The intersection of securities regulation and social media
September 2015 | FEATURE | LEGAL & REGULATORY
Financier Worldwide Magazine
Social media has had a transformative effect on many facets of everyday life. Communications channels such as Facebook, Twitter, LinkedIn and YouTube, to name just a few, have not only changed the way that humanity communicates, they have also had a considerable impact on business practices. Indeed, social media has become a critical tool for companies operating today.
Increasingly, companies are turning to social media platforms to promote their products and services and to report on important global events. However, the dawn of social media has not been without its consequences. Social media poses a number of challenges for federal securities regulators across the globe. In recent years, securities regulators have found themselves required to enforce outdated laws. For companies, the challenge is to remain compliant in a rapidly evolving technological landscape.
As social media platforms have grown in recent years, regulators – specifically the US Securities and Exchange Commission (SEC) – have had to work hard to keep up with the rapid pace of technological change. The growing use of social media in the corporate world has presented federal securities regulators with a number of challenges, the most pressing of which relates to the enforcement of now seemingly antiquated antifraud rules.
Much of the existing antifraud regulations were written decades ago, when social media and its potential impact was not a consideration. But the modern business environment is like nothing before it. With activists, investors and regulators all easily able to access reams and reams of data instantaneously, the internet and social media have transformed the way we do business. Certainly, social media has become one of the business community’s most preferred methods of communication. In years to come, for a growing percentage of market participants, the need to adapt federal securities laws and the regulatory framework applicable to broker-dealers and investment advisers to social media channels will become all the more urgent. As such, it falls to regulators to play catch-up with changes in the business world.
In order to understand the relationship between regulatory bodies and social media, we must first examine the evolution of disclosure standards and the internet.
Regulation Fair Disclosure (Regulation FD) was enacted by the SEC in 2000 to prohibit selective disclosure of material non-public information by public companies or persons acting on their behalf to a selected group of outsiders, be they market professionals, analysts or major investors, where it is reasonably foreseeable that they would trade on that information before it is made available to the general public. According to Regulation FD, if such selective disclosure has been made, then the company must quickly disclose the same information to the public. Previously, this public disclosure was typically made by filing a Form 8-K with the SEC and issuing a press release.
However, taking into account the importance of the internet and company websites, rules governing Regulation FD were amended in 2008. According to the SEC’s interpretive guidance, it is possible for companies to distribute information by posting it on the company’s website, so long as it was viewed as the company’s “recognised channel of distribution”. This would depend on the “steps that the company has taken to alert the market to its website and its disclosure practices, as well as the use by investors and the market of the company’s website”. The guidance offered a non-exhaustive list of factors to be considered in evaluating whether the website is a “recognised channel of distribution”. Mainly, the inquiry focused on the question of whether the company has made its shareholders, investors and the market in general aware that it was going to use its website as its main channel of news distribution.
Further to the 2008 amendments, the SEC, in April 2013, issued guidance which allows public companies to publish earnings and other material information via social media channels, such as Facebook and Twitter, provided investors have been notified beforehand that material disclosures will be made on those platforms.
This ruling was brought about by a controversial Facebook post published by Netflix Inc.’s chief executive and co-founder Reed Hastings in July 2012. There was considerable concern that Mr Hastings’ 43-word post on his own Facebook page, which noted that one billion hours of video had been accessed by subscribers to the Netflix service in the prior month, was in violation of Regulation FD.
The post by Mr Hastings was of concern for investors and regulators alike. The nature of public disclosures in modern business, where social and digital media are commonplace, was called into question. For the first time the SEC issued a ‘Wells Notice’ based on a social media communication. Although at that time the SEC itself utilised social media channels to disclose important information, the agency had not yet offered any formal guidance regarding the use of social media to communicate with the investing public. Ultimately, Mr Hastings was cleared of any wrongdoing, but the debate became a catalyst for change at the SEC, leading to the 2013 guidance.
As more CEOs and C-suite members join the ranks of social media platforms, SEC guidance on social media disclosures is more important than ever. Arguably, a lack of official guidance could have compromised the interests that Regulation FD was created to protect – namely the effective, rapid and equal dissemination of important market information to investors, the market and the media.
