Facebook, You and the Government: The SEC is Following Your Tweets

© 2013 The Texas Lawbook.

By Jeffrey Ansley and Jay Wallace
Contributing Writers to The Texas Lawbook

(May 21) – The United States Securities and Exchange Commission has finally joined the age of social media. In a watershed report issued last month, the SEC concluded that publicly-traded companies, subject to the still-vague limitations discussed below, may use social media sites to disclose material financial information to the investment community.

Since the report, dozens of public companies have used various social media sites, including Twitter and Facebook, to disseminate information to their investors and to the public at large. In doing so, these companies have joined the billion-plus users of social media who increasingly turn to these burgeoning communities to share or receive the growing currency of the day – information.

The SEC’s report followed an investigation into Netflix, Inc. and Reed Hastings, its Chief Executive Officer, by the Commission’s Division of Enforcement after Hastings posted information about the company’s growing subscriber numbers on his personal Facebook page. The Netflix CEO used his personal Facebook page instead of reporting the information to investors through the traditional – and SEC approved – disclosure methods of filing of a company Form 8-K or even issuing a press release.

Although the Enforcement Division ultimately did not pursue a case against Netflix or Hastings, the investigation resulted in the Commission’s issuance of a report that attempts to modernize SEC rules regarding how companies can share important information with investors.

Historically, these disclosure rules have been defined by the SEC’s Regulation Fair Disclosure, or “Regulation FD,” which generally requires issuers to publish material, nonpublic information to investors simultaneously. According to the SEC, Regulation FD is “intended to ensure that all investors have the ability to gain access to material information at the same time.” Regulation FD is, and always has been, about the fair and equal distribution of information to the investing public.

The New Normal: Social Media as a Source of Regulation FD Disclosures
In its April 2, 2013 press release announcing the new rule, which effectively supplements Regulation FD, the SEC stated for the first time that, “companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation FD…”

In a word, the new rule places Facebook, Twitter and other social media outlets alongside traditional SEC filings, company-issued press releases, and analyst and earnings calls as legitimate and approved Regulation FD disclosure tools.

This new rule, however, while granting companies the newly-issued power to use social media to share their important information, comes (like almost all grants of authority by federal regulators) with conditions on the use of that authority. Specifically, the SEC concluded that social media outlets – like the content of a company’s website – can constitute precisely the selective, and unfair, disclosure of material information that Regulation FD was designed to prevent in the first place.

As a result, the SEC’s newly-implemented rule requires that while companies can use social media to disseminate key information, any that do so must also take the necessary steps to ensure that investors are alerted about which social media channels will be used to disseminate the information. The SEC gave little real guidance on what it would view as “recognized channels of distribution” for company communications with their investors. This requirement, of course, is in addition to the general mandate that issuers comply with the overall requirements of Regulation FD in their disclosures of information through any social media outlet they put to use.
In the days ahead, many companies will doubtlessly use social media to share with investors what they believe to be important information. This decision by for-profit companies will in turn be driven by, as you might guess, the numbers. Today, estimates are that approximately one billion people are on Facebook, while in excess of 175 million people use Twitter on a regular basis.

Both of those numbers are growing daily. What’s more, they will certainly continue to expand exponentially throughout our lifetimes, even after Facebook and Twitter are inevitably replaced by later generations of social media and take their place beside MySpace and other Information-Age extinctions.

So based on these large and ever-increasing figures, it only makes sense for public companies to use social media outlets to share important information with investors whenever possible. It’s good business.

What Now: Following a Rule When it’s Little More Than Guidance
But for regulated entities like public companies, good business also requires good corporate governance. Indeed, the price today of even perceived poor management and governance may be an SEC enforcement action – or worse. The SEC’s investigation into Netflix’s use of Facebook as a possible violation of Regulation FD is only the most immediate example. Even though the SEC ultimately elected not to pursue an enforcement case, one can easily imagine a different, and far more costly, result.

The problem, as is so often the case, is that the devil is in the details. Yes, the SEC – rightly and laudably – now permits public companies to do what the rest of the world does, namely, to utilize social media for the sharing of information that’s needed by others. The Commission should be applauded for this timely decision.

The pitfalls created, however, by the SEC’s solution are twofold. First, the Commission has yet to provide any real guidance to those companies on how they can use social media to share information with their investors. In the months ahead, the Commission will certainly deliver some parameters to companies on how to comply with the report, now only a few weeks old. In the meantime, however, those companies are largely on their own in navigating the new rule.

Second, in an age of increasingly sophisticated frauds and identity theft – think of the recent worldwide cyberattacks that, in a matter of hours, inflicted $45 million in global losses using sophisticated computer intrusion techniques – companies run the risk of having their social media feeds hijacked or spoofed and false information spread to the marketplace. A fake Twitter or Facebook report on a public company could easily cost investors millions or billions of dollars in the blink of an eye.

Consequently, companies and their management venturing into the world of disclosure by social media should take precautions in its use.

What Should Companies Do in Response to the SEC’s Report?
Remember that social media is a fabulous tool that also carries with it noteworthy risks. Prior to issuing important information through social media, be mindful that any disseminated information will garner the same scrutiny as information from a traditional press release, company website, or SEC filing. Consequently, companies need to set up guidelines for vetting information issued via social media. This includes information like expected sales or revenue, financial reporting regarding the previous quarter or fiscal year, short and long-range strategic plans, and other material corporate developments.

Some suggested steps:

• Treat social media information as any other information issued via a traditional press release. Identify an individual, or individuals, in your organization who will be responsible for approving the content of any social media information issued by the company. Keep in mind that the SEC’s report notes that “disclosure of material, nonpublic information on the personal social media site of an individual corporate officer, without advance notice…is unlikely to qualify as a method” complying with this interpretation of Regulation FD.
• In addition to having an individual approve the content, make sure that no information is transmitted by social media without written approval of a designated individual within your organization. This will not only guard against incorrect or factually unverifiable information reaching the public through social media, but it will also protect the company from prematurely releasing information or accidentally transmitting confidential information, something that has become increasingly common as social media communication has risen exponentially in the last few years.
• Establish protocols for alerting investors about the format of social media the company will use to transmit information.
• Task individuals in your organization with identifying the most effective and reliable social media channels through which to transmit information.
• Monitor what’s out there in the social media world that potentially could be viewed, by the SEC or public, as social media content from or sanctioned by your organization, knowing that false or incomplete information could have an immediate impact on your company’s share price or result in an unwanted regulatory inquiry.

Jeffrey J. Ansley and Jay M. Wallace are partners at Dallas-based Bell Nunnally & Martin LLP. Ansley is a member of the firm’s White Collar Defense and Internal Investigations practice area and can be reached at jeffa@bellnunnally.com. Wallace is partner in the firm’s Labor, Employment and Benefits practice area and can be reached at jayw@bellnunnally.com Both can be reached via Bell Nunnally’s website: www.bellnunnally.com.

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