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A research on technology and the stock market

Executive Summary Section 510 a of the National Securities Markets Improvement Act of 1996 directed the Commission to study and report to Congress on the impact of technological advances on the securities markets.

Pursuant to that provision, this report discusses the impact of recent technological advances on the securities markets, how these advances have changed the way the markets operate, and steps the Commission has taken to address these changes. The use of new technologies at this time varies considerably in nature and scope among different segments of the industry, and the report separately addresses the current trends in technology use by public companies, the mutual fund industry, investment advisers, and the secondary markets.

Finally, the report discusses the effect of recent technological advances on enforcement of the federal securities laws. The Commission is mindful of the benefits of increasing use of new technologies for investors and the markets, and has encouraged experimentation and innovation by adopting flexible interpretations of the federal securities laws. The Commission's approach has balanced the goals of promoting the benefits of electronic media, with the need to protect investors and the integrity of the markets from fraud and abuse.

As technological advances proceed, continued coordination with market participants and federal, state and international regulators will be essential. Public Companies Many investors now have improved access to information about securities, partly through use of the Internet. The ready access to this database made possible by the Internet, both through a research on technology and the stock market Commission's own web site and others, forms the core of a new body of corporate information now available on-line.

Many public companies now publicize business and financial information on the Internet, but few as yet use the Internet or other electronic media to meet delivery and disclosure requirements under the federal securities laws. Developing communication technologies hold the promise of making the capital markets more efficient by providing all participants with faster, more effective means of exchanging information. The Commission has provided guidance to facilitate the use of electronic media for companies to satisfy their disclosure obligations: The Commission's October 1995 and May 1996 interpretive releases provided guidance for market participants on using electronic media to satisfy delivery obligations of disclosure documents.

The Commission staff has provided interpretive guidance regarding applications of technology to market practices.

The Commission staff also addresses electronic issues on a case by case basis as they are raised by market participants. The Commission also has begun an initiative to reexamine basic federal securities law principles partly in response to technological advances.

In July 1996 the Commission published a concept release on Securities Act registration and disclosure reform which sought comment from the public about broad reform of the capital formation regulatory framework.

The Commission's regulatory authority, including the exemptive authority in the National Securities Markets Improvement Act of 1996, will allow the Commission to adapt the federal securities law framework to keep abreast of -- and realize the potential benefits of -- new technological developments.

Investment Companies Investment companies are now electronically providing a substantial amount of information and services to a large number of investors, particularly via the Internet. Investors, in turn, are taking advantage of the enormous amount of information that is available electronically from investment companies, and are making additional demands for increased electronic information flow. The Commission has facilitated the investment company industry's use of many technological innovations that serve investors more efficiently, consistent with investor protection.

Investment Advisers New computer technologies, and increasing access to the Internet, have the potential to affect investment advisory services substantially in the next century.

U.S. Securities and Exchange Commission

Many investment advisers are taking advantage of the extensive information that is available electronically to research potential investments for a research on technology and the stock market clients. As investors have become more comfortable with using their personal computers, some advisers have begun to provide advisory services on-line, creating a new medium for their services.

The Commission has provided guidance regarding a variety of legal issues created by the use of new technologies by investment advisers, and the Commission will continue to facilitate the future use of such technologies, a research on technology and the stock market with investor protection.

Secondary Markets As computing power has become exponentially more powerful and comparatively inexpensive, technology has transformed trading in secondary markets.

The Exchanges and Nasdaq have adopted electronic systems for order delivery and automatic execution and have automated other functions such as the dissemination of transaction and quotation information, specialists' limit order books and the comparison of trades prior to settlement.

Broker-dealers and institutional investors use powerful computer systems and sophisticated applications, among other things, to manage inventory, order flow and risk and to receive market data, research reports and company information electronically. For most markets and market professionals, the Internet and Internet technology should enhance communications networks already in place.

For individual investors, the Internet can provide information flow and communication links similar to those currently available to institutional investors and market professionals. Technology also has made possible the development of efficient electronic systems for trading securities off the established securities markets. The Commission has begun an effort to ensure a regulatory framework that will integrate regulation of these alternative trading systems into the mechanisms that ensure market transparency, fairness, and oversight.

