Use of Electronic Media for Delivery Purposes

Federal RegisterOct 13, 1995

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SUMMARY: The Securities and Exchange Commission (``Commission'') today

is proposing technical amendments to its rules that are premised on the

distribution of paper documents. These proposals are intended to

clarify certain rules in light of the interpretations set forth in a

companion interpretive release [Release No. 33-7233] outlining the

Commission's view on the use of electronic media in the dissemination

of information under the federal securities laws.

DATES: Comments should be received on or before November 27, 1995.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 5th Street

NW., Washington, D.C., 20549. Comment letters should refer to File No.

S7-31-95. All comments received will be available for public inspection

and copying at the Commission's Public Reference Room, 450 Fifth Street

NW., Washington, D.C. 20549.

FOR FURTHER INFORMATION CONTACT: Joseph P. Babits or James R. Budge,

(202) 942-2910, Division of Corporation Finance; and, with regard to

questions concerning investment companies and investment advisers,

Kathleen K. Clarke, (202) 942-0721, Division of Investment Management,

U.S. Securities and Exchange Commission, 450 Fifth Street NW.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: In order to clarify certain rules in light

of the interpretations relating to electronic distribution of

information under the federal securities laws, as published

concurrently in an interpretive release (Release No. 33-7233) (the

``Interpretive Release''), the Commission is proposing minor technical

amendments to the following rules and forms: Rule 253 of Regulation A;

1 Rule 420 of Regulation C; 2 Rules 481 and 482 of Regulation

C; 3 Rule 605 of Regulation E; 4 Rule 304 of Regulation S-T;

5 Forms F-7, 6 F-8, 7 F-9; 8 F-10 9 and F-80;

10 Rule 12b-12; 11 Rule 13e-3; 12 Rule 13e-4; 13

Schedule 13E-4F; 14 Rule 14a-3; 15 Rule 14a-5; 16 Rule

14a-7; 17 Rule 14c-4; 18 Rule 14c-7; 19 Rule 14d-5;

20 Schedule 14D-1F; 21 Schedule 14D-9F; 22 Rule 8b-12;

23 Rule 30d-1; 24 and Rule 30d-2. 25

\1\ 17 CFR 230.253.

\2\ 17 CFR 230.420.

\3\ 17 CFR 230.481 and 230.482.

\4\ 17 CFR 230.605.

\5\ 17 CFR 232.304.

\6\ 17 CFR 239.37.

\7\ 17 CFR 239.38.

\8\ 17 CFR 239.39.

\9\ 17 CFR 239.40.

\10\ 17 CFR 239.41.

\11\ 17 CFR 240.12b-12.

\12\ 17 CFR 240.13d-3.

\13\ 17 CFR 240.13e-4.

\14\ 17 CFR 240.13e-102.

\15\ 17 CFR 240.14a-3.

\16\ 17 CFR 240.14a-5.

\17\ 17 CFR 240.14a-7.

\18\ 17 CFR 240.14c-4.

\19\ 17 CFR 240.14c-7.

\20\ 17 CFR 240.14d-5.

\21\ 17 CFR 240.14d-102.

\22\ 17 CFR 240.14d-103.

\23\ 17 CFR 270.8b-12.

\24\ 17 CFR 270.30d-1.

\25\ 17 CFR 270.30d-2.

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I. Proposed Amendments

In its Interpretive Release, published concurrently, the Commission

states its views with respect to the use of electronic media to

disseminate information in compliance with the federal securities laws.

The rules that are the subject of today's proposals relate to various

aspects of how a document is to be sent, given or otherwise distributed

to investors or others, and were originally adopted on the assumption

that delivery was to be accomplished by means of a paper document. The

Commission believes it is appropriate to modify these rules in light of

the views expressed in the Interpretive Release to make it clear that

the rules do not limit an issuer's (or other person's) delivery options

to paper dissemination only, and that compliance with the rules

governing legibility or specific methods of delivery may be effected by

alternative means reasonably calculated to satisfy the requirements if

electronic dissemination is chosen.

These proposals demonstrate that the Commission recognizes the

diversity of media available to issuers and others who distribute

securities-related materials, as well as the fact that strict

compliance with requirements applicable to printed material may not be

possible in all electronic media. The purpose of the proposed rule

changes is to maintain the intent of the original requirements while

allowing flexibility in the choice of distribution medium.

A. General Formatting Requirements

Wherever the Commission's rules prescribe the physical appearance

of a paper disclosure document, such as type size and font

requirements, the Commission is proposing to add statements to the

rules to provide that if the document is being delivered in an

electronic version, the issuer may comply with the requirements by

presenting the information in a format readily communicated to

investors. Where rules require legends to be printed in red ink or

bold-face type, or using a different font size, the rules would include

a statement that issuers may satisfy such requirements by presenting

the legends in any manner reasonably calculated to draw attention to

them. Comment is solicited as to whether more specific standards

relating to legibility of electronic documents should be required, or

whether the more flexible approach proposed today is preferable. If

more specific standards are desirable, commenters should indicate which

standards should apply.

