SEC's Social Media Guidance Raises as Many Questions as it Answers

The Securities and Exchange Commission issued a report last week broadly interpreted as a blessing for companies to use social media sites such as Facebook and Twitter for disseminating information to investors.

The SEC itself posted the news on Twitter, where it was retweeted and commented upon. In true Twitter fashion, however, the celebratory, overly-simplistic interpretation is the sort of 140-character summation one might expect given the limitations of the medium. What the Commission said is really a bit more complicated and may raise as many questions as it answered.

“I think a concern for a lot of compliance officers is inadvertent communication,” says Mike Rost, global head of industry analysts, financial & risk, at Thomson Reuters. “If an organization does come out and tell investors that it is going to utilize Twitter as an official communication channel, what disciplines does it then have to put in place to make sure information isn't distributed inadvertently through that channel?”

The guidance stems from an inquiry the Division of Enforcement launched into a post by Netflix CEO Reed Hastings on his personal Facebook page stating that Netflix's monthly online viewing had exceeded one billion hours for the first time. Netflix did not report the information, which caused the company's share price to rise 13 percent in one day, to investors through a press release or Form 8-K filing. The SEC decided not to initiate an enforcement action, recognizing market uncertainty about the application of Regulation Fair Disclosure, a rule that prohibits selective disclosure of material information, to social media.

The resulting SEC report and the guidance it contains is in many ways a restatement of what it said in 2008, clarifying that Websites can serve as a means for disseminating information to investors as long as they've already been told to look for it there. Building upon that guidance, the Commission clarified that social media outlets can similarly comply with Reg FD so long as investors are alerted about which services will be used and that the information is distributed broadly and non-exclusively.

The report explains that disclosure of material, non-public 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 an acceptable method of disclosure under the securities laws. What this means for companies looking to dabble more in social media, is that they should decide which services they want to use and clearly relay, in advance and in as many places as possible, specific information to find these sites. An investor should have relatively unhindered access to the site, and not have to pay for access.

It remains to be seen how quickly companies will jump into these new communication channels. A recent Stanford University survey finds that only 14 percent of companies currently communicate with shareholders through social media sites. This hesitancy echoes the challenge faced by regulators as they struggle to keep pace with rapidly evolving technology, and the compliance gaps it creates.

Rost explains that corporate Websites, investor relations materials, and annual reports all require time, a clear chain of command, and defined responsibilities. In contrast, setting up a Twitter or Facebook page can be done in a matter of minutes by anyone within an organization, sanctioned or not. Addressing these risks and establishing controls are a unique, modern challenge.

If you want to use social media channels to communicate official information about your company to investors, “that declaration really means that you are putting all of the appropriate disciplines in place,” Rost says. “This can't just be a casual communication channel. It all comes back to having really tight policies and making sure those policies are communicated throughout the organization.”

He suggests that companies follow the lead of others forced by regulation to live on the leading edge of the curve. Broker-dealers, for example, needed to address concerns posed by instant messaging platforms by having the ability to capture and audit those messages and ensure they were used appropriately.

“The focus going forward needs to be on managing stakeholder expectations to ensure that everyone—especially investors—understands exactly where and how material information can be disclosed.”

—Shellye Archambeau,

CEO,

MetricStream

Training is crucial, Rost says, lamenting that many organizations are behind in this area. At a recent event, Thompson Reuters and audit firm KPMG surveyed 355 attendees regarding their social media practices; roughly 72 percent said they had no specific employee training in place for using these tools. “Anybody in the organization could now become a communicator in that channel,” warns Rost. “What password controls are there? Do people who tweet in that account understand what a material disclosure is, or is not?”

Given that so many people rely on Twitter and Facebook feeds to get their news,” the SEC's guidance is both positive and overdue, says Shellye Archambeau, CEO of MetricStream, a provider of governance, risk, and compliance solutions. She says, however, it leaves plenty of questions.

Amended or new regulations won't necessarily solve the complex issue of social media disclosure, as it would be “difficult to enact legislation now that fully addresses evolving and future stakeholder interests,” Archambeau says. “The focus going forward needs to be on managing stakeholder expectations to ensure that everyone—especially investors—understands exactly where and how material information can be disclosed, whether that be through a traditional SEC filing, press release, 140 character tweet, or all of the above.”

