Social Media, the SEC and Corporate Disclosure – a Wobbly Three Legged Stool

I’m always surprised by it, but it turns out that some people actually read what I write. In my last post I wrote about the practical implications of the SEC’s recent Netflix social media investigation. In a nutshell, here’s what I said:

“…the release basically establishes a safe harbor for the use of social media which investor relations departments should waste no time in establishing as a prudent risk management tool. The SEC has said that companies should take steps to alert the market about which forms of communications a company intends to use for dissemination of material, non-public information. Therefore, adding language to a company’s web site and press releases to the effect that the company may from time to time use social media sites to disclose important information would seem to be the prudent thing to do.”

Shortly thereafter I received an email from Broc Romanek at TheCorporateCounsel.net (www.thecorporatecounsel.net) explaining his take on the issues at hand. I have a great deal of respect for Broc and will readily admit that he knows more about the ins and outs of how the Securities and Exchange Commission works and thinks about issues than I do. On the other hand, I’ve spent the bulk of my career inside public corporations and have a pretty good feel for that particular viewpoint.  I’ve reproduced (with Broc’s permission) the email exchange below because I think it is a good illustration of the two points of view on this subject.

John – on your blog about the SEC’s guidance, the CYA approach actually is problematic. As borne out on my webcast on this topic last week, I hear that the SEC Staff is not happy with those companies announcing a bevy of SM channels for which they have no real intention of using them as investor communication venues. And investors probably don’t want to be forced to track a bevy of channels for which the company doesn’t intend to provide useful info for them. It’s a loser on both fronts.

thx, broc

Broc:

I recognize that it's problematic, but it is a problem the SEC created. If I was a general counsel, and I had the opportunity to create one more layer of insulation from Reg FD claims, I would grab it. Fear of Reg FD retroactive enforcement is a giant bugaboo for many companies, so doing everything you can to lower the chance that the SEC will open an investigation makes sense.

From an investor's standpoint it is a real headache to follow multiple feeds, but most investor relations departments will take the view that it is not their job to make the analysts' job easier.

I think the CYA approach only works if the social media site is widely followed and qualifies as a recognized channel of distribution, but as more companies use social media, and CEOs become more comfortable with blogging & posting, there has got to be a way to facilitate open communication without constant fear that you will wander into the Reg FD quagmire.

John

John: I believe there is way too much paranoia about Reg FD compliance. Just because a statement may be Reg FD compliant – because a CYA channel was created – it isn’t insulated from a 10b-5 claim that the statement was misleading or omitted something, which will be the more likely result – and much more serious result – when something “material” is posted on a SM channel, particularly Twitter since it is limited to just 140 characters.

Broc

I’m not sure what all the implications of this social media stuff are, but this is probably a good illustration of the law of unintended consequences relating to governmental regulation. The SEC says its OK to use social media to disclose material non-public information if it qualifies as a “recognized channel of distribution” for communicating with their investors, but then is not happy when companies announce they intend to use them. Companies on the other hand, see this as a way to add a layer of protection so they don’t wind up in the SEC’s crosshairs when their CEO either gets carried away when writing a blog or Facebook post or writes something that they genuinely believe is not material as Reed Hastings of Netflix did.

The point of all of this should be to enhance and facilitate the flow of information to investors and allowing social media to serve as a recognized channel of distribution will help accomplish this. 

The Practical Implication of the SEC’s Netflix Social Media Investigation

Investor relations Musings has been on hiatus over the past five months as various items from my personal life – selling a house, moving back to the Chicago area, buying a new house, finishing my teaching at the Jones Graduate School of Business at Rice University – have conspired to keep me from doing much writing. However, now I’m back to add my two cents to whatever investor relations topics catch my fancy.

