incentive to “skew” its disclosure requirements and resources to maximize its own profits to the detriment of the securities markets. And they say Nasdaq’s unique position and power over listed companies “would significantly distort competition in the market for information dissemination services.”

In its comment letter to the SEC, Nasdaq said that since it was removing reference to the investor communication services from its proposal, it “believes it is not necessary to address the merits of the comments objecting to Nasdaq providing these services.”

Nasdaq blames Reg. FD, so let’s update it

Nasdaq says it’s “important to note” that its rules permit companies to disseminate information in any “Regulation FD compliant manner.” In other words, they’re simply enforcing the SEC’s own rules. If any conflict is created, it’s due to Regulation FD.

Good point. Let’s reform Reg. FD while we’re at it. If the SEC made it clear that companies can use alternative and freely available website technologies to meet their Reg. FD obligations, then most probably wouldn’t use newswires. Together, they would save millions of dollars in unnecessary expense annually.

As I’ve reported, Chairman Christopher Cox has said the SEC is continuing to look at the Reg. FD requirements. This issue gives that review added importance and urgency.

Shareholder.com also an issue

Unfortunately for Nasdaq, even if the SEC does allow companies to use their websites for disclosure under Reg. FD, not only will the exchange own a significantly devalued asset in its newswire service, but it will continue to have an ongoing conflict of interest through its ownership of Shareholder.com, a company that hosts issuers’ investor relations websites.

Through its ownership of Shareholder.com, Nasdaq has an institutional bias, to borrow a phrase from Business Wire’s lawyers, towards Shareholder.com’s technology, irrespective of whether it is the best option for investors or issuers.

As I’ve written most recently here, Shareholder.com’s practices are inconsistent with best practice — and even the SEC’s own thinking on website disclosures.

Either way, it doesn’t look good for Nasdaq. If the SEC decides it does indeed have the authority to look into Nasdaq’s investor communications businesses, or if it decides to update Reg. FD, the exchange seems to be in a lose-lose position.

Someone tell me again why it was such a good idea for Nasdaq to get into the investor communications business.

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