The New York Times Column: Has the SEC bungled disclosure?

By Cydney Posner

You might be interested I this column today from Andrew Ross Sorkin in The New York Times. http://dealbook.nytimes.com/2010/11/08/a-lack-of-transparency-in-s-e-c-disclosure-rule/ In the column, Sorkin suggests that, in issuing (rather opaque) guidance regarding electronic communications on websites (see my email of 8/11/08 pasted below), the SEC may have "bungled" its disclosure rules by allowing companies to announce material news on their websites and not in press releases.

Sorkin reports that recent disclosures from Microsoft, Google and others have created confusion and have potentially given "some savvy investors an edge while potentially putting the rest of us at a disadvantage." As Sorkin reports, Microsoft decided to change the way it releases material information by posting the information on its website instead of issuing a press release, taking "advantage of some vaguely worded guidance from the S.E.C. that now allows companies [actually, the SEC guidance says "some companies in certain circumstances," but that's another issue] to publish market-moving news directly on their own Web sites without requiring any wider distribution." Here's the story:

So, on Oct. 28, at 4:15 p.m. Eastern time, Microsoft published its earnings report on its Web site. At 4:28 p.m., Microsoft filed its 8-K earnings report with the S.E.C., which companies are supposed to do before, or at least simultaneously with, the publication of an earnings report. [Microsoft acknowledged to Sorkin that this first effort wasn't exactly perfect.]

Then, at 4:44 p.m., almost a half-hour after Microsoft had published its results, it issued a media advisory in a traditional press release to remind the world that it had released its earnings, though it didn't include any numbers, just a link to its Web site. So if you had gone to Yahoo Finance or Google Finance looking for a copy of the earnings report, it wasn't there.

Microsoft isn't alone. Google began publishing its results on its own Web site over the summer for the first time, too. The results were equally jarring. Google issued its second quarter results at 4 p.m.; the Reuters news wire didn't move a headline about the earnings until 4:21 p.m."

Sorkin contends that this disclosure trend undermines the purpose of Reg FD: In light of the prevalence of high-frequency trading "when every millisecond counts — even in after-hours trading — the move toward companies' distributing earnings and other market-moving information via their Web sites rather than through wider distribution channels raises some serious questions about transparency. And if Microsoft and Google are doing it, the rest of the Fortune 500 can't be far behind."

The SEC guidance at issue dates from the tenure of Christopher Cox , who, as SEC chairman, was almost obsessed –some might say to the exclusion of other concerns, such as preventing fraud and the breakdown of the financial system -- with modernizing communications. (Remember that XBRL is his brainchild too.) This particular debate was triggered in 2006 by Jonathan Schwartz, then CEO of Sun Microsystems, when he very openly lobbied the SEC to allow companies to make disclosures on their websites instead of through press releases. The SEC then issued interpretive guidance that allows a company to issue news on its website if the website is a "recognized channel of distribution" and the information has been "posted and accessible" and therefore disseminated "in a manner making it available to the securities marketplace in general."

Sorkin has now concluded, contrary to his initial enthusiasm for the approach, that the use of websites to deliver this type of information to the market doesn't work very well: "If every company were to release all of its market-moving news only on its Web site, investors would have to traipse around the Internet in search of the market-moving information. It's one thing for a news organization to have a scoop; it's quite another for a company to actively keep the news on its own site."

Apparently Microsoft received little pushback on its new system. A Microsoft official reported that it "chose to distribute its news online so that the company could provide more disclosure — including items like earnings slides and important performance indicators not included in a typical release. He also noted that most of Microsoft's most important investors ‘subscribe to the RSS feed.'….[Microsoft also] saved some money by not putting out a full press release."

Sorkin also reports that observers believe that self-publishing may help to reduce leaks.

Nevertheless, he seems to regret that, while "the Internet has done a lot to democratize market-moving news and make it more transparent," we may yet be moving away from the "age of information at your fingertips," when "any shareholder or prospective shareholder can look up a stock ticker on any financial Web site and see the latest news and numbers from a company."

Interestingly, it's taken two years for companies to begin taking advantage of the SEC guidance, and it remains to be seen, if this column is any indication of general sentiment, whether the practice becomes generally accepted as Sorkin predicts.