In the period during which I’ve been silent, perhaps the most interesting investor relations development has been the SEC’s report of investigation regarding Netflix. You may recall that Reed Hastings, the CEO of Netflix, used of his personal Facebook page to disclose that Netflix had exceeded 1 billion hours of viewing during a single month and the SEC investigated whether this constituted a violation of Regulation Fair Disclosure. The case presented a number of interesting issues. First, there was the  threshold question of whether an internal company metric such as viewing hours should be considered material, when company revenue was based on fixed subscriber fees, not viewing hours. Second, the case presented a great example of how a company, by talking about an internal company metric such as viewing hours in both public documents such as press releases and shareholder letters, and in less public documents such as blogs and Facebook pages, builds a case for the SEC that the information is in fact material. (This is a great example of how trying to be transparent can get you into trouble with regulators, but that is a topic for another day.) 

However, the SEC sidestepped these issues by giving Reed Hastings and Netflix a pass on any regulatory sanctions and using the investigation to issue guidelines on the dissemination of material non-public information through social media sites. In a nutshell, the SEC said you can do it, as long as you tell investors where to look and your social media sites qualify as a “recognized channel of distribution” for communicating with their investors. 

From my point of view, the release basically establishes a safe harbor for the use of social media which investor relations departments should waste no time in establishing as a prudent risk management tool. The SEC has said that companies should take steps to alert the market about which forms of communications a company intends to use for dissemination of material, non-public information. Therefore, adding language to a company’s web site and press releases to the effect that the company may from time to time use social media sites to disclose important information would seem to be the prudent thing to do. For example, here’s what General Electric said in its first quarter 2013 earnings release: 

“GE’s Investor Relations website at www.ge.com/investor and our corporate blog at www.gereports.com, as well as GE’s Facebook page and Twitter accounts, contain a significant amount of information about GE, including financial and other information for investors. GE encourages investors to visit these websites from time to time, as information is updated and new information is posted.”

For most companies the point of this statement would not be to establish social media as their principal points of disclosure, but rather to insulate them in the event some important piece of information slips out in a twitter, Facebook or blog post. Remember, what is considered material, non-public information is determined with the benefit of 20/20 hindsight.

One Tweet Over the Line - Social Media, Investor Relations and Common Sense

Occasionally a sacrifice must be made to the gods of new technology. That is why innovation is sometimes referred to as “the bleeding edge”.  The latest cautionary tale about the brave new world of social media just happens to be about Gene Morphis, the now former CFO of Francesca’s Holdings, a public company, who used Facebook and Twitter to make comments about company and board activities and got fired for his comments.

We have been living with social media for a number of years now, so perhaps it’s not exactly leading edge, but in areas touching upon investor relations, companies have been late adopters, so there is not a lot of precedence to guide people. However, there are two touchstones people should use when putting out blogs, tweets and other social media postings.

First, consider what the Securities and Exchange Commission has said on the subject. To put it plainly, the SEC has stated that that statements made by a company, or anyone who could be considered as speaking for the company, must comply with all of the requirements and restrictions of the securities laws. That means that you must be truthful, complete and not misleading in any statements you make. You also have to comply with the requirements of Reg. FD, and if your blog or twitter feed doesn’t qualify as a broad based distribution method (and most probably do not) then you cannot use it to release material non-public information.

The second item to take into consideration in making social media comments about your company is plain old common sense. One way to test what you want to put in a blog or twitter post is to ask yourself, “Is this something I would be comfortable saying to a room full of equity analysts?” If not, then don’t put it out on the Internet where everyone can see it. This is not rocket science, but there seems to be a switch that gets flipped when some people get on the computer and start typing. People seem to think they can say anything and not be held to the consequences. Who can forget John Mackey, the CEO of Whole Foods making derogatory postings on a discussion board about a company Whole Foods later acquired? (As an aside, Mackey appears to have learned from his missteps as he now has a blog on the Whole Foods web site which gives you good insight into the way he thinks about his business.)

