The SEC has outlined steps fund companies and corporations can take to reduce their chances of being sued by regulators if a company provides a hyperlink from its own corporate website to that of a third party whose website contains inaccurate or incomplete information.

The SEC, in assessing potential liability, will check whether a fund company that uses a hyperlink to another website has endorsed or approved the information on that third-party website, according to a new SEC directive. SEC lawyers and examiners will consider the risk of investor confusion about the identity of the website they are looking at, how the hyperlinked information is presented and the context of the hyperlink in assessing whether one website effectively is adopting the content of another.

The SEC discussed a company's potential liability for the content of a third-party website to which it is hyperlinked in an interpretive release on the use of electronic media. SEC commissioners authorized issuance of the release April 25. However, the release was not immediately available. The release is the SEC's first broad pronouncement on acceptable use of the Internet to disseminate financial disclosure documents since 1996.

"The absence of up-to-date guidance in the electronic age has the potential to cause uncertainty and may impose unnecessary barriers to efficient employment of electronic modes of communication," said Arthur Levitt, chairman of the SEC, in a statement April 25. "Our action today removes some of the obstacles without jeopardizing important investor safeguards."

SEC lawyers with knowledge of the details of the release did not return a call seeking comment. The agency, however, issued a fact sheet outlining the substance of the release.

It appears the SEC is trying to make it easier for companies to use hyperlinks without being overly concerned that they will be held liable for inaccuracies on third-party websites, said Kent Knudson, a consultant on compliance issues in the Washington office of PricewaterhouseCoopers of New York.

"I think they are trying to take away some of that anxiety," Knudson said.

The agency's guidance also makes it clear that a hyperlink within a prospectus has the effect of making that hyperlinked document part of the prospectus, thereby subjecting it to federal securities laws.

Mutual fund companies have been reluctant to use hyperlinks to third-party sites because of concerns about potential liability, said Lee Kowarski, a consultant with kasina of New York, an electronic business strategy consulting firm that conducts an annual ranking of fund company websites. Concern about hyperlinks is just one area in which developments on the Internet are moving faster than regulators' and compliance executives' abilities to keep pace, Kowarski said. The guidance from the SEC on electronic matters is welcome because it presumably will help clarify areas that have not been addressed or that have been ambiguous, Kowarski said.

The SEC's guidance should make it easier for fund companies that want to provide key documents to shareholders electronically rather than on paper. The SEC, in what it described as a clarification of its current rules, said investors may consent to electronic delivery in a telephone conversation. The agency's earlier pronouncements on the Internet made it clear that investors could consent to electronic delivery in writing.

The SEC is soliciting public comment on when an investor could be deemed to have given so-called implied consent to electronic delivery of documents, according to the SEC's fact sheet summarizing the release. Such implied consent would be based on the presumption that an investor agreed to accept electronic delivery because the investor did not explicitly reject it.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.