Use Extreme Caution

Security risks also come with social media disclosures. The need for improved cyber-security and keeping hackers at bay will become even more important as social media becomes a tool for disseminating material information, Archambeau says. “We have got to make sure that we are doing a better job around security,” she says. “A Facebook or Twitter account can be hacked with information put out there that may or may not be correct.”

Though the SEC stops short of saying so, the SEC report suggests that Hastings' conduct violated Regulation FD. In particular, the SEC did not answer the question of whether Hastings disclosed material information.  Questions such as these illustrate the need for caution when using social media, says Jonathan Green of the law firm Kaye Scholer.

 “Because materiality is often viewed in hindsight, company executives should exercise extreme caution when using social media for any discussions related to the company,” he says. “You don't want to later get into a debate with the SEC over whether your remarks were material.”

The 2008 guidance that the recent report draws upon wasn't widely embraced because it was general, principles-based guidance and “a lot of people just didn't feel comfortable doing exclusive, Website-only communications,” says David Lynn, a partner at Morrison & Foerster.

DID NETFLIX VIOLATE REG FD?

The following is from an SEC Report on whether Netflix and CEO Reed Hastings violated Regulation FD by posting company information via social media outlets.

Our 2008 Guidance was directed primarily at the use of corporate web sites for the disclosure of material, non-public information. Like web sites, corporate social media pages are created, populated, and updated by the issuer. The 2008 Guidance, furthermore, specifically identified “push” technologies, such as email alerts and RSS feeds and “interactive” communication tools, such as blogs, which could enable the automatic electronic dissemination of information to subscribers.

Today's evolving social media channels are an extension of these concepts, whereby information can be disseminated to those with access. Thus, the 2008 Guidance continues to provide a relevant framework for applying Regulation FD to evolving social media channels of distribution.

Specifically, in light of the direct and immediate communication from issuers to investors that is now possible through social media channels, such as Facebook and Twitter, we expect issuers to examine rigorously the factors indicating whether a particular channel is a “recognized channel of distribution” for communicating with their investors.

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, non- public 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.

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.

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. It is not expected that this step would limit the channels of communication a company could use after appropriate notice or the opportunity for a company and investors to benefit from technological innovation and changes in communications practices.

The 2008 Guidance encourages issuers to consider including in periodic reports and press releases the corporate web site address and disclosures that the company routinely posts important information on that web site. Similarly, disclosures on corporate web sites identifying the specific social media channels a company intends to use for the dissemination of material non-public information would give investors and the markets the opportunity to take the steps necessary to be in a position to receive important disclosures—e.g., subscribing, joining, registering, or reviewing that particular channel.

Source: SEC.

Lynn expects the new release will lead many to use social media as a compliment to, but not necessarily a replacement for, more traditional communication methods. Doing so will still require rigorous oversight and controls, lest it become “a nightmare from a compliance perspective.”

“It is almost old news rather than new news,” says Patrick Quick, a partner with the law firm Foley & Lardner, who explains that much of last week's guidance just steered everyone back to what was first issued in 2008.

The SEC wants access to material information to be “non-exclusionary,” a determining factor that may be subject to interpretation on a site-by-site basis, he says.

“Facebook doesn't cost anything but you do have to register,” he says, of its registration process. “It is not falling off a log to get access. Before this new guidance, I would have advised companies that they need to be very careful that Facebook isn't somewhat exclusionary or that there are barriers to access.”

Quick says that social media sites also frequently change their user agreements, creating access and privacy issues that could be problematic for companies using them to push out material information. And while third-party providers, such as cloud services, can be controlled somewhat through contractual agreements, social media sites offer no such negotiation.

The growing number of popular social media sites, also creates an issue. “I just can't imagine that a company is going to say, ‘Here are the 15 potential outlets you are going to have to follow,'” Quick says. “A company is going to have to be careful about not confusing investors and making it easy for them.”

Another issue is the bite-size space to release information afforded by social media outlets. Traditional press releases have included forward-looking disclaimers, a reminder that various factors might cause investment results to vary. “That can be a page-and-a-half,” Quick says, “so how do you do that in a tweet where you are limited to 140 characters?”