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Online Legal Issues Are Roughed Out

Margaret Sheehan is a partner with the Washington D.C. branch of the law firm, Alston & Bird LLP of Atlanta, Ga. Sheehan's practice focuses on electronic commerce compliance. She represents several financial service firms including Invesco and American Express. Sheehan recently discussed current regulatory and compliance issues surrounding electronic commerce with Mutual Fund Market News reporter, Andrew Greene. An edited account of their conversation follows.

MFMN: What are the primary compliance and regulatory issues that fund companies and financial service firms need to be wary of in regards to the Internet and e-commerce strategies?

Sheehan: Right now I think there are several things they need to be focusing on. I would say one big area is content of websites and use of electronic communication to communicate to shareholders, making sure you have appropriate consent for that. Making sure that you're meeting prospectus delivery requirements if you are doing those electronically. Taking care to think about hyper-linking issues and how they can impact your liability or potential liability for content.

MFMN: Are those issues that your clients are raising with you, or are those issues that the SEC has begun to pay greater attention to?

SHEEHAN: It goes both ways. In many ways, the SEC is my greatest source of work. For example, the SEC issued its release in May regarding electronic delivery of electronic communications. And that meant that primarily there were two focuses. One was whether you could use e-mail for required disclosures to customers and the other was website content and your liability for hyper-linked information. So, a lot of the questions that I get are spawned by things that the SEC will say or do, but I don't get questions sort of in a vacuum. Generally, it will be the SEC takes a position and then your clients will want to implement that or have it interpreted for them.

MFMN: In your opinion, is the SEC taking a hard line approach toward electronic communication on the Internet or do they take each situation on a case by case basis?

SHEEHAN: Well, that's interesting. I would think that if you are otherwise a compliant shop and not being viewed as using the Internet or e-mail to perpetrate fraud, I don't think the SEC is being particularly hard line. I think they are trying to be very flexible and frankly, sort of industry friendly. They are trying to come up with solutions that work for people and they are trying not to be particularly heavy handed in respect to rule making or taking really hard line positions before all the information about how people are communicating is really known. On the other hand, they have been very proactive on some issues that have been very helpful. That May release is a very good example of that. In most ways, it was a very permissive release. It was meant to clarify when electronic communication is permitted, it was meant to clarify some misconceptions. I'll give you a perfect example: People would say, Geez, if we have something that is sort of sales literaturey sitting next to our prospectus, is that going to be deemed, because of the proximity to the prospectus, to be part of the prospectus?' And the SEC sort of cleared that up.

MFMN: In the case of electronic communication and online materials?

SHEEHAN: Yes. There was some concern that if you had non-prospectus information literally located on your site too close to a prospectus, or a link

to a prospectus, that non-prospectus content was going to be deemed to be part of the prospectus or subject to the anti-fraud provisions. And the commission basically said no, you have to do something to affirmatively state that something is part of a prospectus before it will be treated as part of a prospectus. Like if you have a prospectus online with a hyperlink embedded in it, that link is considered to be part of the prospectus.

MFMN: Is a fund company responsible for the information that it allows visitors to its site to link with through hyperlinks and web portals?