By Dominic Jones
PROPONENTS of changing the information distribution requirements of Regulation Fair Disclosure (Reg. FD) say the world is ready to receive disclosures direct via companies’ websites rather than via intermediaries like news release distributors.
As evidence, they point to widespread adoption of the Internet and email by investors, plus the availability of new highly economical syndication technologies like RSS and Atom feeds.
However, while the U.S. Securities and Exchange Commission (SEC) continues to look into the merits of allowing companies to use their websites to meet all of their Reg. FD obligations, news release services are attacking Web technologies as being inadequate to ensure fair disclosure.
In public comments and blog posts, senior executives from both PR Newswire and Business Wire argue that corporate website postings and distribution of news via email and RSS cannot ensure a level playing field between investors.
They claim the Web is a poor substitute for what their proprietary technologies do, which is to push companies’ news down patented near real-time feeds to newsrooms, trading desks and websites, for a fee.
With rich revenues at stake, wires attack the Web
If the SEC agrees that websites can satisfy its requirements for “broad, non-exclusionary distribution,” the wire services could lose hundreds of millions in revenues annually. Not surprisingly, the newswire services want to preserve their privileged disclosure business.
They have been loud and persistent in their opposition ever since SEC Chairman Christopher Cox invited Sun Microsystems CEO Jonathan Schwartz to provide suggestions on how currently available Web technologies could meet the SEC’s requirements.
First out of the gate was PR Newswire’s Managing Director of Investor Relations Mark Hynes. In a blog post last November, he listed 10 reasons why website postings alone could not meet the demands of securities disclosure and why newswires were the best and only option.
Personally, I think each of Hynes’ points is invalid. However, Sun Microsystems’ Tim Bray has already provided a detailed counterargument to each of Hynes’ criticisms, so I won’t add unnecessary detail here. Best you read Bray’s analysis for yourself.
The “simultaneity” red herring
However, I do want to zero in on one point Hynes made, and which Bray concedes is the “single best point” from those opposed to removing the newswire requirements from FD.
That point is what Hynes refers to as “simultaneity” — the idea that newswires push information out to all investors at the same time so no one can trade and profit ahead of the others. He says “this would be impossible for companies to achieve.”
This is exactly the same point that Business Wire CIO Steve Messick made today. In a blog post, he says the feed technologies that companies are using — RSS and Atom — do not meet fair disclosure requirements. His argument is that Reg. FD requires simultaneous distribution of information, not just “broad, non-exclusionary distribution,” and RSS as a poll-pull technology cannot do that.
While he is correct in his characterization of RSS and Atom, Messick is wrong about what Reg. FD requires and he is making far too much of the need for ultra-low-latency push distribution.
The fact is, absent embedding microchips in traders’ molars, there really is no such thing as simultaneous distribution to all. Traders’ systems may all receive the information at near the same time, but they don’t all pay attention and process it at the same time.
Furthermore, seconds and milliseconds only matter if you can trade on the information. But most material releases are issued either before the markets open or after they close, so the information cannot be traded on anyway.
And when material information is issued during trading hours, exchanges have a mechanism to ensure that no one is disadvantaged. It’s called a trading halt, and it has worked remarkably well over the years. For all practical purposes, milliseconds are meaningless to real investors.
Milliseconds really only matter to a small portion of the investment audience that relies on computers rather than humans to do their trading. Reg. FD wasn’t designed for day-traders and program trading. It was created for investors, retail investors specifically.
People who want news feeds with sub-second latency are well-heeled traders and hedge fund managers, not mainstream investors trying to fund their retirements. People who need millisecond delivery can surely afford to pay for dedicated feeds. Making companies foot the bill so these privileged few can make short-term bets in effect makes all shareholders subsidize the profits of a few short-term traders.
Actually, this whole issue of network latency is a red herring, a theoretical problem and nothing more than a distraction. It is not an issue for retail investors, who were and are the intended beneficiaries of Reg. FD. As long as material information is not given selectively to any one group, retail investors are being treated fairly.
Web disclosure will improve upon Reg. FD requirements
It seems clear to me that Regulation FD was never intended to force companies to pay to distribute information to market pros via closed proprietary networks, or to be a license for PR wire services to print money. Indeed, companies currently don’t have to use wire services to distribute information under Reg. FD in all circumstances.
They can meet their obligations by filing an 8-K with the SEC. Filing an 8-K clearly doesn’t qualify as distributing information to all points at the same time as newswire services understand it. It only provides broad, non-exclusionary access to all at the same time. Interestingly, there’s no requirement that companies notify investors they’ve filed an 8-K. It’s apparently assumed that anyone who cares will know where to look.
In other words, the process and standards proposed recently by Sun Microsystems CEO Jonathan Schwartz will improve upon what the SEC already permits. Rather than having to go to the SEC website to get the 8-K, they will get it via an RSS or Atom feed (or instant message or email). Alternatively, they can go to a company’s website to retrieve the information.
The SEC sponsored a consultation six years ago that reached the conclusion that Web-based disclosure was ready for Prime Time and that news release services were not necessary. We are even more ready for Web disclosure now.
By giving companies the option to use RSS, email alerts, standards-based website postings and advance notifications of release dates, the SEC will save money for companies and their shareholders.
It will also encourage companies to invest in their websites and strengthen their communications capabilities to the benefit of all investors. This will further level access between mainstream investors and Wall Street insiders.
To be perfectly clear, our research of investor relations website practices shows that relatively few companies are ready to use their websites for Reg. FD disclosure, so newswires probably have little to worry about in the near-term. However, those companies that are ready shouldn’t be held back.
Thank you for adding your voice to the debate – I’m obviously partial to the belief that web based disclosure improves access for retail investors, and increases the transparency with which we operate businesses on their behalf. Witness that we’re having this debate in front of investors, rather than in a smoke filled room.
Jonathan,
Thanks for pushing for this, and doing so openly. I support anything that will prompt companies to recognize the Web’s potential to build a dialogue between themselves and their owners and other stakeholders. Sun’s proposals to the SEC are a big step in that direction because they will help to focus companies’ attention on effective Web-based communication. A lot of good can come from that.
[...] More conversation has happened around this topic including PR Newswire and Business Wire contributions. Here’s a great recap as of 2/07. Most recently Business Wire’s CIO recently wrote at length why he thinks RSS fails the Reg FD test. And Dominic Jones continues his point that companies should not be required to use (pay) newswires to fulfill Reg FD. Schwartz has another post on the topic which includes further communication with chairman Cox. [...]
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[...] the new guidance corporate websites or blogs can now be the sole means of disclosure. The SEC began studying the issue in late 2006 after Sun Microsystems CEO Jonathan Schwartz called the news release requirements an [...]
Wire releases may or may not be required but to say that filing a document at the SEC is the same is also very mis-leading.
Imagine the world without the many FREE investor tracking websites. This information is provided to hundreds of thousands of investors world wide at no cost. Remove the wire fees and the majority of investors would have to hunt and peck all over for the information.
Have you searched at the EDGAR website???
It easy to bash wire… sure it pricey. But as a common investor I love that I can find my information for free… that the disclosure takes place around the same time every year.
If anything I say get rid of the forms that file at the S.E.C. that’s what is repetitive.
Matt, for the sake of transparency, when you are not being a common investor, you’re a sales rep for a wire service.
Can you throw some more light on the mechanism of enforcement of the Reg FD – to clarify my question – How does SEC actually come to know that there is a case of selective disclosure???
One cannot really thrive upon regulations as there is a lot of informal communication happening. so how does SEC come to know if an IR officer engages in selective disclosure – intentionally / unintentionally to an analyst over a coffee table outside the office?????