In the three-ring circus that is Washington, D.C., the amazing contortions on display at the Securities and Exchange Commission are a regular occurrence.
The recent uproar over roadshows and a
compelling speech by SEC chairman Arthur Levitt last week reveals an agency writhing in the grip of a fundamental dilemma, one that lies at the heart of securities law. The agency's Internet strategy -- if it can be called that -- illustrates a schism that divides securities regulators, best illustrated by paraphrasing
: Can investors handle the truth?
The technology of the Net offers average investors the capacity to go toe-to-toe with institutional investors. And the power of the Net lets individuals trade with the same speed as the pros, if not the same ferocity. But the SEC is clearly of two minds on one subject, made more problematic because of the Net: Is the stock market really a place for amateurs?
The agency has had to wrestle with fake "news" Web sites, fraudulent bulletin board posts and new levels of insider trading. Last week the SEC's enforcement division settled charges against three clowns offering unregistered stock for sale on
. The three agreed to cease-and-desist orders, without admitting or denying the charges (eBay was not charged with any wrongdoing). Their schemes seemed ridiculous -- two of the three offered shares of piss-ant companies that have not had public offerings -- but the situation represents the commission's worst nightmare: technology outpacing the purview of regulators.
"The Internet opens up some new possibilities; in some cases, it's just using electronics to get out documents that were once distributed on paper," says Gene Gohlke, associate director of the SEC's
Office of Compliance, Inspections and Examinations
. "But there are some new wrinkles. What is the trade-off between having a greater flow of information but perhaps having certain information that wasn't available to the general public? That's what we're having to deal with."
Is there investment information the public can't handle? In the view of some regulators, online traders are suckers, likely to suffer massively and quickly in the whipsaw of market volatility. Initial public offerings are three-card monte games, where the public can only lose.
Caught in the mix is the roadshow. Since they first began in the 1970s, roadshows have become an integral part of the IPO process. After a registration statement is filed with the SEC, company management takes to the road to tell its story to gatherings of institutional investors. Securities law interprets the road show as "oral communication" and is, therefore, permissible. But the
Securities Act of 1933
specifically bars "any notice, advertisement or communication, written or by radio or television, which offers a security for sale." Under that precedent, broadcasting roadshows on the Internet is also banned. But of course, roadshow presentations are full-on multimedia events now, above and beyond "oral." And as has been well documented by the
fiasco, institutional investors use these shows to get a leg up on the rest of the investing public.
When a company called the
Private Financial Network
set up a service to broadcast these roadshows on the Net, the SEC took an interesting approach. In March 1997, the SEC issued a "no-action letter" -- the SEC's equivalent of a get-out-of-jail-free card -- saying that the Private Financial Network (now a division of
) could broadcast these events, but only to institutional investors. In doing so, the SEC invoked another concept from the Securities Act of 1933 -- that rich guys can play by different rules. Essentially, this argument holds that moneyed hedge funds and professional investors can afford to lose a buck or two, so they can play the high-stakes games, but the average public should be banned from same. This notion doesn't please the Internet investor, natch.
It's encouraging that SEC Chairman Levitt seems to be warming to the Internet. The SEC is woefully underbudgeted, so Levitt rules largely by bully pulpit. But under his lead, the
database has become the Internet's premier source of investor information. And last week, in a speech before the
Economic Club of New York
in Manhattan, Levitt took a hard stab at those who try to restrict financial information from the public -- and he used the Internet as his skewer.
"Quality information is the lifeblood of strong, vibrant markets," said Levitt. "Without it, investor confidence erodes. Liquidity dries up. Fair and efficient markets simply cease to exist. As the quantity of information increases exponentially through the Internet and other technologies, the quality of that information must be our signal priority."
He went on to urge companies to open up their conference calls, another realm where the individual investor is often shut out. "I appeal to companies, in the spirit of fair play: Make your quarterly conference calls open to everyone, post them on the Internet, invite the press."
The Internet stakes are high here. The investing public represents a tiny fraction of the U.S. population. But according to
, 39% of consumers with brokerage accounts are online. According to
analyst Scott Appleby, over a quarter of American Internet users hold brokerage accounts.
Increasingly, it's becoming clear that the Internet is the chosen medium of the investing public. So as the SEC proudly trumpets the words of former Chairman
William O. Douglas
, "We are the investor's advocate," it will be interesting to see if the SEC will take the lead as the Internet investor's advocate as well.
Cory Johnson files several times weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at