THE US Securities and Exchange Commission (SEC) has clarified that companies can use social media to meet their public disclosure obligations under Regulation FD if the channels they use meet certain standards and companies expressly inform investors about their disclosure practices.
In essence, the SEC has now explicitly extended its 2008 interpretive guidance (PDF) governing the use of company websites and blogs for Reg FD compliance to social networks such as Facebook, Twitter and StockTwits. (I thought they’d already done that?)
That is not necessarily a good thing, however, because many lawyers have criticized the 2008 guidance as being too vague to be useful. Some have called for the SEC to provide bright line standards rather than the principles-based “facts and circumstances” framework contained in the 2008 guidance. Consequently, yesterday’s pronouncements are unlikely to open the floodgates to material disclosures through social media.
The SEC’s report (PDF) yesterday came after the commissioners decided to drop an enforcement action against Netflix and its CEO Reed Hastings over a Facebook post he made last July saying the company’s users had streamed 1 billion hours of content the previous month.
The SEC was almost universally criticized and branded as out of touch after news of the potential action emerged in December. Public incredulity at the planned action stemmed from the fact that Hastings’ Facebook account had more than 200,000 followers at the time and the hours viewed metric was not material information.
Critical that investors know where to look
In the report of investigation made public yesterday, the SEC made no determination about the materiality of Hastings’ post, but it was critical of the fact that Netflix had never informed investors about Hastings’ Facebook account or that he might use it to post company information.
Indeed, the dominant theme of the report is that companies must give investors advance notice about the channels they will use for disclosure, including social media.
“We emphasize for issuers that the steps taken to alert the market about which forms of communication a company intends to use for the dissemination of material, non-public information, including the social media channels that may be used and the types of information that may be disclosed through these channels, are critical to the fair and efficient disclosure of information,” says the report.
The report sounds a special note of caution when dealing with personal social media accounts of corporate officers, saying that without advance notice to investors such accounts are unlikely to meet Reg. FD’s requirements.
“This is true even if the individual in question has a large number of subscribers, friends, or other social media contacts, such that the information is likely to reach a broader audience over time. Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information. Without adequate notice that such a site may be used for this purpose, investors would not have an opportunity to access this information or, in some cases, would not know of that opportunity, at the same time as other investors,” the report states.
The SEC suggests that companies explain on their websites the specific social media channels a company intends to use to disseminate material non-public information so that investors can take the steps necessary to receive important disclosures. Companies can also include the same information in SEC filings and news releases.
“Careful Reg. FD Analysis Required”
Importantly, yesterday’s report also makes it clear that informing investors about which social media channels the company may use to disseminate material non-public information is not by itself sufficient for compliance with Reg FD.
The SEC says issuer communications through social media channels also require “careful Regulation FD analysis comparable to communications through more traditional channels.”
Companies must “examine rigorously the factors indicating whether a particular channel is a ‘recognized channel of distribution’ for communicating with their investors.”
In this regard, the report refers readers to the “non-exclusive” factors outlined on pages 20 to 22 of the 2008 Guidance. For the sake of convenience, I have extracted the contents of those pages (excluding footnotes) from the 2008 Guidance below:
Some factors, though certainly non-exclusive ones, for companies to consider in evaluating whether their company web site is a recognized channel of distribution and whether the company information on such site is “posted and accessible” and therefore “disseminated,” include:
•Whether and how companies let investors and the markets know that the company has a web site and that they should look at the company’s web site for information. For example, does the company include disclosure in its periodic reports (and in its press releases) of its web site address and that it routinely posts important information on its web site?
•Whether the company has made investors and the markets aware that it will post important information on its web site and whether it has a pattern or practice of posting such information on its web site;
•Whether the company’s web site is designed to lead investors and the market efficiently to information about the company, including information specifically addressed to investors, whether the information is prominently disclosed on the web site in the location known and routinely used for such disclosures, and whether the information is presented in a format readily accessible to the general public;
•The extent to which information posted on the web site is regularly picked up by the market and readily available media, and reported in, such media or the extent to which the company has advised newswires or the media about such information and the size and market following of the company involved. For example, in evaluating accessibility to the posted information, companies that are well-followed by the market and the media may know that the market and the media will pick up and further distribute the disclosures they make on their web sites. On the other hand, companies with less of a market following, which may include many companies with smaller market capitalizations, may need to take more affirmative steps so that investors and others know that information is or has been posted on the company’s web site and that they should look at the company web site for current information about the company;
• The steps the company has taken to make its web site and the information accessible, including the use of “push” technology, such as RSS feeds, or releases through other distribution channels either to widely distribute such information or advise the market of its availability. We do not believe, however, that it is necessary that push technology be used in order for the information to be disseminated, although that may be one factor to consider in evaluating the accessibility to the information;
• Whether the company keeps its web site current and accurate;
• Whether the company uses other methods in addition to its web site posting to disseminate the information and whether and to what extent those other methods are the predominant methods the company uses to disseminate information; and
• The nature of the information.
The third element in evaluating whether and when information posted on a company’s web site would be public for purposes of evaluating whether a subsequent selective disclosure may implicate Regulation FD is whether investors and the market have been afforded a reasonable waiting period to react to the information. What constitutes a reasonable waiting period depends on the circumstances of the dissemination, which, in the context of company web sites, may include:
• the size and market following of the company;
• the extent to which investor oriented information on the company web site is regularly accessed;
• the steps the company has taken to make investors and the market aware that it uses its company web site as a key source of important information about the company, including the location of the posted information;
• whether the company has taken steps to actively disseminate the information or the availability of the information posted on the web site, including using other channels of distribution of information; and
• the nature and complexity of the information.
As you can see, it’s all getting rather more complicated than the mainstream media headlines (and the SEC’s news release) would have you think. The SEC’s report doesn’t even begin to dig into whether Hastings’ Facebook post meets the “posted and accessible” requirements or whether there was a suitable waiting period before anyone at the company discussed the information in private with an analyst or investor.
Nonetheless, the SEC’s news release and “report on investigation” want you to know that the agency doesn’t want to be a barrier to companies adopting new technologies that can improve investor communications.
Yesterday’s release and report are peppered with conciliatory statements, including that “most social media are perfectly suitable methods for communicating with investors” and “we encourage companies to seek out new forms of communication to better connect with shareholders.”
The reality, however, is much different. It’s the corporate lawyers who will make the final decisions. Being the cautious lot that they are, don’t expect them to give CEOs free reign to tweet material, non-public information any time soon.
- Broc Romanek of TheCorporateCounsel.net notes that the new guidance comes from an Enforcement report “perhaps not the best vehicle to encourage new practices.”
- Stephen M. Quinlivan of Leonard Street and Deinard, writes that “while the guidance is not hard to understand, it will be difficult to apply. And the SEC will be looking for someone to cross the line.”
- David A. Katz of Wachtell, Lipton, Rosen & Katz was one prominent lawyer who recently called for clearer SEC guidance. He authored an excellent article The Board, Social Media and Regulation FD, on The Harvard Law School Forum on Corporate Governance and Financial Regulation.
- Cydney Posner of Cooley LLP writes in SEC Embraces Modernity — Sort Of that “it will be interesting to see whether the report has the effect of encouraging more companies to use social media more often and filing fewer 8-Ks.”
- Goodwin Procter‘s client alert highlights other sensitive content companies and executives should be mindful of when using social media.