In the case in question, there are a number of statements Mr. Morphis made that are just plain dumb, and probably were reason enough to get him fired by a CEO and Board of Directors lacking in a sense of humor. One example was on March 6th when he said, “Dinner w/Board tonite. Used to be fun. Now one must be on guard every second." But the post that, in my view, he deserves to get fired for was made the following day when he wrote, "Board meeting. Good numbers=Happy Board." Given that the quarterly earnings were not released until March 13, it appears to me that he was making a comment on the upcoming quarterly earnings.  It violates both of the considerations I discuss above: it appears to disclose material non-public information in a selective manner, and it is something that even the most junior investor relations officer would have the common sense not to say. It is clearly, to misquote an old Brewer & Shipley song, one tweet over the line.

Can’t This Gang Shoot Straight?

The Securities and Exchange Commission used to be one of the most respected federal agencies in Washington. Some would argue that this is a low barrier to overcome, but nevertheless, the SEC was for many years considered a well run agency that, by and large, did what it was supposed to, and helped to give the United States the best and most transparent capital markets in the world. Alas, things have changed and now it seems that the SEC is the agency that can’t seem to get it right.

The most recent stumbles have come over the fact that the SEC Chairwoman, Mary Shapiro, who was given a mandate by President Obama to strengthen enforcement, failed to disclose to her fellow commissioners a conflict of interest involving the agency’s former top lawyer, David Becker. According to the SEC Inspector General’s report, it seems that Mr. Becker stood to have a financial interest in the settlement of the Bernie Madoff fraud case, and although he disclosed the potential conflict, Ms. Shapiro stayed silent on it, even allowing her fellow commissioners to vote on how to divide up the Madoff assets without telling them how their top lawyer might potentially benefit from the decision.

Not only that, but the Inspector General’s report also brings to light the fact that the SEC decided not to have Mr. Becker testify before Congress for fear that his conflict of interest would come to light. And this is from the agency that is charged with “full and fair disclosure” for investors.

This is bad enough, but it come after a series of other blunders over recent years that make you wonder if the agency has lost its way. Most notably, this is the agency, charged with protecting investors, that actively ignored the pleas of Harry Markopolos to investigate the returns being generated by Bernie Madoff, which turned out to be the biggest ponzi scheme in history.

More recently, and somewhat more mundanely, proxy access, a pet SEC project that would allow shareholders the ability to nominate directors using a company’s own proxy materials, was struck down by the Federal Appeals Court for the District of Columbia. According to the appeals court, the SEC had “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.” Further, the court said there is “good reason to believe that institutional investors with special interests” – such as unions and pension funds -- would use the proxy access rules to advance their own issues and chided the SEC for “ducking serious evaluation of the costs that could be imposed” by shareholders representing special interests. It certainly doesn’t sound as if the Court of Appeals thought the SEC was taking a fair and balanced approach towards rule making in this instance.

And finally, how about the $557 million lease the SEC entered into without competitive bidding, which the agency can’t afford and doesn’t need because the underlying assumptions for the space were incorrect. Never mind that Commissioner Shapiro approved the lease in a 10 minute unscheduled meeting and later said that “The agency made a terrible mistake here,” and “I view myself as being ultimately responsible.” In most corporations if you were responsible for a $557 million mistake, you’d be fired, or maybe the SEC would investigate you…

Proxy Advisory Services Regulation: What’s Good For the Goose…

As a commentator, one of the best things you can find to write about is when you come across someone being totally disingenuous; it’s almost as good as when companies do something really stupid (for which see “How Not to Run a Conference Call” December, 2007 and “What Was He Thinking, Whole Foods Version”, August 2007).

Which brings me to this week’s subject, the possibility of the Securities and Exchange Commission imposing regulations upon proxy advisory firms. Proxy advisory firms have grown in size and influence over the last twenty years. Their positions on corporate governance, compensation and proposed mergers and acquisitions have become important to both investors and corporations, creating in effect, de facto standards. Yet the manner in which the proxy advisory firms reach their recommendations and ratings, the formulas they use when looking at compensation and equity plans, and the process by which they make recommendations regarding merger and acquisition activity are considerably less than transparent. Further, the amount of research available to support their positions on corporate governance is less than overwhelming and far from conclusive. Finally, some firms, such as ISS, have actively worked both sides of the street, advising institutions how to vote and selling their consulting services to corporations to tell them how to structure things in order to get approval and high ratings from ISS.

