Problems Amid the Promise
What appears to be a brave new world of electronic disclosure and technological initiatives for the SEC may just be a case of history repeating itself, according to Thomas O. Gorman of Porter Wright Morris & Arthur.
Certainly investors will have better access to company documents after completion of the U.S. Securities and Exchange Commission’s mandated changeover to the IDEA system (short for Interactive Data Electronic Applications). And corporate counsel should be more confident in satisfying fair disclosure regulations via company website postings following a new SEC guideline about electronic dissemination.
Still, concerns about adequate public disclosure remain—and to a larger degree, says Gorman, who chairs the securities litigation practice group for Porter Wright in Washington, D.C. He is co-chair of the ABA’s Subcommittee on Securities Fraud, an offshoot of the Criminal Justice Section’s White Collar Crime Committee; and he has worked in the SEC’s enforcement division and general counsel’s office.
The world of securities has changed dramatically, even though principal questions of what to disclose and how are similar to those in the past, Gorman says. “What you have is the SEC trying to update the disclosure system. But that creates a whole host of liability issues,” he says.
The SEC’s requirement that within two years all publicly traded companies and mutual funds switch to interactive XBRL (extensible business reporting language) software—the IDEA program—means practically anyone will be able to quickly comb through filings and extract pieces of information. Individual lines of data can be tagged, customized reports can be created, and word definitions are a mere click away. There is a graduated implementation schedule, and all public companies and mutual funds are required to make the transition by the end of 2009.
Empowering though that might be, the initiative also means this information can be taken out of context and made very misleading, Gorman says. When cut-and-paste reports can be created quickly and easily, data can be manipulated to show just about anything and liability concerns crop up everywhere, he says. There is also the issue of different companies documenting things different ways, such as the numerous methods used to record executive compensation. And then there is human error.
But at the same time that XBRL software has the potential to make investors’ lives easier, an SEC interpretative release about when and how companies can satisfy disclosure requirements on their websites could allow in-house counsel to sleep a little better.
SEC Regulation FD, for “fair disclosure,” requires that company information be disseminated to the public all at once to ensure that no one group gets preferential treatment. The Internet has been used as a supplemental means of distributing company information, often in concert with Form 8-K filings, news releases and annual meetings or other public forums.
The new guideline says information posted on a company website is public. It also provides specific ways for corporations to ensure an online posting satisfies Regulation FD. In addition, some online liability standards are provided to pre-empt lawsuits.
According to David T. Mittelman, counsel and deputy leader of the securities and capital markets team at Reed Smith in San Francisco, the release “gives companies a hook to hang their hats on.”
Mittelman says, “It would make a small change in the balance” of litigation, “probably tipping a small bit toward the company.”
On the other hand, in-house counsel will have to be ever cognizant of what’s going up on websites. Mittelman says another possible effect is that there will be more of everything to monitor online.
“The disclosure system as we know it may change from periodic disclosure to constant disclosure,” Mittelman states. “This guidance is more a road map than a safe harbor. … Public companies still must exercise judgment in how, when and where to disclose information. There are risks associated with relying solely on website posting.”
Despite some concerns, Gorman and Mittelman are generally in favor of the SEC’s recent measures. In terms of future liability and litigation, both sides will have to learn to adjust, they say.
Gorman says, “I think overall these things are good for everybody. But they create a new set of challenges for corporate lawyers, and at the same time, they create challenges for litigation people who are always concerned about liability.”