Disclosure for Dummies: Notice-and-Access Press Releases Compared to U.S. Mail Service

January 19, 2011
by Steve Messick, Chief Information Officer, Business Wire

I always respond to a staff newbie when he or she comes into my office asking a question with, “Did you read the manual first?”  I actually prefer to use a more famous acronym but, in the interest of political correctness, will not elaborate.

But that is an important starting point of understanding any technology.  You have to read and research it.  If you still need clarification, then seek out the true experts and ask questions. If you don’t do your due diligence, then you won’t be well-informed, and will not understand the value proposition that technology brings to the table.  So, let’s get educated and talk about the real technology at work here, and examine the competing value propositions of Business Wire versus the “Notice-and-Access” model when it comes to fair disclosure.

Warren Buffett defines value as not what you pay, but what you get for your money. This is so true with applied technology.  We can all relate to the earbud example.  You pay more for a Bose earbud than a lesser brand. But have you ever sat on a noisy subway, jet, or busy freeway and tried to listen to music or talk to someone on your phone with cheap earbuds?  Forget it.  The value proposition of Bose technology is that you pay more, but you get something that actually works, meets your needs, and delivers real value. That is priceless.  When you use Business Wire, you benefit from the value of 50 years of experience and technology.

So let’s get specific here about web technology and its role in fair disclosure.  The operative word is “fair,” which is the key deliverable. Fair disclosure involves three main components: simultaneity, synchronization, and security.   Technology plays a major role in all three.

Simultaneity means that everyone has access to public company information at the same time.  No one gets a head start in acting on the news; it is simultaneous whether you are in Sydney or San Francisco.  Some folks consider posting a news release on a corporate website as simultaneous, and “fair” disclosure.  Yes, I agree that posting a document on a web site means it is available for access by everyone (at least everyone with access to the internet).   But is it “fair” access?  Absolutely not, if you understand the underlying technology.

A simple example: your local post office.   Does everyone in your town go to the same post office at the same time to get their mail?  If they did,  you would have long lines, extended waits, traffic jams,  and the person who shows up late may get their mail a day later. A single web-site has the same problem: extreme competition for access.  If thousands — or perhaps even millions — of investors go to a corporate website at the same time (at the moment of access cited in an advisory alert) to view an earnings release or other material news announcement, it is impossible to get the information in a fair and simultaneous manner.   The site is going to slow down; some investors will get the news later than others.   If the company has not invested heavily in its website infrastructure, the site may crash, or become so slow that your browser will give up.  Not fair, not simultaneous, and ultimately a low technology value proposition.

Synchronization involves the seamless linking of technical systems worldwide to deliver market-moving news to the global investment community. The moment your news release is simultaneously distributed worldwide, billions of dollars in technology at companies and institutions around the globe are synchronized to provide the information to the investor universe — instantly. That is the behind-the-scenes disclosure synchronization that powers the global financial markets. That is the value of Business Wire technology working in synchronization with the investment industry, financial information systems, and major consumer portals for the collective benefit of institutional and individual investors.  The integrated, multi-tiered pipeline that regulatory information flows through generates opinion, analysis and recommendations, all of which build value for the investor.  Independent analysis and expertise is essential for retail investors working at home, as well as the trading desks at large institutional firms.  And it all happens as a result of Business Wire feeding the pipeline.  Simultaneity drives synchronization, which drives value.  Priceless.

Conversely, Notice-and-Access (single web-site posting)  advisories impede the information pipeline and disrupt the synchronization process.    Why does UPS bring your inventory to your door? The answer is so that your business can function flawlessly, as you designed it.   If you had to jump in your truck every day and drive to UPS, then head over to Fed Ex,  and then to the Post Office  for your business inventory, is that value to you?  Your business is synchronized by the predictable flow of inventory into your manufacturing plant.  So is the global information pipeline.

The seamless synchronization of financial information is crucial for fair disclosure. If every investor has to go to UPS (your corporate website, via notice-and-access ) to get the latest news, and then go to the individual web sites of companies releasing information at the same time, it will derail the work flow process. leading to delays and confusion. Fair and efficient markets will cease to exist.

Completing the value proposition of fair disclosure is security.   Value is in knowing that your information is secure and safe until the appropriate time to share with others. Reg FD is all about keeping information secure and private, and then simultaneously providing everyone with equal access.  Any breach in this process can lead to market volatility, investor uncertainty, and potential lawsuits. Is that value?

Keeping your information safe until public disclosure is a complex technology puzzle.   Business Wire’s 50-year track record in secured technology systems means that your information is safe and protected. Posting on a corporate website can be very risky unless the company has invested significant resources in security safeguards. Business Wire’s systems and networks are subject to rigorous annual audits to ensure that your information is secure. Security is at the heart of what we do, and a major element of Business Wire’s core value proposition.