So when the Securities and Exchange Commission asked for comments on the proxy process earlier this year it is not surprising that a number of comments came back suggesting that proxy advisory firms be subject to some regulation from the SEC, namely that proxy advisory firms should be subject to proxy rules and regulated as investment advisers, including mandated disclosure of specific conflicts of interest, transparency on how they develop their ratings and recommendations, and that they adopt procedures ensuring the accuracy of their reports and voting recommendations.

It seems as though the proxy advisory firms, which like more regulation for corporations, are not so happy when the shoe is on the other foot. Here’s Nell Minow, Chair of The Corporate Library and former general counsel and CEO of ISS in a comment letter to the SEC: “I would like to object in the strongest possible terms to the possible regulation of proxy advisory services.” Later in her comment letter, she goes on to explain how market forces will keep the proxy advisory services honest.

In other words, if we just let competition work without government getting in the way, everything should be fine. Of course this is exactly what they say doesn’t work for corporations when they want more regulation on say on pay, proxy access, compensation disclosure and a whole host of other corporate governance issues.

It does seem to make sense that these firms, which have a great deal of influence in how investment firms vote should at least be required to disclose the methodology by which they come to their ratings and recommendations, disclose any potential conflicts of interest (or better yet, be prohibited from conflicts of interest) and show they have stringent procedures in place to prevent inaccurate reports and recommendations.

After all, if increased disclosure and regulation is good for the goose (corporations), then it is certainly also good for the gander (proxy advisory firms).

Insider Trading – The More Things Change…

There’s an old French proverb, “plus ça change, plus c’est la même chose”, which translates into “the more things change, the more they stay the same” and that’s the way I feel about insider trading. Every few years, the topic seems to rear its ugly head long enough for prosecutors to make some headlines before moving on to other offenses.

In the past few weeks insider trading has come back into the news. Federal prosecutors recently unveiled a sweeping investigation centered upon the use of so called “expert networks” and involving subpoenas to SAC Capital, Janus Mutual funds, Fidelity Investments and Wellington Management. The current round follows about a year after the indictments announced in connection with the investigation of Galleon Hedge Fund and there appear to be a number of links between the two cases.

Insider trading issues are always going to be part of Wall Street as there is an inherent conflict of interests between our regulatory scheme and what motivates professional investors. The regulations seek to ensure fair and honest markets where all investors play on an even field. On the other hand, investors seek to gain an “investment edge” either through superior analysis or by figuring out insights to what may be happening at the company in question by piecing together disparate snippets of information. Given that there are significant amounts of money involved, Wall Street analysts are always going to push as hard as they can to gain an investment edge, up to, and sometimes over, the ethical line.

It doesn’t help matters that the current regulations and case law regarding insider information are not crystal clear. To greatly oversimplify things: If you are in possession of material, nonpublic information and you received it as a result of a duty to the corporation, or from someone who has such a duty, or if you have misappropriated the information in violation of a fiduciary duty, you can’t buy or sell the securities of that company. However, the mosaic theory, first enunciated by the federal courts in Elkind v. Liggitt & Myers, Inc., holds that analysts can assemble seemingly disparate non-material information into a material piece of information; that is, information that leads to a decision to buy or sell the stock. Of course, if some of the mosaic of information was obtained as a result of violations of duty to the company discussed above, things become somewhat less clear.

And there we have what I believe to be the crux of the current crop of insider trading cases. If you listen to the defendant’s attorneys you hear a constant drumbeat of mosaic this and mosaic that, portraying their clients as simple analysts who gain insight into companies by dint of digging harder than anyone else. If you listen to the prosecutors, what you hear is a tale of misappropriation of information that was known to be from sources that had a duty not to disclose the information, even if the piece of information was not material in and of itself. To my knowledge, there is no clear case law that governs in such a situation. Judges and juries are going to have to figure this one out, followed by inevitable appeals.