The Commission also has adopted rules that permit markets and market participants to make use of technology, and has modified other rules or interpretive positions that might conflict with technological innovations.

Enforcement Recent technological advances, particularly Internet-related forms of communication, have presented new challenges in the Commission's effort to combat fraud. The Commission is responding to attempts to use the Internet to perpetrate securities fraud through an evolving program of education, surveillance and litigation. Coordination and cooperation with other federal and state regulators and the self-regulatory organizations are part of this program.

Because the Internet provides an easy method for cross-border communications, abuses of the Internet emphasize the need for coordinated activities with foreign securities regulators.

The staff works closely with other agencies, both foreign and domestic, to promote fair and efficient markets and to protect investors. Introduction The Securities and Exchange Commission has principal responsibility for the administration and enforcement of the federal securities laws. Section 510 a of the National Securities Markets Improvement Act of 1996 1 directed the Commission to study and report to Congress within one year on the impact of technological advances on the securities markets.

Indeed, under the federal securities laws, disclosure and dissemination requirements are crucial elements of the Commission's approach to protecting investors and promoting fair and orderly markets.

The Commission has long recognized the benefits of information and communication technologies in furthering these goals. While the markets have always quickly assimilated technological advances that increase market efficiencies and enhance information flow, the recent pace of development has accelerated. In the last decade, such tools as personal computers, desktop workstations, networking capabilities, more powerful computer processing and increasingly sophisticated hardware and software have been developed and made commercially available.

In these respects, the impact of new technologies upon the securities industry as a whole has been pervasive. Moreover, the benefits of recent technological developments have not been limited to the markets, but extend to all securities industry professionals. The future impact of continuing technological advance is far-reaching. Information and communication technologies such as the Internet may ultimately significantly affect the ways in which investors interact in our markets.

On the other hand, although there have been numerous experiments in the on-line world, the vast majority of securities transactions still occur in traditional ways.

This may be because the technologies that will ultimately allow realization of these benefits are developing and changing. Until new technologies coalesce around uniform standards, and until consumers and investors generally accept new technologies as safe and effective ways of doing business, the potential benefits will not be fully realized.

Because of the continuing stream of advances in the information technology industry and the rapid pace of implementation by industry participants, this report can only provide a snapshot of the impact of technological advances on the markets.

As detailed in the body of this report, the use of new technologies at this time varies considerably in nature and scope among different segments of the industry.

Because of the central role of technology in the securities markets, the Commission's regulations have always had to take into account the state of technology in the industry. The Commission has issued interpretive releases making clear that electronic media, including the Internet, may be used to satisfy statutory delivery requirements and has provided extensive guidance on using these media for effective delivery.

Technology and the Stock Market

The Commission staff has issued numerous no-action and interpretive letters and has provided informal guidance to facilitate compliance with securities law requirements by users of novel applications of new technologies. The staff has also acted to clarify the application of existing legal requirements to securities products or services made possible by new technology. In addition, the staff has underway major initiatives to review fundamental elements of the regulatory structure governing public offerings under the Securities Act of 1933, and of the regulatory structure governing securities markets under the Securities Exchange Act of 1934.

Consistent with these efforts, the Commission has been sensitive to the regulatory challenges of a changing technological environment. It has sought to balance the benefits of encouraging innovation and the use of new technologies against the need to protect investors and maintain orderly markets.

For example, while the Commission has permitted electronic delivery of required documents, it remains committed to protecting all investors, including those who do not have access to, or do not choose to use, new technologies. The Commission has acted to encourage such beneficial products and services, while also aggressively seeking to ensure that new technologies, and particularly the Internet, do not become new media for fraud and abuse.

  1. The release lists five nonexclusive types of electronic delivery evidence. Commission's Response to Technological Challenges 1.
  2. Because communication of information is such a central concept under these laws, the following discussion provides highlights of the regulatory framework to provide a basis for assessing the impact of trends in the use of electronic media.
  3. Many web site annual reports have enhanced features. This requires complex calculations on the cash flow attributes of the numerous assets underlying the security.