There is a de facto manual for full and fair disclosure, based on real-world applications. Business Wire is proud to be a major contributor to the pragmatic, best-practices model that serves as the backbone of full and fair disclosure in financial centers throughout North America and the European Union. Not only did we read the manual, we helped write it.


Disclosure: The Dawning of the Age of Precarious – Let the Sunshine Back In

November 18, 2010

by Cathy Baron Tamraz, Chairman and Chief Executive Officer, Business Wire

Once upon a time, in the Year 2000, a wonderful law was passed that protected the interests of all investors in our great land. You may have heard of it; it was called Regulation Fair Disclosure.  Thanks to the great mind of Arthur Levitt, the “whisper” and good ol’ boy network that had gone on for far too long on Wall Street by those in the know, was finally curtailed.  Good triumphed over evil on October 23, 2000 – and all of our citizens were protected.

Reg FD served to shine a bright light on material information, so that now everyone had equal access to all news that could impact a stock price.  It was a great day for the retail investor, and all was well in our land. The new words of the day were “full and fair for all.”   Transparency and simultaneity were now the gold standards and endorsed and enforced by our nation’s regulators.

To assist in ensuring that all companies now played by these new rules, “neutral” services like Business Wire were touted and recommended as best practice and “valuable” newswires for the purpose of making news ubiquitous and available to all. This made sense because it confirmed the vital role they have played for 50 years in helping to keep “law and order” on the Street. Further, our nation’s regulators relied on Business Wire’s audit trail to help keep our markets honest. Business Wire’s proprietary news delivery platform ensured simultaneous, real-time access to all investors.

Regulation FD flourished, and all was well.

But alas, in August 2008, a seemingly insignificant event led to some unintended consequences – a dark cloud now hovered over full and fair disclosure.

 

Image by Flickr user r8r

 

In an attempt to embrace new technology and encourage more disclosures, not fewer, an interpretation (not a rule change) was added to Reg FD that encouraged the use of company websites as an enhancement.  This certainly made sense because it provided an added venue for material news, thus widening access. Our regulators wanted to appear current and relevant – and that made sense.  All seemed fine in our great land . . . the more, the merrier. Or so it seemed.

But then something strange happened . . . self-anointed experts promoting their own commercial agenda decided that restricting the information flow by limiting it to a company website ONLY, was now good enough.

Let the people figure out when and where the information is available. Let the reporters, analysts and investors troll through thousands of websites to find and report on the information. Let the algo traders, who have the most sophisticated systems, get a jump on the news and perhaps beat out everyone else. In effect, let the retail investor eat cake.

Even worse, questions around system crashes, redundancy, security and simultaneity were not even addressed, because those who were now playing in this arena had no idea of its complexity – and had not even thought it through.  What about those vital security audit trails?  What about protection from insider trading allegations with standalone web disclosure?  What about server crashes? What about redundancy and simultaneity?

Alas, darkness was falling . . . and the proof was in the proverbial pudding. In the few instances where this “standalone methodology” was followed, the truth revealed itself. Confusion now reigned, as investors scrambled to get the news.

THE MORAL OF THE STORY:

Reg FD’s level playing field is in danger of going “POOF”, turning a prince back into a frog.  However, this parable can still have a happy ending.  We can’t let the Holy Grail of full and fair disclosure slip away. The SEC did not intend it to be that way – just read the SEC’s CIFiR report, citizens.

This much we know: Reg FD was meant to protect all investors – and retail investors, in particular, dread a return to the dark days (and Wall Street whisper) of disclosure. Therefore, we ask our nation’s protectors to slay this dragon, to clarify both the spirit and intent of the Interpretive Guidance, and to let the sun continue to shine on our financial markets.


Microsoft Needs To Get its Head Out of the Cloud When it Comes to Disclosure

November 3, 2010

by Cathy Baron Tamraz, Chairman & Chief Executive Officer, Business Wire

Cathy Baron Tamraz

BW Chairman & CEO Cathy Baron Tamraz

Records are meant to be broken. Rules, on the other hand, aren’t.

And when those rules have a direct impact on both the fairness and workings of our financial markets, then an even higher standard of accountability is in order.

Unfortunately, it is becoming apparent that Regulation Fair Disclosure — which the SEC originally conceived to provide ALL investors with a level playing field — is something of a misnomer. “Request Fair Disclosure” or “Regulation Flex Disclosure” would seem to be more appropriate rubrics, as issuers who fail to meet Reg FD’s compliance standards continue to go unchallenged.

This troubling situation raises the obvious question: If rules aren’t enforced, then what is the purpose of having them in the first place?

The latest disclosure debacle involves Microsoft, which abruptly notified the market of its shift to a web-disclosure model. The company posted its earnings online, without benefit of a corresponding broadly disseminated release.

Microsoft’s ill-fated foray into web-based disclosure provides a textbook example of “worst practices” investor relations.

