The SEC's requirements for online annual reports and proxy statements

SINCE a few people have asked recently about the U.S. Securities and Exchange Commission’s (SEC) requirements for online annual reports and proxy statements,  I thought I’d put them in this post for future reference.

Although many aspects of the so-called e-Proxy rules are not being done well, I think the most overlooked aspect is the requirement that “the materials must be presented on the Web site in a format, or formats, convenient for both reading online and printing on paper.”

This requirement applies to all companies, whether they are using the voluntary notice-and-access process, or following the traditional full-set delivery method and also posting their documents online.

The question most people have is what are convenient formats. This information is not easy to find because it’s contained in two separate documents or rule releases that are referenced via footnotes.

Most people appear to make the mistake of reading only the second release, but the really useful information is contained in the first release.

Large PDF file sizes not acceptable

The second release (PDF 72 pages, 425KB) contains two footnotes — 35 and 67. Footnote 35 states in part (emphasis added):

“We believe that requiring readable and printable formats is important so that shareholders have meaningful access to the proxy materials. When determining the readability and printability of formats, issuers should consider the size of the files because many shareholders do not have broadband connections. Although some types of files may be suitable for persons with high-speed Internet access, the readability and printability of a document may be affected significantly by the time that it takes to download the document.”

This reference to download times is important because the two most common formats in which companies are currently posting their information – images and PDF — create large files. They can be slow to load on dial-up connections, although as a practical matter that isn’t the major problem with them. The real issue is that both formats are not meant for online reading and interaction.

One version for printing, one for onscreen use

In both footnotes 35 and 67 of the second release, the SEC refers readers to Section II.A.3 of the first release (PDF 110 pages, 575KB), also known as the “voluntary e-Proxy release.” This is where the clearest explanation of the requirements can be found.

To quote the first release (emphasis added): “The final rules require the electronically posted proxy materials to be presented on the Internet Web site in a format, or formats, convenient for both printing and viewing online. Under technology commonly in use today, this may require posting the materials in two different formats. First, the materials should be posted in a format that provides a version of those materials, including all charts, tables, graphics, and similarly formatted information, that is substantially identical to the paper version of the materials.

“In addition, to take better advantage of the capabilities of the Internet, the materials also must be presented in a readily searchable format, such as HTML. This type of format would make the proxy materials easier to read on a computer screen. In addition, such a version may incorporate additional user-friendly features such as hyperlinks from a table of contents to enable shareholders to quickly and easily navigate through the document. Many Internet Web sites today provide documents in dual formats such as this.”

From this it’s clear the the first version must be “substantially identical to the paper version of the materials,” which most reasonably is a PDF. Of note, the description of the second version has no requirement that it be “substantially identical” to the printed materials, and goes on to say that in may “incorporate additional user-friendly features.”

What is HTML?

The SEC’s first e-Proxy release refers directly to HTML, which is by far the best format for onscreen use and interaction. However, what most annual report vendors call HTML is not actually HTML. Broadridge, Thomson, Shareholder.com, Computershare and mobular all do this.

The documents they call HTML are actually image formats that put entire pages in formats like .gif .jpg and .png. These formats are supposed to be used for graphics and photographs within HTML documents, but they shouldn’t be used for text.

The vendors use these image formats for text because they’re much quicker and cheaper for them to do than HTML. Companies also must shoulder some responsibility for this because they leave the production of their online documents to the very end and don’t give vendors enough time to do things properly.

To test if something is HTML, place your mouse over some text in the document and try to copy and paste a few lines. If you can’t do that, it’s not HTML.

Another test is when a vendor refers to “document conversion.” You can’t convert a printed document to a web document. You have to produce a true web document from scratch. A print document put online in a PDF or image-based document is still a print document.

For a fuller explanation of the requirements and the research around what investors use and need in online proxy materials, see my article in the Winter 2009 issue of InvestorRelationships.com.

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