As the Commission moves forward to implement the goals of the federal securities laws, it will be important to keep abreast of changing technologies and developments in related areas of the law. As information and communication technologies mature and gain more widespread market acceptance, the Commission will need to continue to work closely with other governmental regulators, industry participants and technical specialists.

Overview Recent technological advances have offered unprecedented opportunities to public companies and investors alike. This chapter will discuss the regulatory framework, the current practices, and the Commission's approach to these developments as they relate to capital-raising, as well as to companies' disclosure of information to their investors and the trading markets at large.

It rests on the premise that an investor can make a reasoned decision on whether to buy, sell or hold securities, or how to vote on corporate matters, if the investor has full and accurate information -- about the company, its business and financial condition, the security it is selling, and any merger, tender offer or other transaction in which it is engaged. As early as 1984, the Commission recognized the value of having information required by the federal securities laws available in electronic format, when it instituted a pilot program for electronic filing with the Commission.

The ready access to this database made possible by the Internet, both through the Commission's own web site and other sources, forms the core of a new body of corporate information now available on-line.

Public companies and other market participants are also using electronic media to communicate directly with their shareholders and potential investors. While the Internet is the most widely used technology for this purpose, experimentation with other electronic technology has also begun. The use of these technologies to disseminate information provides numerous benefits to companies and other market participants, such as: Similarly, it enhances the ability of investors and their advisors to make informed investment and voting decisions: These developments are at an early stage and not all companies, or all investors, have access to this new technology.

Many large public companies use the Internet to publicize general business and financial information, commonly by posting this information on their own web sites. It is much less common, however, for companies to use the Internet or other media as a substitute for traditional paper documents when information is required to be delivered to specific investors under the securities laws.

To enable the use of developing technologies, the Commission has engaged in several initiatives. The Commission's October 1995 interpretive release provided guidance for market participants on using electronic media to satisfy delivery obligations of disclosure documents.

The Commission staff also has provided interpretive guidance or no-action relief in certain regulated areas where market participants have presented novel and innovative applications of technology to market practices. As technologies continue to develop, the regulatory framework must evolve as well.

The Commission began an initiative to reexamine basic federal securities law principles that have existed for over 60 years -- since the creation of the Securities Act of 1933. This reexamination is partially driven by the impact of recent technological advances. In July 1996, the Commission published a concept release on Securities Act registration and disclosure reform which sought comment from the public about broad reform of the capital formation regulatory framework.

Regulation of Securities Offerings, Public Company Disclosure and Communications The Securities Act of 1933 and the Securities Exchange Act of 1934 are premised on the philosophy that investors are best protected in making investment decisions if they are presented with full and accurate disclosure of all material information about a research on technology and the stock market. Under some circumstances, the requirements focus on preventing premature or inappropriate disclosure, while under other circumstances, the requirements focus merely on establishing minimum standards of disclosure.

In some cases, this information must be delivered directly to the investor, while in other cases, the information need only be filed with the Commission and made public, so that the entire investing public has access to it.

Because communication of information is such a central concept under these laws, the following discussion provides highlights of the regulatory framework to provide a basis for assessing the impact of trends in the use of electronic media. Public Offerings The Securities Act establishes a framework for providing information during a securities offering, requiring that issuers provide investors with material information concerning securities offered for public sale. Before a company may offer a security to investors, the Securities Act requires that the security either be registered with the Commission or that the transaction or security be entitled to an exemption from registration.

The Securities Act applies both to initial public offerings and to subsequent public offerings. Different limitations apply to disclosure of information in each period. A research on technology and the stock market pre-filing period is when an issuer contemplates conducting a public offering but has not yet filed a registration statement with the Commission. Once a registration statement is filed with the Commission, 10 the waiting period begins.

During the waiting period, while the Commission staff is processing the registration statement, only oral communications and distribution of the preliminary prospectus included in the registration statement also known as a "red herring" are permitted. No other written material generally may be distributed and no sales of securities may be made. After the Commission declares the registration statement "effective," issuers may complete their offerings.

To complete a securities sale, a final prospectus must be delivered to all purchasers before or with the sales confirmation.

In initial public offerings, a preliminary prospectus also must be sent to investors 48 hours before delivering the sales confirmation. Certain securities and transactions are exempt from registration with the Commission.