The company issued an advisory on October 27, 2010, alerting the marketplace that it would post its earnings on its website the next day. No time was specified as to when the results would be posted.

Microsoft’s disclosure strategy is problematic on many substantive levels. The SEC’s 2008 Interpretive Guidance Release states that companies can disclose material information on their web sites provided certain criteria are satisfied; a key requirement is that the corporate website is a “recognized disclosure channel.”  This standard suggests that the issuer must be able to demonstrate that its website is a primary “go-to” site for investor information, over a sustained period of time.

Given the fact that Microsoft literally made the transition to web disclosure overnight, it makes a sham of one of the SEC’s few tangible web-disclosure guidelines. Unfortunately, there aren’t all that many requirements to begin with, which is the crux of the problem.

Clearly, Microsoft has one of the most heavily trafficked sites on the Internet. However, there isn’t necessarily a correlation between a popular consumer site, and a “recognized disclosure channel.”  By my way of thinking, “recognized” suggests a documented and defensible track record over an extended time frame.

Microsoft’s arbitrary disclosure designation has short-circuited the SEC’s intent, giving the clause new meaning. The unwelcome result: Instant disclosure channel. The SEC’s Interpretive Guidance Release, already condemned by its critics for its lack of clarity, has effectively been watered down further by Microsoft’s unanswered actions.

Philosophical arguments aside, Microsoft’s disclosure process was  badly bungled.

Here’s a chronology of the confusion (all times Eastern):

  • Investors were frantically scrambling to get the results at market close; the results weren’t posted until 4:15 pm. That’s 15 minutes of high anxiety, angst and frustration as investors pounded the Microsoft site seeking the company’s results.
  • The 8-K wasn’t filed until 4:28:49 p.m.
  • The advisory press release finally moved almost a half-hour after the posting [4:44 p.m.], thus the Notice came AFTER the Access.
  • The conference call was held at 5:30 p.m.

Without question, it was a disclosure disaster.

As noted, the 8-K was filed 13 minutes after the posting on Microsoft’s website. Our interpretation of Reg FD is that the filing should have preceded, or been filed simultaneously, with the web posting.

In a Dow Jones interview published in The Wall Street Journal, a Microsoft IR team member revealed a basic lack of understanding of what services are available today, as well as a blatant disregard for investor relations’ core mission.

The Microsoft spokesperson asserted that posting onto the company’s website allowed users to “see additional information that they wouldn’t see if they only looked at our press release.”

Definitely not true. Releases today are transmitted in XHTML format, which provides for increased online functionality and flexibility. Business Wire, for example, has all of the rich multimedia capabilities that Microsoft was seeking to accomplish on its own site; e.g., slides detailing the company’s performance, key operating metrics, and links to webcasts and other documents.

The major difference, however, is that Business Wire makes this information available to the entire investment community simultaneously, and in real-time. Business Wire’s patented news delivery platform distributes and posts to the world’s leading portals, financial information platforms, and databases, creating a true level playing field for all market participants. We literally push the information to millions of eyeballs around the globe,  and everyone receives it AT THE SAME TIME.  Yes, it’s ubiquitous.

In rationalizing the company’s decision, the Microsoft executive focused on the benefit of a reduced staff workload, concluding “it’s one less check mark.”

The critical lesson that has been lost here is that when it comes to investor relations, it’s not about the issuer, it’s about the shareholders. It’s unfortunate and inexcusable that the legitimate  information needs of the marketplace are deliberately being sacrificed simply because they require an extra “check mark.”  It’s a small price to pay, in our view, for market fairness.

Web disclosure clearly has major drawbacks; its obvious deficiencies disadvantage investors in multiple ways. Seasoned market observers shudder when imagining the ensuing anarchy if hundreds, or thousands, of issuers choose to follow Microsoft’s misguided example.

At a time when there continues to be a growing global demand for increased transparency and disclosure, Reg FD —  the backbone of America’s disclosure system — is unfortunately being emasculated because of benign neglect and gross misinterpretation. The SEC needs to take decisive action reaffirming the basic tenets of Reg FD; otherwise, the concept of full and fair disclosure will prove to be more of an empty premise rather than an enduring, guiding principle that has proudly come to define our capital markets.

The facts speak for themselves: The SEC should take appropriate action to reverse these disturbing disclosure trends. The evidence supporting such a move is overwhelming.

Authoritative academic research conducted by a professor at the Harvard Business School has conclusively demonstrated that greater news dissemination improves stock liquidity and lowers volatility, while enhancing a firm’s visibility. It can even lower the cost of capital.

Independent surveys confirm that an overwhelming majority of securities attorneys continue to counsel corporate clients to broadly disseminate their news, rather than limiting distribution to a corporate website.

There’s a large investor in Omaha who doesn’t want to be checking hundreds of websites minute-by-minute throughout the day. But then again, who would?


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