Last month, the SEC announced that it is acceptable to use social media, such as Facebook and Twitter, to announce information in accordance with Regulation Fair Disclosure (Reg FD), provided that investors are made aware in advance that the site in question will be used for that purpose.
A review of Reg FD is required when an issuer discloses material, non-public information. Essentially it prohibits selective disclosure (e.g., disclosing material, non-public information to select audiences such as securities analysts) without simultaneously making the information available to the general public. This provides all investors with equal access to material information on a company. Reg FD applies to the issuer, individuals acting on the issuer’s behalf (e.g., directors or executives officers), and employees who communicate with the securities industry and securities holders. Reg FD does not specifically define what is material or non-public; however, SEC guidance explains what factors and circumstances should be considered and provides examples of material and/or non-public information, as well as citations to case law.
In 2008, as a result of electronic forms of communication surpassing more traditional methods, the SEC issued guidance on Reg FD and its application to websites. The SEC’s most recent report, issued in April 2013, expands that guidance to incorporate the exploding popularity of social media as a form of communication by individuals and companies. The essence of the expanded guidance is that a company must provide advance notice to investors that a particular site, such as Facebook or Twitter, may be used for the purpose of providing information. Personal sites of employees of a company would not generally be channels that a company should use to disclose material corporate information, as they are not readily accessible and are not an appropriate substitute for a company’s official site.
The SEC launched its most recent investigation related to Reg FD as a result of an Enforcement Division review of a post by Netflix’s chief executive officer on his personal Facebook page. The CEO disclosed information on his personal Facebook page without reporting the information to investors through a press release or Form 8-K filing. In addition, the CEO did not alert investors in advance that his personal Facebook page would be used to communicate information about Netflix. The investigation resulted in the report issued last month by the SEC.
Ultimately, this review did not result in an enforcement action against Netflix by the SEC; but in conducting the investigation, the SEC recognized the need for clarification on this issue, realizing that many companies were unsure of how Reg FD and the SEC’s 2008 guidance on websites applied to social media. The SEC determined that social media channels are similar to websites and blogs and therefore subject to the application of Reg FD. The SEC noted that its goal is not to discourage communication with investors through new channels or discourage the use of innovation in communication, but rather to make sure that communications are accessible and the public is aware of the avenues of communications in advance.
Following the SEC’s announcement, Netflix announced that it will use Twitter and both the company and the CEO’s Facebook pages to make disclosure to the public. Other companies are expected to follow this example.
In making a decision as to what channels and methods to use to communicate material, non-public information, companies should review the SEC’s recent press release and Report of Investigation, as well as Reg FD. Companies would be well advised to also review Reg FD’s adopting release and all other guidance issued by the SEC to date, including the 2008 guidance, which discusses how a website can be used to disseminate information to investors.
Going forward, companies should look out for additional guidance, speeches, and press releases issued by the SEC, and for cases that may arise from SEC reviews relating to Reg FD. Companies that wish to communicate through social media channels should keep in mind that violations of Reg FD depend on the facts and circumstances of a case. Of course, technology ever evolves, and new Internet platforms constantly pop up, so in the future some other service may be the center of debate. Companies may be eager to use these new platforms, but should perhaps be guarded in their adoption. In a 2002 report of investigation, the SEC did “caution issuers that a deviation from their usual practices for making public disclosure may affect our judgment as to whether the method they have chosen in a particular case was reasonable.”
Today the public is accustomed to receiving information more from websites as opposed to print, and as time goes on the public will become more accustomed to receiving information from a platform such as Twitter. Yet in today’s world of ever-evolving technology and means of communication, it is impossible to predict what the next popular innovation will be. Thus it is important to understand that there will never be a time when the answer will be completely clear, as the crafting of guidance and the resolution of violations will never outpace technology. By the time companies feel more confident using Twitter, other avenues may more efficiently disseminate information. A key indicator of this is the user base: when something catches on and begins attracting a significant following, companies will want to follow suit, not wanting to be left behind by continuing to use a communication platform no one reads anymore.
In sum, it is of the utmost importance when reviewing a potential communication and the application of Reg FD that the focus should be not on which platform is used, but instead on factors such as accessibility to the information and giving advance notice that a company will use a certain method to communicate the information.
Contributing Author Charles Lundelius is a director and leader of Berkeley Research Group’s Financial Institutions Practice. Among his more notable consulting engagements, the SEC Inspector General asked him to lead the team investigating the SEC’s failure to uncover the Madoff Ponzi scheme.
He specializes in SEC, FINRA and NYSE market regulation investigations, securities valuation, share price modeling and commodities trading, having testified in over 30 different cases. Further, Lundelius has testified or is designated to testify on at least three of the major litigation initiatives announced by the SEC relating to the 2007 financial crisis.
Lundelius is a Certified Public Accountant and is accredited in Business Valuation and certified in Financial Forensics by the American Institute of Certified Public Accountants.