If we’re lucky, there eventually may be some clarifying language that will help people understand what they can and cannot do - what lawyers like to refer to as a “bright line” test. If we’re really lucky, the courts will give it a handy catch phrase such as “fruit of the poisonous tree” or “clean hands doctrine” that will help investors know what they can and cannot do.

Goodness knows, the securities laws could use some simple, clear rules that everyone can understand.

Reg. FD - There’s a New Sheriff in Town

Regulation Fair Disclosure has had an up and down history in terms of enforcement. It would appear that we are currently in an up cycle and investor relations officers need to have an enhanced sense of awareness about Reg. FD so that they don’t find themselves in the SEC Enforcement Division’s crosshairs.

A bit of history is in order at this point. Reg. FD was enacted by the SEC in August, 2000 in order to prohibit companies from selectively disclosing material nonpublic information to market professionals under circumstances in which it would be reasonably foreseeable that the market professionals would trade on such information. In enacting the regulation, the SEC was attempting to level the investment playing field by assuring that all investors receive material nonpublic information at the same time. Of course, given that investors are constantly looking for an investment edge, usually in the form of information, there were bound to be some built in conflicts in the actual operation of the rule.

In the first years following the adoption of Reg. FD, the SEC brought a number of successful enforcement actions, as if to drive home their point. In these cases, companies had their knuckles rapped because they: told analysts (i) that earnings estimates were “too high” or “aggressive” (In re Raytheon Co., SEC Release No. 34-46897 (Nov. 25, 2002)), (ii) they were entering into a new material supply agreement (In re Secure Computing Corp., SEC Release No. 34-46895 (Nov. 25, 2002)), (iii) through a “combination of words, tone, emphasis and demeanor” indicated that next year’s earnings would decline significantly” (In re Schering-Plough Corporation, SEC Release No. 34-48461 (Sept. 9, 2003)).

During this period the SEC also brought not one, but two enforcement actions against Siebel Systems. After acquiescing in the first enforcement action, Siebel got their back up in the second enforcement action and litigated the issue in Federal District Court, where the SEC met their Waterloo. Basically, the District Court ruled that the SEC was being too aggressive on how they enforced selective disclosure and that companies could make statements in private conversations with analysts that vary from their public statements, so long as the statements were “equivalent in substance” (SEC v. Siebel Systems, Inc., 384 F.Supp.2d 694 (2005)). And there the matter stayed, with the SEC bringing no further enforcement actions.

Until recently, that is. Since September 2009, the SEC has brought three enforcement actions for Reg. FD. In addition to the high profile case against Office Depot which I wrote about several weeks ago (Nudge, nudge, wink, wink – Office Depot and Reg. FD, October 25, 2010), American Commercial Lines and Presstek have been taken to the regulatory woodshed. In September 2009 the SEC settled a civil action against Christopher Black, former CFO of American Commercial Lines for emailing 8 sell side analysts from his home on a Saturday, adding "additional color" to a previous company press release that had stated "2007 second quarter results to look similar to the first quarter". Black's email said that "EPS for the second quarter will likely be in the neighborhood of about a dime below that of the first quarter", which effectively cut in half the previously given guidance. That email cost Mr. Black $25,000, payable to the SEC.

In March of 2010, the SEC settled a Reg. FD enforcement action against Presstek, Inc. for selectively disclosing its poor earnings outlook to a single investment advisor in a phone conversation, who then sold his holdings of approximately 500,000 shares. Although Presstek issued a public announcement about 12 hours later, they still wound up paying a $400,000 fine.

I have no special insights into the inner workings of the SEC, but it appears to me that for whatever reason – new political administration, new head of the enforcement division of the SEC, desire to nail some scalps on the wall following a number of highly publicized enforcement failures – the SEC has decided that Reg. FD will receive renewed enforcement attention. In reality, the underlying reason doesn’t matter. Investor relations officers need to sit up and take notice that the SEC is once again taking a close look at fair disclosure situations. After all, receiving a Wells Notice letter can really ruin your day.

