April 5, 2013
On Tuesday, April 2, the Securities and Exchange Commission (SEC) issued a report of investigation which makes it clear that companies can use social media outlets like Facebook and Twitter to announce key information, in compliance with Regulation Fair Disclosure (Regulation FD), provided that investors have been alerted about which social media channels will be used to disseminate such information. The SEC’s press release and report are available at www.sec.gov/news/press/2013/2013-51.htm.
As detailed in its press release, the SEC’s report1 confirms that Regulation FD applies to social media and other emerging means of communication used by public companies the same way in which Regulation FD applies to company websites. In 2008, the SEC issued guidance clarifying that websites can serve as an effective means for disseminating information to investors if they have been made aware that they may find such information there.2 The Governing Rules of “Fair Disclosure” However, prior to the release of its report of investigation, the SEC had not explicitly addressed the application of Regulation FD and the 2008 guidance to disclosures made via social media channels. That void opened the need for clarity.
The Governing Rules of “Fair Disclosure”
This matter arose over a probe of a public company and its CEO by the SEC Enforcement Division over disclosures made on its CEO's Facebook page, providing an important test of whether a rule designed to prevent leaks to analysts can translate to the social media age. Specifically, Regulation FD and Section 13(a) of the 1934 Exchange Act prohibit public companies, or persons acting on their behalf, from selectively disclosing material nonpublic information to certain securities professionals, or shareholders where it is reasonably foreseeable that they will trade on that information, before the information is made available to the general public. At issue in the SEC’s aforementioned probe was whether the information provided on the CEO’s Facebook page was material to investors and, if it was material, whether investors knew that the Facebook page was a venue to release important company news.
In its investigation, the SEC staff learned (and some public commentary further suggested) that there is uncertainty concerning how Regulation FD and the Commission’s 2008 guidance apply to disclosures made through social media channels. This is interesting as the 2008 guidance was intended to respond to the changing electronic landscape of issuer disclosure and the widespread use of websites to disseminate information electronically to investors and the market. In lieu of issuing an enforcement action or alleging wrongdoing, the SEC issued its report of investigation to provide further guidance around applying Regulation FD to social media communications.
The SEC’s report clarifies that company communications made through social media channels could constitute selective disclosures and, therefore, require careful Regulation FD analysis. In its 2008 guidance, the Commission explained that it had “long recognized the vital role of the Internet and electronic communications in modernizing the disclosure system under the federal securities laws and in promoting transparency, liquidity and efficiency in [the] trading markets.” Since the issuance of the 2008 guidance, the use of social media has proliferated and the SEC is aware that public companies are increasingly using social media to communicate with shareholders and the market generally. This rapid proliferation of social media channels for corporate communication purposes prompted an update of the Commission’s guidance on the following two fronts:
- First, issuer communications through social media channels require careful Regulation FD analysis comparable to communications through more traditional channels. Regulation FD applies when an issuer discloses material, nonpublic information to certain enumerated persons, including shareholders and securities professionals. It prohibits selective disclosure “[w]henever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer to any enumerated person described in [the Regulation].”
Because the identification of enumerated persons within Regulation FD is inclusive, the rule makes it clear that public disclosure of material, nonpublic information must be made in a manner that conforms with Regulation FD whenever such information is disclosed to any group that includes one or more enumerated persons. This requirement means that any disclosures in social media channels to groups that include an “enumerated person” should be analyzed for compliance with Regulation FD to ascertain whether the channel was in fact a “recognized channel of distribution.” This distinction requires an issuer to provide investors with appropriate notice of the channel, along with all other channels, by which it will disseminate material nonpublic information.
