Every year, $10 billion is spent printing and distributing compliance documents—like annual reports and proxies—which most investors simply dump in the trash.
Yet nearly a decade ago, the Securities and Exchange Commission gave the “thumbs up” for the electronic delivery of those compliance documents, provided investor consent was received. However, surprisingly few companies have adopted the practice.
In a series of releases published in the mid-1990s, the SEC recognized that emerging technologies—like email and the Internet—were improving the efficiency of securities markets. Specifically, the Commission noted that electronic communications were allowing for the dissemination of information “in a more cost-efficient, widespread, and equitable way than traditional paper-based methods.” And in acknowledging the growth of the digital medium, the Commission provided guidelines and requirements to issuers delivering documents electronically.
In a 1995 release, titled “Use Of Electronic Media For Delivery Purposes,” the SEC noted that electronic delivery could satisfy the “delivery” requirements of federal securities laws so long as the content is “equivalent in scope and breadth as the printed versions,” and the order of its delivery is the same as for paper delivery. In addition, there should be an opportunity to retain a permanent record of the information.
Among other protections, the SEC emphasized the need to take precautions to ensure the integrity, security, and confidentiality of electronically delivered information. In addition, the SEC called for assurances that investors are duly notified that they have indeed received electronic documents, and that investors are provided easy and direct access to the material provided. And, of course, investors must give consent or permission to receive compliance documents electronically.
Where Companies Stand
John Heine, a spokesperson at the SEC, says that the SEC does not track or monitor how many companies are offering electronic delivery of compliance documents. That’s largely because companies deliver documents electronically are not required to notify the SEC that they are doing so.
One such company is PalmOne, the Milpitas, Calif.-based maker of handheld computers and operating systems. In Sept. 2003, Palm—as it was known at the time—announced it would enable its stockholders to receive proxy statements, annual reports and related materials via email. Those who wanted to receive the compliance documents electronically had to provide consent, and also had to have an active email account.
Bruner
According to Judy Bruner, Palm’s CFO at the time, the decision was prompted in part by a complicated transaction that required shareholder approval. “As we draw near to finalizing proxy materials and other documentation associated with the proposed spin-off of PalmSource and the acquisition of Handspring, ” noted Bruner, “it became clear that the estimated 2-pound, 700-page mailing to some 350,000 stockholders is not only costly, but can be viewed by some as a waste of paper.”
According to Bruner, the benefits of cost-savings and minimized environmental impact were enhanced by speed and functionality. “Electronic storage and disposal are superior to paper,” she said, “and stockholders can 'search' for subjects of interest vs. wade through pages."
E-DELIVERY
In addition to the requirement for gathering consent from shareholders, the SEC noted the following concepts “that should be
considered in determining whether applicable statutory
requirements have been satisfied.”
Notice
Companies providing electronic information should provide “timely and adequate notice” to investors that information
for them is available. Generally speaking, posting information on a Web site would not satisfy this requirement—another separate notice informing the investor of the document would be necessary to satisfy the delivery requirement.
Access & Retention
The use of a particular medium should not be so burdensome that intended recipients cannot effectively access the information provided. In addition, a recipient should have the opportunity to retain the information, or have ongoing access equivalent to personal retention. If disclosure is made available by posting it on a Web site, the document “should be accessible
for as long as the delivery requirement applies.”
Paper Copies
Due to the vagaries of electronic communications, issuers must be able to make available paper versions of documents on request. Specifically, if an investor agrees to receive documents electronically but later chooses to revoke that consent, paper copies must be provided to him/her.
Evidence Of Delivery
Companies providing electronic delivery of compliance documents should be able to provide “reasonable assurance” that delivery will be made. According to the SEC, some procedures evidencing satisfaction of the delivery requirements include obtaining informed consent from the investor, or obtaining evidence of download or reception through “return-receipt” like confirmations.
In accordance with SEC rules, Palm stockholders who did not choose electronic delivery continued to receive stockholder communications by postal service or other hard-copy mail service.
According to Marlene Somsak, vice president of communications at PalmOne, adoption rates by stockholders has been steadily increasing. “We're very pleased with our shareholder participation in the electronic-delivery program,” she says, “and believe it's a great way for shareholders to receive, store and manage their portfolio information.” In addition, Somsak acknowledges it’s an “excellent way” for companies to save on postage and printing costs. “We're all better off sparing trees from the mill.”
