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SEC Forum Adopts Investrend Research Proposal to Clarify 17(b)

An Investrend Research proposal for the U.S. Securities and Exchange Commission to clarify Regulation 17(b), including confusion about the requirements of public issuers for full compensation transparency, has been adopted by the annual SEC Business Forum on Small Business Capital Formation, and will be placed in its minutes for submission to the Commissioners.

The proposal had been opposed by research provider John Dutton, who told the SEC “there is no crisis in disclosure.” Meanwhile, Dutton was cited by BusinessWeek for providing incomplete disclosure for his coverage of EasyLink (NASDAQ: EASY), currently under SEC investigation, and his firm’s coverage of companies such as Nymox Pharmaceuticals (NASDAQ: NYMX), which sometimes bypasses compensation disclosures in its own announcements. Other recent similar announcements lacking complete compensation disclosures were issued by GWIN, Inc. (OTCBB: GWIN) and International Fuel Technology (OTCBB: IFUE).

Investrend Research counsel Marshal Shichtman, Esq. (see photo) spearheaded the proposal through the “Smaller Public Companies” committee of the Forum.

The U.S. Securities and Exchange Commission Regulation 17(b) states:

“It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.”

In queries to the SEC, John Nester, a spokesperson, confirmed that there is no clarity on the responsibilities of public companies under 17(b).

Subsequently, Investrend Research contacted the CFA Institute and National Investor Relations Institute to ask to amend its comments to their joint panel considering Guidelines for issuer-paid research to require public companies to disclose compensation arrangements in any public announcements of reports issue by independent research providers.

While not identifying his source, a spokesperson for Dutton recently stated, “The (SEC) staff has confirmed that Section 17(b) only requires disclosure by persons who have received compensation (or other consideration) for the publication of information regarding a company, such as a research report or a press release.

“For example, while a press release issued by J M Dutton would require Section 17(b) disclosures if the press release related to a company that had paid J M Dutton for research coverage; however, a press release issued by a company that had retained Dutton … would not.
“There is no duty under 17(b) for a company that has retained an independent research firm to disclose the fact that it has done so …,” he concluded.

While officials at the SEC said they had no memory of talking to anyone representing Dutton, they subsequently told FinancialWire that the SEC indeed has not clarified whether public companies can circumvent the transparency of disclosure by issuing a press release about coverage by a paid research provider instead of the research provider issuing the announcement itself.

According to the SEC, there appears to be no definitive interpretation of Regulation 17(b) that would prevent disclosure circumventions.

Investrend has also asked the National Investor Relations Institute and CFA Institute joint panel developing guidelines for independent research providers for permission to amend its March 20 comments to ask the panel to require public company issuers “to make all disclosures contemplated by Regulation 17(b), whether or not the SEC has issued an authoritative interpretation or the company’s counsel states that it does not have to do so by law.”

The SEC has told FinancialWire that Regulation 17(b) means full and complete compensation for research and any other services provided, including amounts and sources, must be disclosed in “every press release” as well as other published documents. The SEC states that third party compensations must include the relationship of the payer to the issuer.

In an email to FinancialWire, John J. Nester, a spokesperson for the U.S. Securities and Exchange Commission, confirmed that regulators interpret 17(b) to mean that specific compensation information must be contained in press releases, and that a link to a disclosure somewhere else, for example, is a violation of the regulation. He further stated that the compensation disclosure required by the SEC includes “amounts and sources in any press release mentioning the company under research coverage.”

The SEC had previously told FinancialWire that it intends to enforce these provisions so that investors may have a fully transparent understanding of any potential agenda or lack thereof.

In a January 2000 research report, for example, the SEC said outside analyst Paul Bornstein, who it has charged with 17(b) violations and fraud, “failed to disclose that at least part of Bornstein's optimism about CyberCare (OTC: CYBR), then on the NASDAQ (OTCBB: NDAQ), resulted from his simultaneous employment by CyberCare's public relation's firm.

In subsequent communications with Nester, the SEC’s spokesperson, he appeared to equivocate on the subject of whether public companies bear the same disclosure responsibilities as do the research firms covering them. While stating he had no recollection of any conversations with Dutton or his firm’s lawyers, Nester said there is currently no authoritative interpretation from the Commission as to public disclosure transparency by public companies themselves.

While independent research by standards-driven providers are “growing in legitimacy,” according to the Dow Jones (NYSE: DJ) in a recent article that singled out Investrend Research in that category, the article went on to quote Lou Thompson, president of the National Investor Relations Institute, which had issued new Guidelines in 2002 endorsing legitimate “paid-for” research, as warning of “various mutations of paid-for research."

The SEC Forum is the annual event mandated by Congress to secure opinions and recommendations from public issuers, financial industry professionals and the public.

http://www.investrend.com/articles/defaultFinancialWire.asp?level=160