SEC clears disclosures on social media
The SEC recently issued a report that clears the way for companies to use social media outlets like Twitter and Facebook to announce key compliance information, so long as investors have been told in advance which social media outlets will be used.
According to the Securities and Exchange Commission’s April 2 report, a CEO can now legally disclose material information about his company on his personal Facebook page – what a relief for Netflix CEO Reed Hastings, who made precisely such a disclosure last July. Instead of going after Hastings and prescribing punishment, the SEC decided to clarify the boundaries involving social media use and investor communications. Going forward it is impossible for companies to plausibly claim they didn’t know how the disclosure rules and social media interact.
Disclosing material information to some investors and not others has been prohibited since the SEC banned the practice in 2000 with Regulation FD (as in Fair Disclosure.) But that rule was written before social media transformed the way individuals and companies communicate, arguably leaving companies facing an uncertain compliance landscape. Patrick Quick, partner in Foley & Lardner's transactional and securities practice, dismissed the idea that the new report reflected any profound change in the SEC’s approach, however: ‘It’s not really different [from guidance the SEC issued in 2008.] There’s no big surprises here,’ he says.
Indeed, the SEC’s report makes clear that the agency, at least, did not view the compliance landscape as particularly uncertain. The agency heavily cited its 2008 guidance and said social media wasn’t different from the internet uses it had discussed then.
‘The SEC in 2008 basically said if you wanted to use the internet, you had to set it up as a regular channel of distribution. That would have required a fair amount of effort on a company’s part. Companies either were confused by that or didn’t see it as particularly useful,’ Quick says. ‘To me, this is more of the same.’
Quick doesn’t think companies will change the way they do disclosures as a result, predicting that many companies ‘will continue to be scared and not embrace social media as a medium to communicate with investors.’
Reg FD compliance
Reg FD was issued to block companies’ habit of giving stock analysts and others disclosures that gave them trading advantages not shared by the general public. The regulation achieved that goal by requiring companies to publicly disclose material information, and in the case of inadvertent disclosures, to promptly make the information public. Quick noted, however, ‘An interesting question is “what is in the public domain?” The SEC would say that something filed with the commission on a Form 8-k is. What else qualifies? There is this question, ok, someone has a Facebook post, is that public?’ Now that the SEC report is out, the answer is yes, so long as investors knew to watch that Facebook page. To some extent, that result surprised Quick.
‘I think the SEC did go a little farther than I would have expected because it allowed companies to require investors to register or join something to get access to the information. Registration can be a barrier to people, and not everyone knows how to use sites like Facebook, so the guidance essentially allows companies to put some barriers up to the public’s access to disclosures. I think that if the registration or other process was too onerous the SEC would not allow it but I was surprised it went as far as it did.’
Even so, Quick thinks disclosing material information via social media is simply a bad idea. ‘I think this kind of disclosure would not work for many companies. I’m not going to tell any companies that the right way to do disclosure is to just do a Facebook post.’
Nonetheless Quick recognizes some companies might want to use social media this way, and so added ‘if you really want to do it, perhaps because an executive particularly likes to tweet, the key is telling the public that disclosure may happen that way: “We may, from time to time, issue tweets out of this account, post on this Facebook page, disclose on this blog.” Be very direct and explicit about where disclosure may happen. If possible, say when it is likely to happen, though that is more than the SEC requires.’ Even so, Quick emphasizes, if a client asked him about disclosing material information via social media, ‘I would counsel against it.’