Challenges & Delivery Options
One of the major hurdles in electronic delivery is collecting consent; that is, gathering permission from a critical mass of stockholders to offset printing and mailing costs. According to the SEC, companies must obtain the intended recipient's “informed consent” to receive documents electronically, which can be extraordinarily expensive given the tens of thousands of shareholders that some companies have. And at a time when many companies are cutting—or outsourcing—investor communications departments and pouring efforts into Sarbanes-Oxley compliance initiatives, consent collection has not exactly been a priority.
Several investor communications firms have emerged to help companies manage the complexities of consent collection. The Informa Alliance, for example, is a partnership of several firms—including $1.7 billion financial data processor DST Systems—that offers a system for collecting and managing the formal consent process.
According to Informa, an understanding of all facets of acquiring, storing and managing consent from investors is critical. That’s not only because of the SEC’s rigorous requirements, but because investors can be finicky, demanding, for example, quarterly reports delivered electronically, but annual reports delivered in print.
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Andover, Mass.-based NewRiver, another member of The Informa Alliance, has helped financial service firms like E*Trade deliver compliance documents electronically. According to NewRiver Managing Director Jeff Levering, the company pulls EDGAR filings from the SEC, and then delivers the documents to consenting investors through a variety of mechanisms. Electronically, the company “provides investors with an ‘envelope’ of all current documents,” notes Levering, including “prospectuses, annual and semi-annual reports, which are the same as those that reside with the SEC.”
NewRiver also works with the Investor Communication Services group at ADP, a $7.3 billion payroll and tax filing giant, to provide electronic delivery services. ADP also provides other services like online proxy voting through its proxyvote.com Web site.
“In line with their responsibility to the regulators, ADP acts as an agent for the delivery of materials for 800 banks and brokerage houses as well as directly for 400 mutual funds,” says Michael Collins, senior director of account management for ADP ICS.
ADP ICS acts as a conduit by collecting consent and then maintaining this consent in their database. However, the group does not actually deliver compliance documents; rather they send out an electronic notification to recipients that the information is available on the Web.
Low Adoption; High Growth?
Though companies like PalmOne, Fidelity Investments and others are leveraging electronic delivery to suppress print-fulfillment costs, few companies have jumped in with both feet.
That’s partially because of the challenges of consent collection, and the historically low adoption rates of investors. According to NewRiver Managing Director Susan Cronin, adoption rates hover between 2 percent and 6 percent.
Collins at ADP concurs that the average industry adoption rate is about 3 percent to 5 percent. However, he points out that this range represents the percentage of total shareholders, and does not take into account the fact that not all shareholders have access to the Internet or even a decent computer. As Collins puts it, “ADP is not likely to send out a five megabyte PDF to someone with a Commodore 64.”
In addition to the challenges of collecting consents, the maintenance of programs can be a huge headache. For example, according to Levering at NewRiver, 10 percent of all email addresses turn over each year. That requires companies or providers to follow up with investors via phone or mail to secure updated email addresses.
Nadir
Dan Nadir, vice president of product management at FrontBridge Technologies, also claims that technology and customer service can be issues, as well. That’s because some of the more sensitive documents need to be encrypted to meet the SEC’s mandate for integrity and security of electronically delivered documents. “Companies seeking to deliver investor documents electronically need access to a secure email solution that enables companies to send email that is encrypted,” notes Nadir. Unfortunately, such solutions can be costly and complex, leading to customer service issues. “If a user can't actually figure out how to read the [encrypted] message,” says Nadir, “you are going to end up with greater costs because now you have a customer-support event plus the costs of mailing a print version.”
However, experts note that the potential for cost savings will ultimately drive adoption, especially as the Web sites of corporate investor relations departments and financial services firms begin to capture consent on a more regular basis.
According to Collins at ADP, his firm has collected 7 million consents, compared to 5 million two years ago. “The numbers speak for themselves,” he says, noting that 23 million electronic communications were delivered by his firm last year. “Twenty-three million is a good example of the population who chose to consent, and the record is growing.” Adds Collins, “I view it as an annuity.”
ADP expects continued growth not only because of the cost savings, but because of the features and service enhancements that have been well received by shareholders.
The challenge, however, will be convincing overtaxed investor relations departments that electronic delivery is a priority amid the compliance headaches of SOX 404, new 8-K requirements, tougher disclosure mandates, and other regulatory changes.
“It’s a process change, a mindset change,” notes Cronin at NewRiver. But it’s one that will likely gain credibility as pressure mounts to minimize compliance costs while improving shareholder experience.
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