Why almost no one is complying with Regulation FD

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LAST July, the US Securities and Exchange Commission (SEC) approved new guidance for company websites that covered a broad spectrum of issues that have apparently been holding companies back from making better use of their websites as a source of disclosure.

Although the interpretive release provided advice on a range of topics, including links to third-party information and company participation on blogs, the issue that attracted the most attention was the SEC’s recognition that standalone website and blog postings, under specific circumstances, can meet the public disclosure requirements of Regulation FD.

While the Reg. FD guidance was seen as a major move forward by some, including myself, the reaction from the issuer community and most corporate securities lawyers has been much more muted. And PR wire services, which get a large portion of their revenues from distributing corporate disclosures, have gone on the offensive to attack websites as a source of disclosure, claiming that their systems remain the only fair way for material disclosures to be released to the market.

With a few notable exceptions, most law firms have now counseled their clients not to make any quick changes to their current Reg. FD disclosure practices. They have criticized the new guidance as vague and cautioned that whether a website posting is public for the purposes of Reg. FD is a difficult facts and circumstances determination. Better to do nothing, seems to be the consensus view.

But I say the lawyers have failed their clients. Why? Because doing nothing means almost no one is complying with Reg. FD.

PR wire services not simultaneous

What few people realize is that disclosure via PR wire services is not simultaneous. Some investors, mostly professionals with access to expensive subscription services, are trading in extended hours on information they receive from companies up to several minutes ahead of most other investors who rely on public sources of information, such as company websites or popular investment websites like Yahoo! Finance.

The uneven access of the current system might surprise many because the PR wire services routinely talk about the “simultaneous” nature of their services with great gusto and hyperbole. As recently as this month, for example, Business Wire claimed in a letter to the SEC (PDF 55KB):

“In actual practice, as opposed to a coveted ideal, all investors have equal and unrestricted access to market-moving information. There are absolutely no advantages from an access standpoint. In layman’s terms, professional money managers monitoring a Bloomberg terminal, and senior citizens eyeing their portfolios on Yahoo! Finance at home, have totally equivalent access to price-sensitive news that may influence their investment decisions.”

However, that is simply not true. If you read Business Wire’s NX patent very carefully, US patent N. 7069245, you will realize that only organizations that have NX software installed can access the information simultaneously. Business Wire’s system requires the installation of a proprietary viewer on the recipient’s computer system that unlocks pre-delivered news releases, something most investors do not have.

Without this, Business Wire uses the same basic Internet technology as all the other PR wire services, which Business Wire in its patent documents acknowledges “can not insure that information would reach multiple destinations in a fair and simultaneous fashion.”

I have personally observed delays of as much as 3 minutes between when news was released in Business Wire’s feed and when it appeared on a public website. To be clear, all of the PR wire services have these delays when posting material releases to public websites. The typical delay is between 1 and 4 minutes depending on the time of day, length of the release, the website used and other factors.  In one recent case, a release took 7 minutes to appear on an online brokerage firm’s client website.

Don’t take my word for it, look at an independently verifiable example concerning Google Inc.’s  Q3 earnings announcement at 4:01pm ET on October 16, which was issued via Business Wire. In a transcript of a live blog by the popular Silicon Alley Insider, it is noted at 4:02pm ET by one of the three bloggers covering the event,  ex-analyst Henry Blodget, that Google’s stock is experiencing a “huge move up in aftermarket per Yahoo, but I don’t see release yet.”

In fact, it was not until a full minute later, at 4:03pm, that the Silicon Alley bloggers and the general public gained access to Google’s earnings release on Yahoo! By that time, however, average investors had missed the opportunity to participate in informed trading as Google’s stock was already trading up almost 9% in the after-market.

Clearly, some traders received Google’s news release almost two minutes before the release was posted to Yahoo! Finance, the most popular website for US investors. The privileged few had an unfair advantage over other investors to trade on the information. In today’s highly volatile markets where 90% of companies report their earnings during extended hours trading, such uneven access is unacceptable.

Without simultaneous website posting, it’s not fair disclosure

More to the point, Regulation FD requires simultaneous disclosure to the public when management intentionally discloses material non-public information to analysts and investors in a private setting. Those professional investors and analysts who have direct access to wire service feeds are in a private setting and so companies are obligated to ensure that the information in the feed is simultaneously accessible to the general public.

One way to do this, of course, is to ensure that material news is posted on the company website simultaneously to it being released via a PR wire service. This will give anyone the opportunity to access the information at the same time as those who currently have privileged access via expensive subscription services.

However, very few companies post news releases directly to their websites, and I know of only one (Sun Microsystems) that does it at the precise moment that the same information is released on a paid newswire service. About 75% of companies today have arranged for news releases distributed via their wire services to automatically appear on their sites in much the same way they appear on Yahoo! Finance, which involves the same typical delays.

Indeed, sometimes companies’ investor relations websites are the last places to post material news. For example, Cisco’s earnings announcement on November 5 was only available on its investor relations website 7 minutes after it was released via Marketwire. It also was slow in being posted to Yahoo! Finance, appearing 4 minutes after the 4:05pm ET release time.

In effect then, when almost all US companies issue material news today, they are providing it to a select few investors for the first one to four minutes, which clearly is not fair disclosure.

So unless you are posting your news releases on your IR website at the very instant that they are released via a wire service, you are not disclosing information fairly. And you should be in a position to prove what information your company released on its website, when it did so,  how that information was displayed, and that investors knew it was there.

We have outlined a process for scheduled disclosures that any company can adopt to ensure that it is meeting Reg. FD requirements while using its website as its primary disclosure channel.

If you want to continue sending full-text earnings releases via the wire services, please continue to do so, but it’s not going to help you comply with Reg. FD and may even be contrary to the regulations if you’re not taking steps to ensure the same information is simultaneously available to the public at large.

Because, as you now know, PR wires are neither fair nor simultaneous.

Dominic Jones

Dominic (bio & disclosures) is IR Web Report‘s founder and an online investor relations consultant. He advises leading public companies and investor relations service providers worldwide on using the web for disclosure, engagement and profile building. You can contact him via the contacts page.