Securities law and the Internet

Laura S. Unger

A NUMBER of theoretical, yet very real, questions may be raised about how technology and the Internet affect the way the Securities and Exchange Commission regulates.

The impact of technology is fascinating, not really in terms of how it affects one's personal life, but in how it affects the way regulation is viewed. The Internet provides all of us with a unique opportunity to view the federal securities laws and its various rules, regulations and interpretations with a new perspective. The challenge, simply put, is understanding how technology changes the way the Commission regulates public companies, market participants and the self-regulatory organisations.

There are four fundamental tenets of the securities laws that must be re-examined as a result of the Internet.

First, though it has become a cliche to talk about the amount of financial information now available to investors, we need to ask the question: ``How can information be made meaningful to investors?''

Second, with many new participants providing financial information and effecting securities transactions: ``What is a broker-dealer?'' (Or, more pointedly, what makes financial portals different from broker-dealers and should portals be included in tomorrow's regulatory scheme?)

Third, in this day of Internet publications, newsletters and stock-picking sites: ``What is an investment advisor?''

Fourth, with technology, and Regulation ATS providing additional trading venues and competition: ``What is tomorrows market and how do we promote competition and innovation in that market?''

And finally, now that technology has made a global marketplace truly feasible, ``What can regulators do to facilitate this? In the short term, what should we do to provide foreign access to US markets and investors?''

Financial information: How does the Internet impact information flow to investors and the marketplace? From the big picture policy perspective, the Internet enables us to achieve an unlimited amount of disclosure. The Internet has made information a relatively cheap and accessible commodity. Information that could never previously have been provided -- never mind broadly disseminated -- is now available real-time to those individuals with Internet access. Some of this information was previously available through a market intermediary, if the customer requested it, but can now be found on most brokerage firms and financial portal websites. There is a whole new category of information, however, that was not previously available to retail investors, but that can now be accessed through electronic media. This is a welcome development for the SEC a disclosure-based agency.

The first question we need to ask, however, is what information benefits investors most? Right now, this question is being asked in two significant ways.

Regulation FD: The Internet has made it feasible for issuers to open up their analyst conference calls, and many companies have begun doing this. A recent study indicated that approximately 80 per cent of all companies either had or were about to open up their analyst calls to investors. This access would clearly benefit investors. The Commission has a proposal before it, however, that would go beyond analyst conference calls. Regulation FD, intended to cure selective disclosure of material, non-public information (usually earnings-sensitive information), would require issuers intentionally disclosing material, non-public information to disclose it to everyone simultaneously.

If an issuer inadvertently disclosed such information, it would have to tell the rest of the world promptly. For some, the proposal presents a danger that the information flow may be reduced if issuers decide not to talk at all rather than get it wrong. But ironically, a major concern voiced by other commenters is the opposite situation -- that Regulation FD, if adopted, will result in significantly greater amounts of information being disclosed in the form of press releases. Can the information be disseminated and digested in a meaningful way?

Do we need to be concerned about potential ``information overload?''. Admittedly, this is a lesser concern than the one about the information flow being chilled. But if Regulation FD is adopted and makes significantly more information available to individual investors, will it be the sort of information the average investor wants to know?

The release calls for the disclosure of only material information, but many issuers will err on the side of caution and disclose both material and non-material information. The question is, will investors be able to distinguish one from the other? Another important issue to consider is how investors will process information that is not first filtered through industry analysts and the financial press.

This is a new type of concern for the Commission: The question of whether there can be too much information. Should we instead opt for a carrot rather than a stick to bring about desired results? Should we look for ways to encourage companies to open up their analyst calls a proposition the Internet certainly makes viable?

Internet roadshows: Another source of previously unavailable corporate information is the roadshow. The Commission will soon ask and answer if all retail investors should have access to roadshow information and if it should be the same information that institutional investors get.

Prior to the Schwab no-action letter issued last November, issuers were restricted from transmitting roadshows to anyone but sophisticated investors and industry participants. The traditional invitees, brokers, institutional investors and investment advisers, supposedly had the investment savvy to separate fact from fluff. The Schwab letter permitted electronic roadshows to be transmitted to retail investors meeting certain net worth and frequency of trading standards.

For now, roadshow content must be the same for all investors who may access them. A second Schwab no-action letter clarified that underwriters cannot develop two different versions of the roadshow. Issuers cannot have one version for traditional institutional audiences, complete with earnings projections and other material information often presented at roadshows, but not included in the prospectus, and a watered-down ``roadshow lite'' version for retail investors consisting primarily of management interviews.

The existing no-action relief is based on public policy grounds that making roadshow content more widely available is generally a good thing. The Commission will eventually have to consider whether all investors should have access to roadshow information and if so, whether issuers may offer different types of roadshows to meet different investors demands.

(to be concluded.)

(Edited-extracts of the speech on `Securities Law and the Internet' by Ms Laura Unger, US Securities and Exchange Commission. http://www.sec.gov/news/speeches/spch395.htm)