B. Graphic, Image and Audio Information

In addition to the written word, material information may be

effectively conveyed through graphic presentations, such as charts,

graphs and photographs, and through audio soundtracks. Some

distribution media may be able to accommodate these means of

communication, while others may not.26 As noted in Section II of

the Interpretive Release, all versions of a disseminated document,

whether paper or electronic, should convey substantially equivalent

information to investors. The Commission proposes to incorporate this

concept by amending its rules, where appropriate, to provide that if

material graphic, image and audio information is included in one

version of a disclosure document, but not in other versions, the issuer

must include in the other versions a fair and accurate

[[Page 53469]]

description or transcript of the omitted information.

\26\ While graphic, image and audio material may be included by

the issuer in an electronically disseminated document, this

information may not, in some cases, be reproduced by the persons

receiving the electronic version, either because of the technical

constraints of the person's equipment or because of an election not

to receive these types of communications. Issuers should be mindful

of this possibility when using electronic media. If material

information is to be furnished by means of graphics, images or audio

soundtracks, issuers may need to make investors using electronic

media aware of this.

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With respect to filings made on the EDGAR system, issuers may

distribute to investors an electronic version of a disclosure document

that includes video, audio, and graphic presentations in one package,

while the version filed with the Commission on EDGAR could not

accommodate this information. Rule 304 of Regulation S-T currently

requires fair and accurate descriptions of omitted materials and

provides that those portions of the disseminated version would be

deemed filed with the Commission. Rule 304, however, is worded in terms

of graphic and image material included in ``the paper version'' of an

EDGAR filing. In order to reflect the possibility of the delivery of an

electronic version that differs from the EDGAR filing, the Commission

proposes to amend Rule 304 to provide that wherever the ``document

delivered to investors or others'' includes graphic, image or audio

information that cannot be reproduced in an electronic filing on EDGAR,

the EDGAR filing should include a fair and accurate narrative

description, tabular presentation or transcript of the omitted

material. Of course, immaterial differences would not need to be

described. The rule would retain the provisions that all such omitted

material is deemed filed as part of the electronic filing and that

copies of the document as distributed should be retained by the issuer

for a period of five years. Commenters are requested to address whether

there are alternatives to the proposed approach that could better

minimize the impact of issuers using different versions of the same

disclosure document.

C. Rules Where Mailing is Identified as a Delivery Method

Several of the Commission's rules provide that information may be

distributed to investors by mail. Some indicate that reasonably prompt

alternative delivery methods may be used,27 while others speak

only in terms of mailing. These rules should be read consistently to

allow the use of alternative methods of distribution that are

reasonably prompt. The Commission proposes to amend the rules where

necessary to reflect that view.28

\27\ See e.g., Rule 14d-4(a)(2)(ii) [17 CFR 240.14d-

4(a)(2)(ii)].

\28\ Where the costs of distribution are to be calculated under

the rules, the proposals would provide that methods analogous to

those applicable to mailing should be used where alternative

delivery methods are chosen.

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D. Structure of Electronic Filing Rules

This release proposes amendments to individual rules rather than

creating a new regulation dedicated to electronic delivery that would

work in tandem with the individual rules. This has been done to better

integrate and highlight the electronic delivery accommodations in pre-

existing rules and to minimize confusion. However, a separate

regulation approach (Regulation S-T) has been implemented in connection

with electronic filing requirements, which are much more comprehensive

and complex than those contemplated here because of EDGAR programming

and processing considerations. The Commission solicits comment as to

whether, rather than amending the existing rules throughout as

proposed, Regulation S-T should be amended to address not only EDGAR

filings, but also all electronic issues. In that case, the proposed

amendments would be grouped together and would supersede the paper-

based formatting requirements where electronic delivery was used.

II. Solicitation of Comments

Any interested persons wishing to submit written comments relating

to the rule proposals, as explained above, are invited to do so by

submitting them in triplicate to Jonathan G. Katz, Secretary, U.S.

Securities and Exchange Commission, 450 Fifth Street NW., Washington,

D.C., 20549. The Commission further requests comment on any competitive

burdens that might result from the adoption of the proposals. Comments

on this inquiry will be considered by the Commission in complying with

its responsibilities under Section 23(a) of the Exchange Act.29

Commenters should refer to File No. S7-31-95 for comments on the

proposals set forth in this release.

\29\ 15 U.S.C. 78w(a).