Since the SEC issued guidance on the subject, the situation has been much clearer. For Jill Gross, James D. Hopkins Professor of Law at Pace University School of Law, there does not appear to be too much of a disconnect between the use of social media and the application of securities regulation. “Existing securities regulations are worded broadly and flexibly enough to apply to evolving technology and social media developments,” she says. “Generally, securities regulators apply their regulations governing communications with the public equally to social media postings. To address any ambiguities about which industry participants raise compliance concerns, regulators also have been issuing interim guidance in the nature of SEC Compliance and Disclosure Interpretations, SEC Interpretive Material, SEC Reports of Investigation and FINRA Regulatory Notices.”
Given the nature of the SEC’s guidance, it is imperative that companies specifically address the use of social media. As Professor Gross notes, “Companies should absolutely address the use of social media in their Regulation FD policies to ensure that they do not violate Regulation FD intentionally or inadvertently and to ensure that all company employees are expressly aware that Regulation FD applies with equal force in the social media world. Companies should consult with legal and compliance professionals regularly, as the area of law evolves rapidly, and regulators tend to act reactively rather than proactively,” she adds.
Companies that intend to utilise social media as a means of disseminating information into the public realm need to ensure that investors and the wider market are made aware of the imminent posting of data beforehand. “SEC-regulated public companies must ensure that any of their postings on social media do not run afoul of SEC Regulation FD’s ban on selective disclosure of material, non-public information to investors,” says Professor Gross. “The SEC has stated that companies can post material, non-public information on social media as long as investors, the market and the media are alerted in advance that the company will use this method of disseminating material information. Broker-dealers must also ensure that any third-party content posted on their social media sites is either monitored or blocked pending firm review.”
Within Regulation FD the question of who is a ‘covered person’ should be a key consideration, from a social media perspective. This is because those responsible for social media communications may not be the most senior executives in the company, and may have a role that is different from traditional investor relations professionals.
It is possible that an employee who tweets, posts on Facebook or releases information through another social media outlet may not be a senior official or someone who generally communicates with the company’s investors or market professionals. Nonetheless, Regulation FD’s requirements may apply when the employee is handling and communicating material, non-public information about the company. Furthermore, a ‘covered person’ should carefully consider whether a statement made via a social media channel would be considered personal to the individual and not subject to regulation or statements attributable to the company. “Individual registered representatives must ensure that any postings about a particular investment comply with FINRA’s ban on recommending unsuitable investments,” says Professor Gross. “They must also comply with FINRA’s advertising rules when posting information. Among other things, those postings must be fair and balanced in that they adequately disclose the risks, costs and downsides of a particular investment. It is essential to avoid posting any information on social media that is required to be reviewed internally before posting, and ensure that any testimonial that is posted on a social media site – such as a LinkedIn endorsement – complies with regulations barring certain testimonials,” she adds.
For many companies, as well as individuals, social media can be a minefield. As a communications platform, social media is still developing – as is the regulatory response. Given the significance of social media as a preferred method of communication for market participants, it is likely that high level executives will slip up and make a mistake, erroneously divesting sensitive information via social media. For that reason, the SEC and other regulatory bodies have moved to alter existing regulations. However, it is imperative that regulators do not stand still. As social media platforms continue to evolve, it is the responsibility of regulators to adapt federal securities laws and frameworks to ensure that they do not become an anachronism.
Meanwhile, compliance staff and executives need to ensure that their companies act in line with SEC regulations. But the buck does not stop there. Boards of directors also have a responsibility to familiarise themselves with how their companies use social media, including marketing, customer relations and investor relations. Social media training should be arranged at all levels of the company – from the post room to the boardroom – and training should be ongoing. Any new policies and procedures should be distributed throughout the organisation on a regular basis.
Boards should be in a position to challenge senior management over whether the company has updated or adapted its Regulation FD compliance policies to address this usage, to meet the demands of current and future social media related regulations.
These reviews should form part of a wider, and more comprehensive review of all company policies in relation to Regulation FD. As part of the process, organisations should examine whether there is scope for the company to separate or differentiate its social media communications which are targeting investors and the markets, from those used for customer relations, promotions and so on. As social media becomes more normalised in a business context, companies should consider segregating their investor focused communications, much as they do with investor focused websites and mini-sites.
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