Proxy Access - Who Benefits?

There is a famous Latin saying, “Cui bono?” that was used in Roman trials to help determine the underlying truth of a matter. The phrase translates into “To whose benefit?” and is meant to suggest the possibility of a hidden motive or that the party responsible may not be who it appears to be at first. And so it is with proxy access, recently adopted by the Securities and Exchange Commission.

The thinking behind proxy access appears pure at first – to promote shareholder democracy by letting shareholders utilize the corporate proxy statement rather than go through the expense of mounting a proxy campaign of their own. But over the years, I’ve come to be suspicious of anything that drapes itself in motherhood and apple pie, whether it comes from the right or left side of the political spectrum, and so I started to think about who really benefits from proxy access.

As I understand the new rule, shareholders who have held at least 3% of a company’s stock for at least 3 years will be able to nominate up to 25% of a company’s board of directors using the company’s own proxy statement. So I guess this is a move to open up corporate boards to shareholders, but I wonder, which shareholders?

Retail? Certainly not retail shareholders; for the most part they don’t reach the 3% threshold.

Hedge Funds? Unlikely, as the turnover in their portfolios means that it is doubtful they will hold stock for 3 years.

What about activist investors – might this new rule inure to their benefit? Possibly, but not to a large extent. A paper entitled “Hedge Fund Activism, Corporate Governance and Firm Performance” suggests that the median holding period for activist hedge funds is 556 days, or 18.5 months. While this might be longer than you thought, it is still only half the time required by the new rule.

Mutual Funds? I suppose mutual funds might be a beneficiary of the new rule, but I’ve never known them to take an interest in nominating directors.

So who’s left? What entities have the financial muscle to hold 3% of a company’s stock for 3 years? What entities have exhibited a desire to use the proxy system to agitate for their own agendas? The answer is: Foundations and Pension Plans. Of these the bulk of the money is represented by pension plans. Add to that the fact that, according to The Wall Street Journal, four out of five for profit corporations have moved away from pension plans, while unionized employees both in the private sector and government, have fought to retain their fixed benefit pensions and the picture of who benefits starts to become clearer.

Least you were in doubt on the issue, consider also that the SEC adopted the rule in a party line vote, 3 democrats for and 2 republicans against. Suffice it to say that republicans don’t get many campaign contributions (or votes) from union members. Finally, consider two of SEC Chairwoman Shapiro’s key appointments to the Commission staff: senior advisor Kayla Gillian, former general counsel at Calpers, the California state workers pension fund, and Richard Ferlauto, former pension director at AFSCME, the union representing state and local government employees nationwide to the investor advocacy office.

Add it all up and it becomes clear that who benefits under the guise of shareholder democracy for all is really a limited number of unions. Now instead of spending union member’s dues in proxy contests they can lay that cost off on the corporations. It’s a nice deal if you can get it.

The SEC and Climate Change – What Are These Guys Thinking?

First, a brief reminder that my seminar “Fundamentals of Investor Relations” will be held February 24^th in Houston. The seminar blends real world experience with some of the tools we teach in business school such as valuation, decision tree analysis and efficient markets as they interact with the finance, capital markets, legal and communications issues of investor relations. If you’re interested, go to my website, www.palizzapartners.com and click on the seminars tab.

The Securities and Exchange Commission faces a daunting array of issues that need attention - we’re just recovering from the most severe financial crisis our country has faced since the Great Depression which severely tested the structure of our capital markets, credit rating agencies face a crisis of confidence based upon their performance in rating complex mortgage backed bonds and the inherent conflict of interest they face in being paid by the issuers of the bonds they rate, the proper regulation of derivative instruments needs to be addressed, and their enforcement division wasn’t able to identify the billions of dollars being stolen by Bernie Madoff in spite of receiving complaints against him on at least two occasions. So what pressing issue does the SEC choose to tackle first? CLIMATE CHANGE! In the words of Commissioner Kathleen Casey (a Republican who voted against adoption of the release) “our consideration of this release today sends a curious signal to the investment community about what we view as the most pressing issues facing the Commission”.

