Insider Web reporting milestone not without its missteps

By: Dominic Jones    Related: Best practices for insider trading information on your website

WITH little fanfare, the deadline for US public companies to post insider transaction reports on their websites passed on June 30, 2003. And although little attention has been paid to this particular aspect of new corporate disclosure initiatives, the experience has provided us with some valuable lessons for how to better use the Web as a means of delivering valuable information to investors.

Five Lessons Learned 1. Corporate America shows little interest in transparency 2. Regulators need to walk a fine line between rules and principles 3. Regulators should recognize the Web is more than a distribution medium 4. We need to recognize companies and IROs who "Think Web" 5. Standardization by website vendors can be a good thing (sometimes)

In many ways, the requirement is a milestone for corporate reporting on the Internet. It marked the first real occasion that securities rules in the US, most of which predate the fax machine, have formally mandated that companies use their Websites to meet their disclosure obligations. As such, it recognizes the Internet as a valuable part of the disclosure system, something which companies should welcome because it has the potential to make communications with company stakeholders more cost-efficient and potentially more effective.

Unfortunately, the passing of the rule's deadline for website posting wasn't without its missteps. In fact, some companies missed the deadline and weren't in compliance when we conducted a survey of 300 small- and mid-cap companies on July 1, 2003. We found that 11% of companies had done nothing to acknowledge the Securities and Exchange Commission (SEC) requirements, and a few were clearly in breach of the rule. Similarly, the SEC reported that more than 500 insiders attempted to file trading reports on paper in the three days after the deadline.

It is revealing, too, that very few companies took the initiative to comply with the new rule ahead of the deadline. In an earlier survey, we found that just 8% of small- and mid-cap companies were posting insider filings on their sites in March 2003. This was in spite of the fact that the SEC had urged companies not to wait for the final rule before posting insider reports on their websites.

The SEC's rule makes obtuse information more readily available, but that doesn't help anyone.

Of course, you might say that we're seeing only the negative side of the story, that we're losing sight of the fact that 90% of companies did indeed acknowledge the new insider transaction rule by the June 30 deadline. True, but then a large number of those companies were not onside through any action of their own.

The lion's share of the credit for so many companies being onside on June 30 was due to the intervention of the three main US IR website vendors -- CCBN, Shareholder.com and Thomson Financial. They played a pivotal role in getting corporate America up on the right side of the law on deadline day. If not for them making their templates compliant, many more companies would likely have been caught offside. But more about that later.

So what lessons can we take away from the SEC's first mandatory website posting requirement? Here are five lessons that we all can take away from the experience:

Lesson 1. Corporate America shows little interest in transparency
The insider website posting experience illustrates in no uncertain terms the unwillingness of corporate America to step up to the plate and do its part to address the worst crisis of confidence to hit the US capital markets in 70 years.

The vast majority of companies literally did the bare minimum required i.e. provide a link on their IR websites to a list of forms 3, 4 and 5 on a third-party database - a process that took one minute, or for companies hosting their sites through IR website aggregators, no time or thought at all. As explained elsewhere on this site (see Best Practices for Insider Trading Information on Your Website), posting or linking to raw SEC forms falls far short of useful disclosure to an audience of retail investors. It might be within the bounds of the rules, but it isn't the right thing to do.

Unfortunately, too few companies have taken advantage of services available from vendors that make insider information much easier for individual investors to access, understand and use. Both CCBN and Shareholder.com offer insider trading summaries from sources like Vickers, but only a tiny percentage of their clients use them. Of course, cost is a factor here, but not so much that more large-cap companies shouldn't be using them.

Although vendors were selling tools to simplify insider data for investors, few companies were interested.

That said, cost really isn't an excuse for the many companies that did nothing at all to improve the utility of their insider trading information. With a little time and discipline, they all could have done some simple things to make it easier for their investors to access, understand and factor insider trading and ownership information into their investment decisions. It's too bad that they didn't.

Consequently, the overwhelming message from this experience is clear: corporate middle-America has little interest in going beyond minimal compliance. Instead of approaching the current environment of distrust with a sense of accountability and openness, companies have shown only begrudging reluctance. This will do nothing to quiet corporate critics and will give regulators and others little confidence that the current rules go far enough.

Lesson 2: Regulators need to walk a fine line between rules and principles
It seemed simple enough. Companies could meet the requirement for insider ownership posting by linking to individual filings or a list of them on an external site like the SEC's EDGAR database, or by posting the filings on their websites by the end of the business day following the filing being made.

However, even something which seemed so straightforward became the subject of hair-splitting interpretation. Just what exactly did the SEC mean by "a list" of Section 16 filings. Did it mean a list limited to section 16 filings only, or could there be a list of Section 16 filings in among other types of filings, like 8-Ks and 10Qs?

Never mind that the SEC actually addressed the question in its discussion of the final rule, some companies and their advisers preferred to see the easy way out rather than do the right and logical thing. Unfortunately, the SEC in its final wording did not explicitly say that it was not permissible to link to a list that included other types of filings along with insider filings, even though everything else pointed to this being the case, including the commission providing an example of a list page on EDGAR that included only insider filings.

By not specifically outlawing links to general filings pages, the SEC left the door open for those looking for an easy way to do nothing.

The lesson from this is simply that regulators cannot rely on companies to do what is in the best interests of their investors. Many will look for loopholes rather than opportunities to make effective disclosures. Regulators either have to spell out exactly what is required as a minimum standard or adopt rules which establish certain principles that require companies to strive for best practice.

As I wrote in Best Practices for Insider Trading Information on Your Website, some of the best examples of insider ownership disclosure came from companies which voluntarily invented their own approaches before the SEC issued its final rules. Going by the principle that investors need access to insider trading information, these early adopters came up with approaches which are much more useful to investors than the minimum requirement that almost all companies have adopted following publication of the final rules.

Lesson 3: Regulators should recognize the Web is more than a distribution medium
One major factor for the mixed success of the introduction of the insider reports requirement is that the philosophy behind it only recognizes corporate websites as access points in a wider distribution system. The principal objective of forcing companies with websites to post insider reports was to increase access to the filings.

No attention was given to the ability of the Web to provide a cheap, highly effective way for companies to improve investor's understanding of what the information in the filings means. For example, there is nothing in the rules which encourages companies to show trading trends or average activity over time, or to provide plain language explanations for particular trades, or to make the format of the reports more digestible for the 60 million American stockholders who aren't securities lawyers or analysts.

That said, the SEC has taken some important steps of a technical nature, such as providing data in XML. This makes it feasible for vendors or software developers to design applications that let investors easily analyze insider data. However, this hasn't happened and there's no indication yet that it will.

Here again, if companies were given specific principles for what regulators wanted to achieve with a rule, companies might well have taken the initiative to make use of existing technologies to achieve greater levels of communication and understanding. Instead, what the rules have done is make hard-to-understand information more readily available. And that doesn't help anyone.

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