- Second, the principles outlined in the 2008 guidance – and specifically the concept that the investing public should be alerted to the channels of distribution a company will use to disseminate material information – apply with equal force to corporate disclosures made through social media channels. The 2008 guidance was directed primarily at the use of corporate websites for the disclosure of material, nonpublic information. Like websites, corporate social media pages are created, populated and updated by the issuer. The 2008 guidance, furthermore, specifically identified “push” technologies, such as email alerts, RSS feeds and “interactive” communication tools, such as blogs, which could enable the automatic electronic dissemination of Today’s evolving social media channels are an extension of these concepts, whereby information can be disseminated to those with access. The 2008 guidance continues to provide a relevant framework for applying Regulation FD to evolving social media channels of distribution. Therefore, the Commission’s view is that providing appropriate notice to investors of the specific channels a company will use for the dissemination of material, nonpublic information is a sensible and expedient solution. Issuers must decide the specific channels they want to use and disclose the specific social media locations information to subscribers.
Today’s evolving social media channels are an extension of these concepts, whereby information can be disseminated to those with access. The 2008 guidance continues to provide a relevant framework for applying Regulation FD to evolving social media channels of distribution. Therefore, the Commission’s view is that providing appropriate notice to investors of the specific channels a company will use for the dissemination of material, nonpublic information is a sensible and expedient solution. Issuers must decide the specific channels they want to use and disclose the specific social media locations where material information will appear, e.g., the specific URL, Twitter handle or Facebook page. While specificity is the key, practices will likely vary from company to company as to the types of information that will be communicated through these channels.
Although every case must be evaluated on its own facts, the SEC states that “disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to qualify as a method ‘reasonably designed to provide broad, non-exclusionary distribution of the information to the public’ within the meaning of Regulation FD,” regardless of the number of subscribers to that site, particularly when the issuer does not choose to file a Form 8-K. Thus it would not ordinarily be assumed to be a channel through which the company would disclose material corporate information.
Benefits and Impact for Public Companies
The SEC validates that social media is becoming a bona fide communication channel through which to conduct business. The SEC’s announcement paves the way for companies to issue relevant news and announcements in an effective and expedited manner through their social media communities.
However, as noted above, there are a number of challenges and risks that companies will need to address and manage effectively. We have observed that, in many instances, the governance of social business channels within companies is lagging. For example, multiple users – even a large number of them – often share the password to the company’s official Twitter account, enabling any of them to post messages. These employees also may lack the proper training on what may or may not be communicated – in general and with regard to Regulation FD. In addition, users may access the company’s Facebook page via their personal accounts, without controls in place to ensure improper or inappropriate messages or announcements are not posted or archived.
Of note, in Protiviti’s recently released 2013 Internal Audit Capabilities and Needs Survey, the findings from a special section on social media and the audit process reveal that organizational social media use is rising and growing increasingly important from a risk management standpoint, yet formal processes for it – with regard to usage and appropriate controls – remain a rarity.3
Many organizations lack a strong and robust infrastructure to manage these risks. As a result, inadvertent or erroneous social media postings remain a significant possibility and conceivably could influence a company’s stock price. A governance framework is essential to manage and monitor social media-related risks, as well as to educate employees and company insiders about what information is considered public, private, confidential, sensitive, material, etc.
Overall, the SEC’s decree likely will be viewed as a positive development for public companies seeking to deliver information to investors and stakeholders in a more timely and efficient manner. It also will drive these organizations to enhance their governance of social media as well as data, which will benefit them significantly over the long term.
Protiviti (www.protiviti.com) is a global consulting firm that helps companies solve problems in finance, technology, operations, governance, risk and internal audit. Through our network of more than 70 offices in over 20 countries, we have served more than 35 percent of FORTUNE® 1000 and Global 500 companies. We also work with smaller, growing companies, including those looking to go public, as well as with government agencies.
Protiviti is a wholly owned subsidiary of Robert Half International Inc. (NYSE: RHI). Founded in 1948, Robert Half International is a member of the S&P 500 index.
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1SECURITIES AND EXCHANGE ACT OF 1934, Release No. 69279 / April 2, 2013, “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings” available at http://www.sec.gov/litigation/investreport/34-69279.pdf.