June 19, 2000
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 2059-0609
RE: Use of Electronic Media
File Number S7-11-00
Dear Mr. Katz:
This letter is in response to the Commission's Release Nos. 33-7856, 34-42729 and IC-24426 (collectively, the "Release") relating to the use of electronic media under the federal securities laws. My comments are derived from twenty-one years practice as a municipal bond attorney in the State of New York and thirteen years of experience with electronic media and computing. I am also a member of the National Association of Bond Lawyers's ("NABL") Electronic Disclosure Subcommittee and participated in the formulation of its two comments letters to the Commission, dated June 16, 2000. I am filing this comment letter to address additional matters not covered in the NABL letters or to express a viewpoint that may differ, in part, from those contained in the NABL letters.
At the risk of oversimplification, a short discussion into the nature of electronic media itself may be in order since the Commission on the one hand, and market participants like issuers, underwriters, bond counsels and underwriters' counsel on the other, have devoted an enormous amount of effort to utilizing the medium while, at the same time, attempting to safeguard the users thereof from it. This apparent dichotomy seemingly springs from a perceived recognition that because the Internet and the technology that is used to maintain it and access it has experienced such an explosive amount of technological advancement, it is not currently subject to the kinds of "controls" typically found in other media which either have high barriers of entry from a cost perspective or a static nature from a distribution perspective. By contrast, the Internet has no barriers of entry, a fluid nature, and, because no one "owns" it, it has increasingly functioned as a "great leveler" in the business and societal power structure by offering a way for even individuals to reach a huge audience at a low cost. As a result, the Internet currently functions as sort of "new frontier" which may require a higher level of vigilance and a greater need for protective measures.
For purposes of the Release, a basic question that deserves some consideration is to what extent the Internet constitutes a new form of communication with unique capabilities and risks, and to what extent it is an evolving derivative method of communication? It would seem that as a new form of communication, the Internet presents greater legal challenges for commerce in general, and for the offering of securities in particular, which may best be addressed with legislation. An example of an Internet-related legal problem necessitating legislation is the Electronic-Signature and record-keeping bill1 that was recently passed by the United States Congress. By contrast, as a derivative method of communication, the Internet should generally fit within an existing legal framework but nevertheless presents legal/technical problems from a practical perspective. Viewed in this light, the regulation of the "details" of the electronic offering and disclosure process should be undertaken using the same goals and standards as the traditional printed offering and disclosure process2.
As noted in the Release, "one of the key benefits of electronic media is that information can be disseminated to investors and the financial markets rapidly and in a cost-effective and widespread manner". As a public finance attorney who is often called upon to discuss with issuers and underwriters matters relating to disclosure during primary offerings as well as for secondary market purposes, it is clear that issuers and underwriters have a mutual desire to move to electronic-only offerings and electronic disclosure as soon as a raft of legal questions including, due authority and potential liability are resolved. Yet even if the major legal issues could be resolved in short order, practical technological issues would remain. For instance, even on matters as mundane as the distribution of financing documents to working group members, market participants are often bedeviled by technological incompatibilities, glitches, and frustrations that currently exist at the computer hardware and software level, with respect to document security issues, and even with respect to Internet bandwidth. These and other related issues work to inhibit the move to electronic-only offerings and electronic disclosure and reinforce the desire of issuers to not be the "first one out of the blocks" in taking radical steps to achieve these goals.
Use of Hyperlinks in Official Statements
The Commission's position with respect to embedded hyperlinks merits examination. To the extent that an issuer voluntarily chooses to contextually embed hyperlinks in an electronic official statement, I agree, with one small qualification, with the Commission position that (i) such hyperlinks have been "adopted" by the issuer, and are to be considered part of the issuer's official statement, and(ii) the issuer, should be responsible for the content so linked since the placement of such hyperlinks denote endorsement even if the hyperlinks are limited to explanatory purposes. However, it would seem that an issuer ought to be able to create a separate section at the end of an electronic official statement (or in an appendix thereto) which (a) is clearly titled "Additional Reference Information/Resources" or other similar language and (b) contains an unambiguous disclaimer to the effect that the "following hyperlinks are not to part of the official statement and do not constitute an endorsement of either the sources or the information that may be accessed via the hyperlink but are being included for general reference purposes only" without triggering the Commission's "adoption of information" analysis. To do otherwise could prove to be a gross overprotection of an audience whose level of sophistication can only increase over the course of time.
Conformity of Electronic Official Statements with Paper Versions
The Commission's position that "the paper and electronic versions of each of the preliminary deemed final and final official statements must be the same" presents technical problems in that an electronic official statement may contain embedded hyperlinks to take advantage of the linkage afforded by the Internet whereas the paper version might not do so because of a lack of rational linkage. NABL's suggestion to the Commission that the electronic and paper versions of an official statement be "substantively the same" instead of identical in all respects recognizes the differences in the two media and values compliance with the anti-fraud provisions and the absence of investor confusion as being of preeminent importance.
Thus, for example, omissions of certain non-material information in an official statement does not generally raise anti-fraud concerns. Similarly, anti-fraud concerns should not be deemed to exist if a printed version and an electronic version of an official statement varied in immaterial ways.
Websites and Disclosure
Governmental issuers usually establish Internet websites to provide information to the general public relating to themselves, their roles, bond issues, and others reasons.
As discussed in one of the NABL letters, one the most vexing issues may be the Commissions views on access to website information and "republication". Much of the Commission's focus revolves around the user's accessing of information and the shifting of the liability burden to the issuer/provider of the website information each time information is accessed. The electronic media model apparently carries with it the notion of a "continuous update" responsibility because by its very nature, documents in electronic format can be easily changed and therefore, never have to be view as being permanently fixed like a printed document. However, if viewed as a derivative method of communication, a governmental website can be viewed as a library created and maintained by the issuer for the general benefit and convenience of those who might forego a trip to city hall or similar physical location. Taking the analogy further, when a user accesses information made available at a website, whether current or archival in nature, the user is either allowed to review the information but not download it (i.e., "reference materials") or can download a copy (usually in a form, like Portable Document Format or PDF, that cannot be subsequently manipulated with word processing programs) for review offline (i.e., "checking out materials from the stacks"). Library reference materials havetraditionally not been allowed to be checked out because of their current nature which leads to greater usage and interest by readers and because the number of copies are usually quite small. To the extent that the information constitutes an offering document during a primary offering period, a continuous update standard is probably appropriate. However, for all other information, a continuous update should not be imputed to the provider of such information, particularly if the "library user" has no reasonable expectation that the "stacks" materials are up to date or are intended to be kept up to date.
Based on the foregoing, I would suggest consideration of the following points:
1 This legislation which would accord new technologies like scanned signatures, fingerprint or retinal scans and encrypted code the same legal weight as traditional "signed in ink" signatures in all fifty states, thus facilitating electronic commerce. The legislation also provides incentives to financing institutions to offer transactions solely on an electronic basis by relaxing or eliminating certain paper record-keeping requirements.
2 The Commission notes that the Release advances its central statutory goals, namely "ensuring full and fair disclosure to investors; promoting the public interest, including investor protection, efficiency, competition and capital formation; and maintaining fair and orderly markets".