Last month, the Securities and Exchange Commission finally waded into the choppy waters of whether the various forms of social media could be considered part of a company's disclosure regimen. 

The SEC's guidance took the unusual form of a Report of Investigation resulting from a Division of Enforcement inquiry into Netflix CEO Reed Hastings' use of his personal Facebook page to announce in July 2012 that Netflix had streamed a billion hours of videos during the prior month.

The SEC questioned whether Reed's missive constituted material news amounting to selective disclosure and therefore violated Regulation Fair Disclosure.  Since its inception in 2000, Reg FD, as it is known, was predicated on leveling the playing field for all investors by providing fair access to material, non-public information. 

At the time, social media sites like Facebook and Twitter didn't exist at that time, and in 2008, the Commission issued an interpretive release on posting material information on a company's Website.  With last month's guidance, the SEC gave companies a note of caution that while it's OK for a company to use social media as a disclosure mechanism under certain conditions, it did not give companies a green light, “to rush out immediately and disclose material non-public information via social media channels after merely notifying the markets of its intention to do so,” according to an April 12 Alert from law firm Weil, Gotshal & Manges.

The 2008 interpretive release providing the go-ahead to disclosure information on company Websites stopped short of mentioning social media, given the uncertainty in the markets regarding the applicability of Reg FD to emerging technologies.  So in this sea of uncertainty, how do companies move forward in developing their disclosure policies to be in compliance with the SEC's evolving disclosure rules and guidance?

The bedrock of Reg FD is that disclosure through the traditional news release or by filing a Form 8-K containing new material information was a catch-all that would provide cover for any charges of selective disclosure.  The assumption at the time was that all investors had access to either means of disclosure. From the start, those assumptions may have been less than realistic.  It's a real stretch, for example, to assume that all or most investors are accessing a company's news release or are going to its Website to read an 8-K or listen to the company's quarterly earnings call.  It's entirely possible today that certain social media may provide broader access to new material information, than these traditionally accepted methods.

Given that possibility, the Weil Gotshal & Manges guidance says that a company must carefully review the Commission's 2008 guidance and the company's policies related to Reg FD compliance, insider trading, disclosure controls, including those related to “mandatory” Form 8-K reporting and protection of confidential information.  For those who want to be first out of the gate to communicate material, previously non-public information through the social media, there is now a clearer path to do so, but with certain precautions that may not be obvious with a first reading of the new guidance.

Those caveats include whether the social media the company elects to use in disclosing material, non-public information constitute means that are “reasonably designed to provide broad, non-exclusionary distribution of the information to the public,” according to the SEC's April release.  So, the company needs to evaluate whether the social media it chooses to use fit this definition.  Once that is done, the company must disclose in a Form 8-K posted on their Website delineating the specific social media channels it intends to use for disclosing material company information.  This information should also be included in the company's SEC filings and news releases.

A company CEO can't simply start using his or her personal Facebook page, as Netflix's Reed did, to start blasting out material, non-public information. The company must first declare to investors that the CEO's Facebook page will serve as an official channel for company disclosures.

In practice, this means that a company CEO can't simply start using his or her personal Facebook page, as Netflix's Reed did, to start blasting out material, non-public information. The company must first declare to investors that the CEO's Facebook page will serve as an official channel for company disclosures.

What other factors do companies need to consider in revising or updating their disclosure policies related to Reg FD, based on the 2008 disclosure guidance and the April SEC Report of Investigation?

(1) The Investor Relations Officer and corporate counsel should consider conducting a Reg FD refresher involving all persons covered by these disclosure rules.  These normally include the CEO, CFO, IRO, and those in the investor relations department and others who may speak for the company.  Corporate board members might also be included should they speak with investors or before the company's annual meetings.  The content of the refresher should be a review of Reg FD, the SEC's 2008 guidance, and the new social media guidance.

(2) Given the advances in social media, companies should consider how investors, particularly institutional investors and analysts, are using social media.  It's true that investor relations officers are increasingly communicating with shareholders using social media, but those communications started just two years ago, in general, and from a rather low base, largely out of concern for the lack of control of message content. 

(3) Companies must also constantly be on high-alert. Imagine your CEO is presenting at an investor or analyst conference and then engages in a series of one-on-one breakout sessions.  In one meeting, he implies a slight change in previously released guidance and the investor sends a Twitter message saying, “The CEO just said …” The IRO or corporate counsel doesn't know about the “tweet” until the market reacts.  Under Reg FD, the company has only 24 hours to issue a broadly disseminated release containing what the CEO said that was materially new information.  And in today's rapid changes in information dissemination, companies should try to issue a news release or file a Form 8-K even sooner.  A refresher session should emphasize how these events can unfold when a company spokesperson is not sensitive to the implications of any selective disclosure of non-public changes in company's guidance or prospects of performance, no matter how minor it seems to be.  And now that Bloomberg users can access financial news and views in real time since Bloomberg is integrating Twitter feeds for the first time, this scenario is even more relevant.

(4) The company must ensure that insiders honor a reasonable waiting period for investors and the market to react to the newly released material information before trading on that information.

Since Reg FD went into effect in October 2000, there have only been twelve cases citing company officials for violating the disclosure rule, the last of which was in 2010, when the SEC cited Office Depot's IRO for selectively disclosing material earnings guidance to certain analysts.  This case occurred after four years of no Reg FD cases.  So some are questioning to what extent the SEC's new chairman, Mary Jo White, and her staff will pursue Reg FD related violations.  It may be noteworthy that the newly appointed co-leader of the Enforcement Division, Andrew Ceresney, is a former chief to Chairman White as a corporate defense lawyer at Debevoise & Plumpton and earlier served as one of her federal prosecutors in Manhattan.  He is reported to have been instrumental in revamping the SEC's policy on using social media for disclosure.

Companies should not be sanguine about the Commission's now decade long Reg FD enforcement record.  Instead, companies that want to ensure best compliance practices with the disclosure rule and subsequent guidance should brush up their internal disclosure policies and engage all covered persons in a practical refresher course to make sure they are up to speed on the changes and the importance of considering the power of the new social media to change the landscape for disseminating company information in ways many have not even imagined.