Fair Disclosure

There’s a conversation going on about Regulation Fair Disclosure. Our own Jonathan Schwartz kicked it off last October, calling for Reg FD to be revised to allow the use of the Web to publish material financial information. SEC Chairman Chris Cox surprised a lot of people by responding in a comment on Jonathan’s blog (I have a lot of time for Chairman Cox, but I was surprised too). It turns out that there are those who don’t like the idea. This is a complicated issue that blends Web technology with big-money business issues, and I’m interested in what the people who read ongoing think; I suspect you include some of the people in the world most qualified to have an opinion. [I suggest using the tag “WebFD” if you’re going to contribute in your own space.]

Disintermediation · Assuming that Web disclosure were fair and accurate and timely, nobody could be against it, right? Well, it would be a classic case of disintermediation and thus threatening to intermediaries, for example BusinessWire and PR Newswire. They are in the business of collecting news releases from companies and disseminating them to subscribers, who include journalists and the financial community. I don’t know how big a business it is. Back when I was running a startup, it was a couple of thousand dollars to do a press release, but big companies usually have fixed-price annual deals; I’d assume Sun does. I don’t know about the costs to subscribers.

Note that Mark Hynes, who wrote A bad idea for issuers and for investors, is in Investor Relations for PR Newswire. Which doesn’t mean that his arguments are wrong, it just means that he’s unlikely to be neutral; but then, neither am I.

Cox: Be Careful · Chairman Cox’s letter said “among the questions that would need to be addressed is whether there exist effective means to guarantee that a corporation uses its website in ways that assure broad non-exclusionary access, and the extent to which a determination that particular methods are effective in that regard depends on the particular facts.” Which I would translate as “We’d have to ensure that the disclosure is really fair”, and I’d agree with fully.

Given that financial players can squeeze big-bucks advantages out of getting their hands on hot financial info just a little bit ahead of the market, and that there are powerful incentives to lie & cheat & steal for many of the players in the system, both on the company side and the investor side, this has to be done carefully.

Incumbent: Bad Idea · PR Newswire’s Mr. Hynes raises ten potential problems, saying that in the past, such ideas have been “shown to be unworkable, and replaced with the tried and tested option of properly distributed press releases serving the financial services community best.” If you care about this, you should go his essay. Speaking only for myself, I think some of his points are good and others are bogus; I’ve addressed them below.

Accountability and the Market · It seems that that if you were going to Web-enable Reg FD, the key point would be accountability: making it entirely clear that should the fairness or transparency of the disclosure be compromised by a company’s web-site, or a financial player’s use of it, the misbehaving party can be held accountable.

Given that, unless there’s some awful technical flaw, why wouldn’t we give it a try? PR Newswire and BizWire argue strenuously that they can serve companies and investors better. If so, then the market will speak and both sides will continue to choose their services, rather than using the Web to bypass them.

[Disclosure: I’m biased; instinctively suspicious of gatekeepers, intermediaries, and monopolies. I’d really like the to do this on the Web. But Chairman Cox is right: we have to be careful.]

The Contra Position · I’ll take the liberty of quoting Mark Hynes’ points in full and addressing them one by one. (Here’s a chance for my expert commenters to point out why I’m wrong.) He opens with a question:

Why has the concept been found wanting? Here are 10 reasons.

1. Push versus pull. A posting on a website requires investors to proactively set up to receive the information. This has consequences such as the institutional market (with greater resources to do this) being better informed than retail, creating selective disclosure.

Everyone agrees that material releases would have to happen at a pre-announced time. If you cared about a large number of companies that were releasing at the same moment, this might be a problem; but for the typical retail investor, how hard can it be to watch a well-known website at a well-known time? I’d think that for the retail investor, disintermediation would be a win.

2. Formatting. No matter what format is loaded on to the website, it will inconvenience some part of the media and delivery chain, reducing the visibility of news in the multitudes of media. The equity terminals are notoriously inflexible in catching news from multiple, random sources. Reuters et al are highly unlikely to redesign their entire editorial processes to accommodate this notion.

This is a hypothetical. If the media are unwilling to go gather news directly from company web-sites and can’t handle formats like HTML and Atom, then presumably they’ll be happy to go on subscribing to PR Newswire. I can’t imagine retail investors worrying much.

3. Validation/ editorial checking. There is well-substantiated evidence that show the number of occasions on which a release - fully approved by the company - has mistakes. 3rd party eyes and ears can help ensure that incorrect information does not reach the markets.

