NASDAQ has sparked an uproar among its listed firms and investor relations service providers with a proposal to bundle news releases and website services into its listing fees.
We cover the furor over the proposal in a separate story. In this article, I want to address a question posed by at least one company in its comments to the SEC.
That question is whether Nasdaq, as a stock exchange and self-regulatory organization, has any business owning a newswire and website hosting company in the first place.
Obvious conflict of interest
I think the answer should be obvious. Nasdaq should not be in either of these businesses. Nasdaq owning the PrimeZone news release service and the Shareholder.com website services firm puts the exchange in a conflict of interest.
There is no disputing it. I don’t see any nuances or gray areas. A for-profit organization with regulatory powers should never be in a position to regulate increased profits for itself. It is wrong, plain and simple. Yet, that’s exactly the position Nasdaq finds itself in today.
The fact that Nasdaq’s management and board ever ventured down this path is nothing short of an embarrassment for America’s capital markets and regulators.
Coercing listed companies
The outrage is aggravated by the sheer audacity of Nasdaq thinking nothing of using its unique position to prop up PrimeZone and Shareholder.com. The exchange wants to make all of its listed companies pay for services from PrimeZone and Shareholder.com — even though most already use competing services.
Nasdaq is in effect coercing its listed companies into relationships with PrimeZone and Shareholder.com, without regard for whether their services are up to standard or compatible with listed companies’ ethical and professional standards.
If Nasdaq-listed firms elect not to use the exchange’s captive service providers, they will in effect be paying twice for a service they receive only once.
Treating customers badly
This is not the behavior I expect of a stock exchange or an American public company in what is supposed to be the world’s most respected market.
That Nasdaq thought this proposal was acceptable points to a deep dysfunction within the exchange. There are people working there, some of them apparently in high office, who clearly have no concept for why an exchange must always take the high road and set a good example.
There is also no doubt that Nasdaq’s bundling ploy is anti-competitive and a slap in the face to its listed companies. These anti-competitive practices will hamper innovation, which ultimately will hurt investors.
Why would anyone own, want to do business with, or be acquired by a company that treats its customers so badly?
I think the SEC needs to step in and do its own investigation, but here’s how I see it…
Nasdaq and PrimeZone
Nasdaq should never have purchased the PrimeZone newswire service. The exchange has an inherent conflict of interest in owning a newswire service. There are also doubts over the future of newswire services that make them risky investments.
Nasdaq’s conflict of interest is obvious. The exchange has status as a self-regulatory organization and has the power to enforce disclosure requirements on its listed companies, including requiring them to issue news releases and post information on their websites.
Since it now owns a newswire and website hosting service itself, the exchange stands to profit by passing and enforcing rules that require companies to send out news releases and post information on their websites. It has the power to manufacture demand for its products by simply making them a requirement of continued listing on the exchange.
Huh? Are we talking about America or some third-world or socialist backwater?
At the same time, there is currently an important debate underway over whether it still makes sense to require companies to use newswire services when there are cheaper new technologies like RSS that can effectively do the same thing. For these new technologies to be recognized as meeting disclosure requirements, changes are needed to SEC, Nasdaq and NYSE rules.
Regulators need to give companies a green light to use website postings in combination with RSS and email alerts as an alternative to using news releases. That’s not going to happen easily, in part because the wire services stand to lose millions and will fight any change tooth and nail. They are an extremely powerful and influential lobby.
But what about Nasdaq, which way will it go when the question comes up about letting companies bypass newswire services for alternate means of disclosure? Before it owned a newswire service, you could probably have counted on it to make an unbiased decision. But now that the exchange is also a newswire owner it cannot be unbiased.
As long as dissemination via newswire is the de facto requirement of the exchange, Nasdaq stands to gain financially from the status quo and has no incentive to recognize alternative dissemination options. This will hamstring innovation and increase costs for Nasdaq-listed companies relative to their competitors.