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III. Cost-Benefit Analysis

While the Commission expects the increased use of electronic media

to benefit securities markets and investors by making disclosure

available faster and more cheaply, it does not anticipate that the

proposed amendments will, in and of themselves, result in substantial

economic costs or benefits. The rule proposals are not intended to

change what is permissible under the federal securities laws; rather,

they are intended to make it clear how current regulatory requirements

may be satisfied using methods made possible by technological

developments. However, commenters are encouraged to identify any costs

or benefits associated with the rule proposals that the Commission may

have overlooked.

In particular, please identify any costs or benefits associated

with the rule proposals relating to (1) bold-face type, font size, and

red ink requirements, (2) graphic, image and audio information, and (3)

alternatives to mailing as a distribution method. Will these proposals

result in additional costs and benefits (or will the proposed

amendments have no significant effect, as anticipated)? Please

describe, and quantify, where possible, any such significant effects

that you foresee. Will these proposals affect the current compliance

burden?

Commenters should bear in mind that the use of electronic media for

delivery purposes is optional, and persons responsible for furnishing

disclosure may assess for themselves whether the benefits of using

electronic distribution methods would outweigh the costs in a specific

circumstance.

In addition, the Commission seeks comment on the following issues

in order to better assess the costs and benefits of taking additional

actions affecting the dissemination of information under the federal

securities laws. Please describe, and quantify where possible, the

costs and benefits associated with any proposals that you would

recommend.

(1) Should any of the rule changes proposed in this release be

crafted in a manner that would reduce compliance burdens? If so, how

could that be done?

(2) What actions, beyond what is proposed in this release, should

the Commission take to maximize the benefits of document delivery to

shareholders, issuers, and others, while eliminating any unnecessary

costs?

(3) What kinds of documents should the Commission be able to

receive, process, and make publicly available through EDGAR system that

are not currently eligible for that system?

(4) Should the Commission allow the filing of documents in

electronic media other than EDGAR? If so, please make specific

recommendations.

IV. Regulatory Flexibility Act Certification

Pursuant to Section 605(b) of the Regulatory Flexibility Act, 5

U.S.C. 605(b), the Chairman of the Commission has certified that the

amendments proposed herein would not, if adopted, have a significant

economic impact on a substantial number of small entities. This

certification, including the reasons therefor, is attached to this

release as Appendix A.

[[Page 53470]]

V. Statutory Bases

The amendments to the Commission's rules under the Securities Act

and amendments to the Commission's rules under the Exchange Act are

being proposed pursuant to Sections 6, 7, 8, 10 and 19(a) of the

Securities Act and Sections 3, 4, 10, 12, 13, 14, 15, 16 and 23 of the

Exchange Act. The amendments to the Commission's rules under the

Investment Company Act are being proposed pursuant to Sections 8(b) and

38(a) under the Investment Company Act, as amended.

List of Subjects

17 CFR Parts 230, 232, 239, 240, and 270

Reporting and recordkeeping requirements, Securities, and

Investment companies.

Text of the Proposals

In accordance with the foregoing, Title 17, chapter II of the Code

of Federal Regulations is proposed to be amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. The general authority citation for Part 230 is revised to read

as follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,

78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30,

and 80a-37, unless otherwise noted.

* * * * *

2. By amending Sec. 230.253 by designating the text of paragraph

(b) after the heading as paragraph (b)(1) and by adding paragraph

(b)(2), to read as follows:

Sec. 230.253 Offering circular.

* * * * *

(b) Presentation of information. (1) * * *

(2) Where an offering circular is distributed through an electronic

medium, issuers may satisfy legibility requirements applicable to

printed documents by presenting all required information in a format

readily communicated to investors. If material graphic, image and audio

information is included in one version of an offering circular, but not

in other versions, the issuer must include in the other versions a fair

and accurate description or transcript of the omitted information.

* * * * *

3. By amending Sec. 230.420 by designating the text as paragraph

(a) and by adding paragraph (b), to read as follows:

Sec. 230.420 Legibility of prospectus.

(a) * * *

(b) Where a prospectus is distributed through an electronic medium,

issuers may satisfy legibility requirements applicable to printed

documents, such as paper size, type size and font, bold-face type,

italics and red ink, by presenting all required information in a format

readily communicated to investors, and where indicated, in a manner

reasonably calculated to draw investor attention to specific

information. If material graphic, image and audio information is

included in one version of a prospectus, but not in other versions, the

issuer must include in the other versions a fair and accurate

description or transcript of the omitted information.

4. By amending Sec. 230.481 to add paragraph (h) to read as

follows:

Sec. 230.481 Information required in prospectus.

* * * * *

(h) Where a prospectus is distributed through an electronic medium,