The SEC's recent interpretive release about the use of electronic media by securities issuers has caused great concern among issuers of municipal securities as well as mutual fund companies over the treatment of historical information and the use of hyperlinks on an issuer's Web site.

The commenters feel the Commission focused on typical corporate issuers, paying little attention to their special circumstances. They also believe issuers in their industries will stop using electronic media to avoid liability under the securities laws.

Historical Information

In the release, the SEC announced that it will consider a statement posted on an issuer's Web site, such as a press release, to be republished each time it is accessed by an investor or each day that it appears on the Web site.

"Such an interpretation dramatically changes the disclosure obligations for governmental issuers far beyond the existing statutory and regulatory framework that currently exists," the Florida Division of Bond Finance explained.

Unlike corporate entities, governmental bodies provide a lot of information designed to further their governmental functions with no intention of influencing investor sentiment, the Division of Bond Finance stated, adding that "there is little doubt that governmental issuers will be less likely to provide disclosure in other than paper form if electronic information is considered republished each time it is accessed."

The Government Finance Officers Ass'n. ("GFOA") explained that issuer Web sites provide services to citizens as part of a jurisdiction's governmental responsibilities, including the promotion of citizen access to government. In addition, local laws often require official statements and other relevant information to be kept in a governmental archive.

Kutak Rock LLP, one of the most active bond and underwriter counsel firms in the country, was "dismayed that the Commission would consciously endorse a position that creates an impossible updating standard which results in less timely and complete disclosure."

In the municipal market, the Commission's republication standard will exacerbate the already existing problem of lack of disclosure, warned the Nat'l. Federation of Municipal Analysts.

The Nat'l. Council of State Housing Agencies maintained that "a number of housing finance agencies are very concerned about this position and have discussed removing any financial or operating information from their Web sites if it were in effect. We find it difficult to believe that the SEC would consciously endorse a position that creates an impossible updating standard, which results in less timely and complete disclosure," the Council wrote.

The Division of Bond Finance suggested that the SEC explicitly state that the disclosure obligations of governmental issuers are the same for both paper and electronic disclosure and clarify that information presented as of a certain date will not be considered republished each time it is accessed by an investor.

Along with most of the commenters, GFOA suggested that issuers clearly identify the sections of a Web site that constitute continuing disclosure areas and investor information areas, separating the issuer's securities information from other, unrelated public services.

"The key point," GFOA stressed, "is that the medium does not change the securities law responsibilities for the disclosure information."

"There is no reason to believe that the potential for investors to be misled by stale information is any greater because of the use of electronic media," the Council of Infrastructure Financing Authorities stated. "Any obligation of an issuer to update or amend information should be equally applicable without regard to the method of delivery."

Archiving historical information in a clearly marked, separate or distinct area on a Web site also was endorsed by the Investment Co. Institute ("ICI") for mutual funds. Since it would indicate clearly to investors that the material is not current information, it should not be considered to be republished each day or each time it is accessed, ICI stated.

Fidelity Investments encouraged the SEC to promulgate a safe harbor rule that will include specific disclosures to accompany historical information so that information complying with the rule will not be held liable because it is stale.

"The posting of historical information allows investors to obtain access to information that, in the paper context, might have been difficult or impossible to obtain," Fidelity added.

Hyperlinks

In the release, the Commission also stated that it will consider hyperlinked information to be part of an official statement under the antifraud provisions of the federal securities laws.

"The Institute is very disappointed in the ‘guidance' set forth in the release concerning responsibility for third-party information to which a mutual fund establishes a hyperlink," ICI stated, charging that the release ignored the fact that mutual fund advertisements and sales literature are documents required to be filed under the federal securities laws.

Because the Web sites are considered a form of advertising, the release "effectively indicates that a mutual fund is always responsible for third-party information to which it establishes a hyperlink from its Web site," ICI explained.

In addition, the release creates new standards for analyzing responsibility for hyperlinked information that conflict with those already established under the NASD Conduct Rules.

"In short, the discussion of hyperlinks in the [r]elease evidences little understanding of how mutual funds use Web sites or even of how they are regulated—a bizarre occurrence given the Commission's oversight and regulatory responsibilities for this seven trillion dollar industry," ICI stated.

ICI recommended that the Commission clarify that "its sweeping statements" regarding an issuer's responsibility for third-party information to which it establishes a hyperlink from a document required to be filed under federal securities laws were not intended to cover hyperlinks from mutual fund advertisements or sales literature.

For regulatory purposes, ICI stressed, the emphasis should not be on how the information is linked, but that appropriate safeguards are in place to ensure that the third-party information investors receive is unbiased and not misleading.

In addition, the Commission should clarify that any special restrictions on issuers "in registration" would cease to apply to a mutual fund once it has an effective registration statement. ICI also requested real-world examples of the application of the Commission's positions in the context of mutual funds instead of "vague, open-ended theoretical statements."

Fidelity agreed that a reference to a hyperlink in a section 10(a) prospectus, which is not an active link, should not result in the third-party content being adopted in the prospectus.

The SEC's theories seem to rely on elements of the "entanglement" and "adoption" theories developed by federal courts when considering issuer liability for statements by analysts, Fidelity explained. "Although we appreciate the SEC analogizing electronic media to the paper context, we believe that hyperlinks, by their nature, are unique and without clear analogy in the print or off-line world."

To eliminate any argument that the issuer has adopted the linked information, Kutak Rock suggested using an intermediate screen that clearly indicates that the visitor is leaving the issuer's Web site and that the issuer is not adopting information contained on the linked Web site.

The Nat'l. Ass'n. of Bond Lawyers agreed that the risk of investor confusion and the manner of how the hyperlinked information is presented should be among the factors considered when determining whether the information has been adopted.

"However, to treat hyperlinked information as adopted by the issuer would be to treat a document in electronic form differently than one in paper form. We see no justification for this difference, which would discourage the use of electronic media," the NABL concluded.