By Robert MacMillan - Analysis
SAN FRANCISCO (Reuters) - A decision that may allow U.S. companies to use their websites to release market-sensitive information could hurt firms that distribute press releases and give some investors an edge over others.
The Securities and Exchange Commission, in a little-noticed decision last week, said companies could post information about themselves on their websites and blogs, and in some cases skip traditional distribution channels.
The trouble, press release distributors say, is that companies risk running afoul of regulations that require them to disclose information simultaneously and quickly.
Corporate press releases are generally available widely on the Internet, mainly through BusinessWire, which is part of Warren Buffett’s Berkshire Hathaway Inc, and PRNewswire, a division of United Business Media Plc.
“When you post information on a website, it’s not simultaneously available, and nobody really knows it’s there either,” said Cathy Baron Tamraz, chief executive of BusinessWire.
The debate revolves around “Regulation Fair Disclosure” (Reg FD), a rule that “material” financial news, such as results, executive changes or criminal investigations, be distributed to the public at the same time and for free.
“You have to really push it out and take steps to make sure that everyone gets their hands on it whether you’re the largest institutional money manager at Calpers or if you’re an individual investor in Kansas City,” said Dave Armon, president of PRNewswire.
For example, thousands of companies release crucial information in their financial results through BusinessWire, PRNewswire and others.
The companies pay the distributors to put out the releases, and can specify such things as timing and the breadth of distribution. In turn, distributors will help check for errors and have controls to try to prevent fraudulent releases.
News outlets like Bloomberg, News Corp’s Dow Jones Newswires and Thomson Reuters Corp’s Reuters News then write stories about them for their customers and the public. They also distribute the press release feeds.
If companies interpreted the SEC guidelines to say that Web disclosure is enough, under a worst-case scenario they could release the information only on their websites, Tamraz said.
The most recent known example is software company Sun Microsystems Inc, which last year caused an uproar by releasing its quarterly results on its website rather than through the press release services.
Hedge funds and other professional investors could keep up with the technology by working with companies that specialize in scraping the Internet for market-sensitive information that may not show up in a filing.
One start-up, SkyGrid, has received an uptick in inquiries since the SEC’s guidelines came out, Chief Executive Kevin Pomplun said. SkyGrid is attracting venture capital interest, recently raising $11 million from RRE Ventures and BlackRock Inc.
“We don’t think the newswires are going anywhere,” he said. “We’re giving (investors) something outside of what they’re already getting today.”
Issues that further complicate Web disclosure include sites crashing when too many people crowd onto them for breaking news, and security measures to prevent false information from being posted by hackers, Tamraz said.
BusinessWire and PRNewswire officials say they think their businesses will not suffer because of the guidelines, but worry that companies could over time interpret them as meaning they do not have to rely on proven ways of disclosure.
The idea behind the guidelines was to encourage companies to take advantage of recent technology advancements, said Dennis Beresford, a professor at the University of Georgia, and one member of a group that the SEC convened to advise it on its Web recommendations and other guidelines.
“We simply observed that the SEC’s guidelines for what is appropriate were several years old,” said Beresford, former national director of accounting standards at auditors Ernst & Young and former chairman of the Financial Accounting Standards Board.
The advisory committee’s report says its recommendations on increased website usage are “not intended to affect the valuable role that newswires and other news vehicles play in disseminating important company information.”
“I didn’t think they would be that controversial,” said advisory committee member Edward Nusbaum, chief executive of auditing firm Grant Thornton.
The SEC’s report outlining the guidelines says there are “very limited circumstances” where the Internet could be the sole way to disclose information, and urged companies to take additional steps to notify investors.
No matter what the rules are, some people will abuse the system, said David Martin, co-chief of the corporate practices division at Covington & Burling LLP and former director of the SEC’s Division of Corporation Finance.
“Am I going to say to my clients, ‘Play ”Where’s Waldo“ with this information?’ No,” said Martin, who advises companies on corporate governance. “I understand the point, but I‘m not terribly worried about it.”
BusinessWire has embarked on a campaign to lobby against the guidelines. In a commentary distributed to industry publications, it said they “will lead to investor inequality and market inefficiencies, troubling trends for skittish retail investors, who place a premium on market fairness.”
Thomson Reuters refrained from criticizing the rules.
“We support the free flow of information, champion innovation and continually monitor key websites for breaking news,” a company spokesman said.
“At the same time, we recognize the risks of fragmentation of news flow and would want to guard against the possibility of erroneous or intentionally misleading information being disseminated to investors,” he added.
Dow Jones and Bloomberg officials were unavailable for comment.
Smaller investors stand to lose the most, said Barbara Roper, director of investor protection at the Consumer Federation of America, who said the SEC’s guidelines amount to a “nondisclosure disclosure model.”
“There are those companies that will ... broadly disseminate the positive information they want investors to hear and quietly post the bad information that they don’t want them to hear,” she said.
“The fact that there’s a needle in the haystack doesn’t mean that you can find it.”
Editing by Braden Reddall