This is an excellent point; speaking as one with long-time experience in reference publishing, I’m aware of the fact that you keep turning up significant errors even after multiple proof-reading passes; and an error in a material financial release could really hurt. Of course, at the end of the day, the accountability for errors has to be with the originator of the information. Still, assuming that PR Newswire’s customers find value in this, it should be decoupled from the information-pump function and offered as a separate service. I suspect that it would be of significant value to many companies.

4. Security of posting. Is the person posting the release on the issuer's website entitled to do so? Would every company have to create restricted zones for IR, corporate secretary etc?

This seems entirely bogus to me. Is the person sending the release to PR Newswire entitled to do so? Doesn’t every company currently have to create special press-releasing roles for IR, corporate secretary etc? Of course. Plus, any reasonably well-managed company already has some sort of access-control protocol in place for its website; I guarantee that I wouldn’t be allowed to update Sun’s Investor Relations page.

5. Role of financial PR companies. Financial PR companies post large numbers of results releases to the newswires. Would every company expect to give the PR companies access to the (secure) area of their website?

I think it’s worth the experiment of giving companies the option (remember, we’re talking about an option, not a compulsory mandate) of posting their own numbers without going through a PR company.

6. Down time. No single source can be relied upon 100% - the newswires have (had to) invest in redundancy of systems, ensuring permanent access. Not every company will have the resources to do this, and smaller caps are especially vulnerable.

This is another good point; lots of companies’ websites are mostly brochure-ware and don’t have the kind of redundancy that the CFO would require. Others do. Those who need help present another business opportunity for experts such as PR Newswire and BizWire.

7. Access to the 'editorial process'. Journalists work in many different ways, some on email, some using newswires, some on fax etc, with a constantly moving population. It is unreasonable to expect all companies to keep up to date with journalist changes, or to develop multiple mechanisms to deliver to these different audiences. And expecting investors and journalists to re-register is frankly unrealistic.

In my experience, almost all unsolicited press releases are simply ignored by almost all journalists. Those that really matter—for example, financial results from public companies—are actively sought out by those who cover the companies. I see no reason why a journalist covering a particular release would care much whether they’re getting it from a company’s website or the current intermediaries.

8. New media types are constantly emerging - it is in the commercial interests of the newswire to constantly patrol for these media, and harness them. Would all quoted companies be as diligent?

What Mr. Hynes is discussing here is either journalism—proactively going after a story—or feed filtering such as is now provided by Technorati and its competitors. I don’t see what either has to do with material financial disclosures; for those, Reg FD makes it clear that it’s the responsibility of the company to ensure proactively that these be available, timely and fair.

9. Simultaneity. The principles of good disclosure - never mind the law of the land - requires news to be accessible to all investors at the same time. This would be impossible for companies to achieve.

This is Mr. Hynes’ single best point, I think. I don’t know enough to know whether he’s right, but I bet somebody who reads this does. What are the service-level guarantees that the incumbents provide? For example, when HPQ’s quarterlies cross the wires, if I’m a stock-market dabbler on DSL in Bend, Oregon, how many microseconds is the lag between the time when a Goldman Sachs trader sees them and I do? The maximum tolerable lag between Goldman Sachs and Bear Stearns?

Given a clean definition of the acceptable information latencies, it’ll be an interesting question how well the Web can do. It might not be good enough to just post the release on the corporate server in Mountain View or Raleigh or wherever, there might be a case for Akamai-style infrastructure.

It also dawns on me that when you get the quarterlies, the real-world latency is the time it takes you to plow through all the earnest corporate bumph at the top and get to the actual numbers that are actionable for you. To reduce it, the smart thing to do is to start sending the data in XML so that you can pre-program your computer to show you what you care about in a fraction of a second.

10. These challenges will inevitably hurt smaller companies most, a) by increasing cost to enhance their websites to the necessary degree, and b) investors will access large companies first; an investment story from a smaller company will win less prominence, ultimately strangling some prematurely, due to less access to capital.

I’m sorry, but absent the evidence, the above are just unsupported assertions.

My View · I suspect delivering financials to investors is a corporate function that will probably end up being largely outsourced, as it is today. Now is the time to try basing this delivery on open Web infrastructure rather than the proprietary pipes of a few incumbent gatekeepers. That way there’s room for competition, and thus improved business performance, at both ends of the pipe.

What Do You Think? · This dialogue is now in progress. On the evidence, both the corporate and government sides of it are listening. If we can figure out how to make the Web do what companies and investors need, I think there’s a chance to remove some friction from the investment economy.

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