Social Enterprise

Disclosing material, nonpublic information via social warrants caution

A recent SEC report clarifies Regulation Full Disclosure requirements involving social media and investor information. Get tips on staying in compliance.

The U.S. Securities and Exchange Commission's decision not to take enforcement action against Netflix and its CEO Reed Hastings, but rather to issue a report explaining how the agency views release of material, nonpublic information through social media platforms, has been heralded as a breakthrough in bringing security regulations more in line with today's trading environment.

Regulation Full Disclosure expansion covers social media

Regulation FD, adopted October 23, 2000, addressed three issues:

  • selective disclosure of material nonpublic information;
  • insider trading liability arising from a trader's use or knowing possession of material nonpublic information; and
  • family and nonbusiness relationships that may cause liability under the misappropriation theory of insider trading.

In 2008 the SEC issued further guidance on Regulation FD stating that websites could be used to disseminate information to investors as long as those investors were told where to look for that information. The April 2, 2013 report from the SEC expanded that to social media.

The agency said companies can use social media outlets such as Facebook and Twitter to announce "key information in compliance with Regulation FD so long as investors have been alerted about which social media will be used to disseminate such information." However, the agency stopped far short of providing a blanket allowance by stating that each case must be considered based on its own facts. It also cautioned that disclosures by corporate officers on their personal social media sites might not comply with Regulation FD since personal sites would not usually be considered appropriate channels for disclosing material, nonpublic information.

Netflix's Hastings triggered the SEC's scrutiny when he posted the following to his personal Facebook page on July 3, 2012:

"Congrats to Ted Sarados, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we'll blow these records away. Keep going, Ted, we need even more!"

In the report issued from its investigation, the SEC claimed Hastings' mention of 1 billion hours of streamed video represented a 50% increase over its first quarter report. It also pointed out the company's stock jumped by more than $11 a share the day of Hastings' post, that Hastings' personal Facebook page hadn't been previously used to disseminate performance metrics, and that the company hadn't identified his Facebook page as a source for those announcements. The SEC's report on its investigation also noted that Netflix had not mentioned the milestone on Form 8-K, in a press release, or through any of its standard distribution channels. In December 2012 the agency issued a Wells letter to both Netflix and Hastings. A Wells letter warns the recipient of pending enforcement action. Ultimately the SEC did not take enforcement action or allege wrongdoing, citing the "market uncertainty about the application of Regulation FD to social media."

Even though the SEC's clarification is helping to bring SEC rules more in line with today's investing environment, the enthusiasm should be tempered with caution. The SEC made it clear that disclosures on social media must still be analyzed for compliance with Regulation FD and that public companies have to ensure they alert investors and the general public to the locations where they are publishing material, nonpublic information.

Challenges of releasing investor information via social media

For the enterprise, adapting social media to disseminate investor information while staying in compliance with Regulation FD will demand particular attention to detail and could be fraught with pitfalls.

Todd Feinstein, an attorney with Williams Securities Law Firm, P.A. in Tampa, FL, cites the changing nature of social media platforms as just one challenge. (Williams Securities Law Firm, P.A. assists public companies with decisions about public dissemination of information, reviewing and filing press or social media releases and drafting 8-K information.) For example, if the social platform changes settings that affect the distribution or availability of postings, the availability to the desired audience can change. Also, many investors in the upper age groups don't use social media as extensively as younger persons, yet they are generally more invested in the securities markets.

Feinstein also wonders how companies will decide what social media accounts to use to ensure an equitable coverage of all potential investing audiences, and he questions the inequalities in distribution that could creep into the process based on requirements to "friend," "like," or "follow" in order to get investor-related postings in a timely manner. A related issue Feinstein highlighted was how companies would be able to quantify how many people within their investing public was being reached via social platforms. He thinks privacy issues could arise because people will be more easily identified as investors in particular stocks.

But of all things, Feinstein said, just the management of using social media to release investor information would be challenging. He stressed that companies should never release any information they would not put into an S-1 Registration Statement or onto a Q or a K form, and that there are very subtle nuances in how things are written that can affect whether something is in compliance with Regulation FD as well as several other securities regulations related to communications with the investing public.

Compliance tips to keep in mind

While many IT decision makers may be slightly removed from the front lines on this one, they still have plenty to watch out for. CIOs, IT managers who oversee social media efforts, and anyone else with a hand in the social mix need to be aware of Regulation FD and the requirements necessary to stay in compliance.

Here is a compilation of tips offered by Skadden, Arps, Slate, Meagher & Flom LLP in JDSupraLawNews, and Ira N. Rosner, a shareholder at Greenberg Traurig, LLP, in the National Law Review:

  • Use a variety of communications mediums to let investors and the general public know where investor information will be published;
  • Specifically name the social media sites used for investor information and have those sites linked on the company website;
  • Be consistent in using the identified sites to publish investor information;
  • Keep using existing Regulation FD-compliant methods of publishing the information;
  • Set up policies that spell out what can be released and by whom, and have procedures in place for competent counsel to review the information being released; and
  • Train everyone in the correct process for releasing investor information.
Disclaimer: The tips outlined here may not protect you from litigation. Always seek competent legal counsel when dealing with securities regulations and directives.

About

Duane Craig reports and writes on technology, construction, finance, food, and agriculture. He's been published in trade print magazines, the Washington Post, and widely on the web.

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