The interpretive release, which the SEC commissioners adopted in a 3 – 2 party line vote (guess which party voted in favor of the climate change release) and which as of this writing still hasn’t seen the light of day (how’s that for timely disclosure of a material event?) purports not to change disclosure requirements. The last time I checked the definition of materiality as set out by the Supreme Court in Basic v. Levinson, it was “Information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision”. In over thirty years of working in the field of investor relations I have never had an investor who owns, or is interested in owning shares, ask a climate change question. Could I have been dealing with unreasonable investors all these years? I have had questions from advocacy groups, but they are not investors, which is a crucial difference as far as disclosure requirements go.

Previous SEC interpretive releases have focused on areas such as analysis of long and short-term liquidity and capital resources, segment analysis, the effects of federal financial assistance on the operations of financial institutions, and the disclosure of preliminary merger negotiations. It seems to me that these are proper areas for the Commission to be concerned with; they are concrete, defined in scope and fairly immediate. Now we have a release, which according to the speeches of the SEC commissioners, requires companies to consider the reputational damage and its effect on their financial condition caused by their greenhouse gas emissions and requires them to disclose if their operations may be at material risk from the physical effects of climate change. So here are a couple of questions: How do you measure reputational risk in a meaningful and defined way? How do you know if your operations are at risk from climate change as opposed to normal weather shifts? Last time I checked hurricanes didn’t come with tags that say, “climate change related”. This is just bad regulation, requiring companies to engage in speculation about future events. In most other instances the SEC discourages speculation and requires you to make disclaimers about how the events may not come to pass, but this is an issue that is on the political agenda for the party with the majority of Commissioners on the SEC and so speculation is okay.

And just to remind you, the SEC also put out an interpretive release requiring companies to discuss Y2K issues, and we all know how material they turned out to be.

XBRL – Part Three, or, Son of the Return of XBRL

Back in January and February of this year, I wrote a couple of pieces about how I didn’t really get what all the whoopla surrounding XBRL was about. Those pieces generated a fair amount of comments and I even wound up talking to the folks at the SEC about XBRL. Not to put too fine a point on it, at the time I stated that I just couldn’t understand how XBRL was going to revolutionize the use of data by investors.

While I was doing research the other day on the SEC’s EDGAR database of filings, I noticed that reports are now beginning to be tagged as having “Interactive Data”. So I thought that I owed it to myself to go back and see how this XBRL stuff works in practice. Maybe the scales would fall from my eyes and I would see the error of my ways. Maybe I would be able to see how the data flowed seamlessly, enabling us to quickly reach investment decisions that were lost to us before. And maybe pigs would fly.

What I found when I went to the interactive data was that you could click on a heading such as Income Statement, and the P&L would come right up. I found the data had two properties: first, the headings were tagged. So for example, if you click on Revenues, you find that it’s US GAAP, the data type is monetary, the balance type is a credit and the period is the duration of the quarter. In other words, what you learn in Accounting 101. Secondly, you can grab the data and paste it into another document fairly easily. Also of note was the fact that the financials and notes are available as an Excel download, although everything I downloaded had a file name of “Financial_Report.xls”, so if you don’t rename the file right away, it becomes one of many with the same name.

After I had played with the data for a while, I sat back and thought about the cost /benefit analysis for what we’ve gone through with XBRL. On the benefit side we’ve gained a bit of functionality. I, for one, will welcome the ability to grab data off a downloaded spreadsheet rather than re-keying it when I want to do some analysis. But I don’t see a lot beyond that. The tagging of the data seems to merely tell me what I knew before. Further, professional investors have had the data in comparable and downloadable form for years. Systems such as Bloomberg and Telemet Orion (and I assume Reuters, although I have no experience with that system) already perform this function and a lot of other analytics as well. So my conclusion is that only relatively small investors are being helped. Against this we have to weigh the thousands of dollars spent and numerous man-hours invested by every company converting to XBRL.