In addition, there is the question of competition. Nasdaq has an unfair advantage over its three newswire competitors given its unique status as an exchange and its ability to use its listing fees and other revenue sources to subsidize its newswire business.
Taking everything into account, Nasdaq as a newswire owner is intolerable. Nasdaq is hopelessly conflicted by its ownership of PrimeZone.
Its board should do the right thing and divest the newswire business forthwith, not just for its own sake but for the sake of the already compromised global trust perception of America’s capital markets.
Failing that, the SEC should force a sale. Anything less is a cop out.
Nasdaq and Shareholder.com
Nasdaq should be required to divest its Shareholder.com business. Shareholder.com builds and hosts investor relations sections of public companies’ websites. Fees are based on the range of Shareholder.com services that companies use.
Nasdaq is in the unique position of being able to use its marketplace rules to dictate what information issuers are required to post on their websites. Any increase in website disclosure requirements will financially benefit the exchange. This is an unacceptable conflict of interest.
But there’s more, much more, and it’s just plain sleazy.
The integration of Shareholder.com services with Nasdaq’s market intelligence services will severely compromise the confidentiality of investors. Shareholder.com’s website services employ highly unusual surveillance technologies that track investor activity on issuer websites to an unprecedented level of specificity.
Information Shareholder.com collects includes the name and affiliation of a user, when they visit web pages, what information they use, how long they stay, what emails they open from Shareholder.com clients and what print materials they order. This information is then combined with other information, such as share ownership and investor targeting databases.
This website tracking is most often done without being disclosed to investors and never with their consent. These website tracking practices are illegal in Europe and often run counter to the privacy policies and practices of issuers themselves.
It’s wrong for Shareholder.com to use this technology and it’s wrong for Nasdaq to let it continue. But Nasdaq has no intention of stopping the distasteful practice. Indeed, it wants to make it even more invasive.
Nasdaq suggests in its proposal to the SEC that it wants to combine Shareholder.com’s website spying tools into the exchange’s existing market intelligence offerings.
To quote the relevant section of the proposal:
“Specifically, Nasdaq intends to provide enhancements to NASDAQ Online and the Market Intelligence Desk that will provide companies with additional information and analysis to help manage their investor relationship programs and understand movements in the market for their securities.”
In effect, by integrating Shareholder.com website surveillance – and possibly PrimeZone news release surveillance — with its market intelligence tools, Nasdaq hopes to create a super surveillance system that will compromise investors’ confidentiality from the time they start their research on a company’s website through to their trade executions on the exchange.
Investors mostly will be unaware of the monitoring. How will they feel when they find out that issuers are monitoring their every move and compiling detailed personal reports on their activities? I believe many are likely to feel betrayed, violated and deceived. That will undermine investor confidence in Nasdaq, it’s issuers and likely the market in general.
If there is one lesson I learned working in the securities industry, it is that the securities markets depend on trust. That an institution as publicly recognizable as Nasdaq has apparently lost sight of this fundamental principle is deeply disturbing.
Finally, there is the issue of Shareholder.com having preferential insight into potential new Nasdaq disclosure requirements ahead of its competitors. This will give it an unfair advantage to develop new products in anticipation of them being mandated by the exchange.
It could work the other way as well – the exchange could mandate that companies use a product that Shareholder.com has developed. That product may have merit, or it may not. The point is that we will be left to wonder — and competitors will be forced to catch up.
Nasdaq’s only reasonable course is to divest Shareholder.com. Whoever buys the company will need to reevaluate the value proposition because spying on investors is not it.
So what’s next? Well, it’s up to the SEC now. By asking the SEC to approve its listing fee structure, Nasdaq is asking the US’s top watchdog to condone and be complicit in its misguided and conflicted adventures into investor relations services.
For the sake of investors and the public’s confidence in the capital markets, I hope the SEC is smarter than Nasdaq gives them credit for.