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March 30, 2015
Social Media May Satisfy Regulation FD (Fair Disclosure) But Not Without Risk and Preparation
On April 2, 2013, the Securities and Exchange Commission (SEC) released a report of an investigation regarding whether the use of social media to disclose nonpublic material information violates Regulation FD (“the Report”).1 The SEC’s Report resulted from the Division of Enforcement’s investigation of Netflix, Inc.’s Chief Executive Officer, who used his personal Facebook page to announce that Netflix had streamed a record amount of hours of content in a one-month period. The post was not accompanied by a press release, a post on the Netflix website, a post on the Netflix Facebook page or a Form 8-K. Shortly following the posting, the SEC announced that it intended to consider enforcement action for a possible violation of Regulation FD. Regulation FD requires that when an issuer (or a person acting on an issuer’s behalf) discloses material nonpublic information, it must use a method of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.2 In other words, the disclosure must be made publicly and simultaneously.
In good news for Netflix, the SEC determined not to bring an enforcement action and, in light of evolving technology and uses of social media, released the Report, which effectively supplements Regulation FD interpretive guidance last issued by the SEC in 2008. The SEC has consistently, albeit sporadically, revised its views regarding whether Regulation FD can be satisfied other than through traditional press releases and SEC filings. For example, when Regulation FD first became effective in 2000, the SEC’s view was that a post on an issuer’s website, by itself, would probably not meet Regulation FD’s requirement to publicly announce material information, although it did allow that, as technology evolved, a different conclusion could emerge. In 2008, the SEC announced a further evolution of its thinking and recognized that an issuer’s website could, under certain circumstances, satisfy Regulation FD.3 At that time, the SEC articulated a two- prong test: First, is the issuer’s website a recognized channel of distribution of information? Second, does the website posting adequately disseminate the information for purposes of Regulation FD by virtue of the manner in which information is posted on a company website and the timely and ready accessibility of such information to investors and the markets? Ultimately, the SEC made it clear that using an issuer website to satisfy Regulation FD was a matter of the particular facts and circumstances, including the level of importance of the information (apparently, for these purposes, there may be grades of materiality). The SEC also cautioned issuers from deviating from their normal practices for public disclosure in any particular instance.
Now, the SEC has applied the analytical framework articulated in its 2008 guidance to the use of social media channels such as Facebook and Twitter, in addition to longer established “push” technologies such as RSS feeds and interactive blogs. The Report concludes that such channels may satisfy Regulation FD requirements if the market has been previously made aware of the use of these channels and the market recognizes them as such for the issuer. The Report states:
. . . 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 rigorously examine 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, 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. 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.
In the Report, the SEC, as it has in previously issued guidance, acknowledged the role that newly emerging forms of communication play in promptly disseminating corporate developments and in supplementing traditional forms of communication. The Report makes clear, however, that the onus will be placed on the issuer to defend its use of a particular form of communication and places a heavy emphasis on whether an issuer has adequately informed the market of those channels through which information is to be disseminated and the type of information that will be provided through them. The Report also stresses that disseminating information through personal media sites of individuals employed by the issuer is likely to remain suspect.
Although the Report endorses the use of social media channels to disseminate nonpublic material information, the use of such channels must be carefully considered and prepared, particularly if the information is of high importance. Any issuer considering the use of social media should take a number of steps to protect itself, such as:
Providing appropriate advance notice to investors of the specific channels that it will use to disseminate material nonpublic information (which may be accomplished by identifying in periodic reports and press releases the specific social media channels that the issuer intends to use, as well as posting notice of such channels on the issuer’s website);
Providing advance notice to investors of the types of information that will be disseminated through social medial channels;
Creating clear policies for its officers and employees as to the use of personal social media channels to communicate corporate information;
Creating procedures to permit review of communications transmitted through social media channels to ensure consistency with the issuer’s disclosure policies and methods, as well as the appropriateness and reasonableness of the channel in light of the nature of the information; and
- Training its officers and employees (as well as investor relations and public relations firms) as to the proper uses of and predicates for using social media to disclose corporate information.
Without doubt, the evolution of communications technologies and social habits will continue to challenge public companies. While the SEC acknowledges that practices must change accordingly, public companies must exercise caution and undertake careful preparation if they wish to disseminate information through non-traditional means. Although Netflix avoided an enforcement action, the SEC is likely to remain vigilant on the FD front.
1 Available at http://www.sec.gov/news/press/2013/2013-51.htm
2 See Regulation FD, Rule 101(e)(2).
3 See Commission Guidance on the Use of Company Website, Release No. 34-58288, available at http://www.sec.gov/rules/interp/interparchive/interparch2008.shtml
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