To me this seems like another example of something that sounds good in theory, but the practical advantages just don’t seem to live up to the hype. In other words, it’s a governmental agency imposing a standard where the costs outweigh the benefits. The irony of it all is that the ultimate cost for all of this will be born by investors, because the cost of adopting to the new systems is a corporate expense, which lowers earnings, which will result in lower share prices.

Looking Forward by Looking Back

The upcoming holiday season of Thanksgiving, Christmas and New Year’s is always cause to sit back and reflect on what has transpired over the course of the past year and what it portends for next year. I freely admit that my crystal ball is as fuzzy as the next person’s but we’ve had such an interesting year I can’t resist the temptation to extrapolate past events into future predictions in two areas, regulation/legislation and, the use of social media in investor relations.

Investor relations in the U.S. during 2009 was heavily impacted by the advent of a new administration in Washington, an administration that comes from a different political viewpoint than the previous administration, one that favors more regulation rather than less. The new Chairman at the Securities and Exchange Commission, under pressure to prove that the SEC was still relevant, made it very clear during the year that increased regulation of the securities markets and more vigorous enforcement of existing regulations were top priorities at the Commission. Thus during the year we had a flurry of regulatory actions that touch upon investor relations issues, including Reg. SHO, designed to cut down on “naked” short selling, approval of NYSE rules eliminating broker discretionary votes in director elections, proposals regarding the use of “dark pools” and updating the rules surrounding notice and access for proxy materials.

On the enforcement side, we had the first ever enforcement action under Reg. G, relating to abuse of Non-GAAP numbers, the first Reg. FD enforcement action since the SEC lost the Siebel II case in Federal court, and a series of high profile insider trading indictments.

And guess what? For next year I predict … more of the same. In large part, the continued regulatory onslaught will be driven by Congress. For months now, financial markets reform has been on the agenda of our august legislative body, but the bills being considered by the House and Senate are quite a bit different as they relate to how corporations deal with investors. The Senate version includes requirements for annual, non-binding say-on-pay voting, mandated proxy access, and elimination of staggered boards, among other things. My prediction is that most of these requirements will be negotiated out of the Senate version as the business community begins to focus on these items, but that won’t be the end of the process. The SEC, being a political animal, will pick up the ball and then attempt to do by regulation what Congress failed to do by legislation. Look for some of the aforesaid issues to pop up on the SEC agenda next year. It will continue the trend towards the federalization of state corporate law that has been ongoing over the past fifty years. On the enforcement side, the Commission will continue to try and bring actions so that they appear to be doing their job. After dropping the ball on Bernie Madoff, they’re desperate to prove there is a new sheriff in town.

On the more practical side of actually communicating with investors, the hot topic during the year gone by was the use of social media. Particularly during the last half of the year there have been a spate of commentators, myself included, discussing the issue. Generally, the arguments break down upon the following lines: For social media – “This is the dawn of a new era where everyone can communicate with everyone else without anyone getting in the way, and isn’t that great? And anyone who doesn’t get it is a troglodyte.” Those against social media – “You’re right – I don’t get it. This stuff tends to be a bunch of unfiltered junk and a huge waste of time.”

The truth, of course, is somewhere in the middle and I think that over the course of the next year we will continue to see modest use of social media by investor relations departments. Dell has shown that blogs can be done in a thoughtful manner and Southwest Airlines has successfully used Twitter to get the word out quickly during a crisis communications situation. But most corporations are conservative in nature, and have general counsels that lie awake at night worrying about securities litigation, so things will happen very slowly. In fact, by the time corporate legal departments get comfortable with, and figure out how to let investor relations people use Twitter safely, it will be old technology and social media will have moved on to something else.