As social networking has squarely moved out from the fringes of tech geeks and teenagers into mainstream channels, regulators have found themselves wrestling with rules surrounding business communications. Where is the line being drawn?
In the days of old, publicly held companies could simply file earnings reports, guidance and other information and then disseminate the information through traditional means, usually in the investment information section of websites and press releases.
Late last year, when video and streaming powerhouse company Netflix Inc.’s chief executive Reed Hastings posted a 43-word congratulatory message on his personal Facebook feed, officials with the U.S. Securities and Exchange Commission (SEC) decided to take another look at its disclosure rules. And while the SEC has since provided guidance allowing relevant investment information to be disclosed on Facebook, Twitter and other social networks, area securities attorneys say executives at public companies must think through disclosure processes well ahead of time to ensure regulatory compliance.
The review of Regulation Fair Disclosure, commonly called Reg FD, began last December when Hastings used his Facebook feed, which connects to 200,000 followers, to acknowledge his team for delivering more than one billion hours of video in a single month. It was a first for Netflix and, understandably, Hastings was thrilled with the milestone.
For the SEC, however, the message disclosed material investment information. Under Reg FD, companies are required to publish material information to all investors at the same time. In other words, reaching the billion-plus hour mark in a single month is pertinent company-performance information that could play into investor decisions on whether to buy, sell or hold Netflix stock.
“He said, ‘I’m the CEO. Of course, investors are following me’,” says Jack Bowling, a securities compliance attorney with Stinson Morrison Hecker LLP. With roots going back to the late 1800s, Stinson Morrison Hecker has more than 300 attorneys in offices around the country. Bowling is a partner in the law firm’s corporate finance division in its Kansas City-based offices.
Hastings also claimed his post was immaterial and because bloggers and finance reporters picked up the news, the information was effectively distributed to shareholders, Bowling says.
While Bowling doesn’t weigh in on whether or not Hastings crossed a line in his post, he says the concern centers on avoiding “selective disclosure.” The idea, which dates back to the Securities Exchange Act of 1934, “requires disclosure of material information in a manner that’s not selective,” says Bowling.
In essence, Depression Era regulators adopted fair disclosure regulations as a means of putting shareholders on equal footing by addressing how companies communicate to the investing public. No group, fund or other set of investors should gain an unfair advantage by being privy to information not available to others.
“They had never released information in that manner before,” Bowling says about Facebook’s disclosure on Hastings’ Facebook page. The SEC stepped in with an investigation “because there’s so much concern around this area.”
“It’s still not done by the majority of companies,” Bowling says of the disclosure of material information through social networking sites. Still, he doesn’t see any social media use decline on the horizon. Logically, then, financial disclosure with regard to social media is an issue on which Bowling wants to give his clients a heads up.
So far, he says, it’s the coastal companies, such as those in Silicon Valley, who are at the forefront of the issue. And while not yet prominent among Kansas City’s shareholder-owned companies, the social media financial disclosure issue is one area corporations are well-served to begin considering.
Bowling says he opens the discussion with clients by asking executives to review dissemination policies with regard to social media. This includes things like establishing which social media outlets are used and which executives are responsible for the channels.
Another element to consider is that social media is, well, social. In other words, company forays into social media are a two-way street in that “you get comments back,” says Bowling. And because a conversation between a company and investors typically opens a bigger can of worms than a one-sided monologue of company information, the strategy surrounding social media communication must be as well thought out as all other disclosure strategies.
Where Twitter is concerned, the 140-character limitation is another consideration executives must think through. Can accurate information be conveyed within the space constraints? For Bowling, the concern here is information accuracy. For example, an announced jump in profits written in glorious 140-character prose on Twitter doesn’t work when the rest of the story involves skyrocketing costs. “It’s called the total mix test,” says Bowling. “Does it tell the complete story?”
For Bowling, much of the safeguard against running afoul of SEC regulations centers on redundancy. Looking at SEC guidance provided by the SEC as a result of Hastings and Netflix, Bowling says companies must inform investors that social media channels might be used as a point of dissemination. This should be followed up with press releases and any other appropriate filings.
“Generally speaking, I don’t see a problem with companies using social media for the disclosure of material information as long as they’re employing the appropriate disclosure controls and complying with Regulation FD,” Bowling says.
Hastings and Netflix avoided fines and penalties for SEC violations centering on the social media disclosure. After several months of investigation, the commission ruled social media on par with traditional outlets like websites or other filing systems. The 2013 ruling was an expansion of 2008 SEC guidance stating company websites are legitimate disclosure outlets.
The key question executives must ask is, “How do we see this interacting as part of the overall shareholder communications program,” Bowling says.
SEC regulations on social media will continue to be a cloudy area for companies of all sizes.