On April 2, 2013, the U.S. Securities and Exchange Commission announced that companies, under certain circumstances, would have permission to disseminate material, nonpublic information through social media. To provide more information about these particular circumstances, the commission pointed to its own 2008 guidelines regarding the use of company websites to disclose material information.
This FAQ is part of SearchCompliance's IT Compliance FAQ series.
What prompted the SEC to consider social media as an acceptable vehicle for companies to disclose material, nonpublic information?
On July 3, 2012, Netflix CEO Reed Hastings posted a message on his personal Facebook page asserting that monthly viewing of the company's streaming service had topped one billion hours. Netflix had not reported this information via a press release or Form 8-K filing, and it had not alerted investors that a personal Facebook page could be used to disclose material company news. The SEC Division of Enforcement launched an inquiry to determine whether Hastings' Facebook announcement constituted a selective disclosure of information and had thus violated the Regulation Fair Disclosure (Regulation FD).
Rather than pursue enforcement action or accuse Hastings and/or Netflix of wrongdoing, the SEC issued a Report of Investigation "recognizing that there has been market uncertainty about the application of Regulation FD to social media." The commission did not specify in the report whether Hastings' July 3, 2012, Facebook post constituted a disclosure of material information.
What is Regulation FD, and how does it apply to SEC's social media rules when disclosing material information?
Regulation FD requires companies to disclose material information in a nonexclusionary way that aims, in a reasonable manner, to make the information broadly available to the public. The regulation's goal is to ensure that all investors have an opportunity to learn the information simultaneously. The regulation doesn't establish a standard method of disclosure, but the SEC has cautioned that a deviation from a usual disclosure practice can raise compliance-related red flags.
Information disseminated via social media could be deemed selective disclosure and requires a careful Regulation FD analysis on a case-by-case basis, the SEC warned in a Report of Investigation released April 2, 2013. If access to a particular social media platform is restricted, for example, it would not constitute a compliant method of disclosing material information.
What must companies do to ensure compliance with securities laws and regulations if they use social media to disclose material information?
Before using social media to disclose material information, a company must alert investors as to which social media outlets they plan to use. The SEC recommended that companies post this alert on their websites, in news releases or in SEC filings. The measures a company takes to issue this alert are important to ensuring compliance with SEC information disclosure regulations.
"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, nonpublic 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," the SEC wrote in its Report of Investigation released April 2, 2013. "Without such notice, the investing public would be forced to keep pace with a changing and expanding universe of potential disclosure channels, a virtually impossible task."
Companies must also perform a careful Regulation FD analysis of the planned disclosure, including a rigorous examination into whether the social media platform is a "recognized channel of distribution." To make this determination, the SEC directs companies back to 2008 guidelines for material disclosures on company websites. That guidance presented a long -- but not exhaustive -- list of factors that a company needs to consider before deeming its website a recognized channel of distribution. Among those factors are whether a website's design efficiently leads investors to information and whether the information is prominently disclosed in a location known and routinely used for such disclosures.
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Are personal social media sites such as individual Facebook pages acceptable avenues for disclosing material information?
In its Report of Investigation into the July 3, 2012, Facebook posting by Netflix CEO Reed Hastings, the SEC said it is unlikely that disclosing material information on a personal social media site would comply with securities laws unless investors had been notified that the site would be used for that purpose. Even if a corporate officer's personal social media page had 200,000 followers -- as Hastings' page reportedly had -- it would still require advanced notice to investors if it were to qualify as a reasonable vehicle for disclosure.
What do critics of the SEC social media rules say about the policy?
Some critics have voiced concern that requiring companies to alert investors of social media site use does not necessarily create a central location for the discovery of material information. If a company were to provide a roster of a dozen or more social media sites, for example, investors would have to continuously search various websites to ensure they learned of the news.
Other critics complained that the SEC's 2008 guidance on the use of company websites to disclose material information is too vague for companies to reference regarding social media use. The 2008 guidance did not offer straightforward rules, but instead "a factor-based framework for analysis" to determine whether a site is a recognizable channel of distribution according to the SEC. For many corporate lawyers, this may leave too many unanswered questions and create compliance risk when using social media for disclosing material information.
This was first published in June 2013