Could that Facebook posting land you in hot water?
Social media and fair disclosure regulations can coexist with a little help from these four steps.
February 7, 2013
Social media can consume more time than many of us would like to admit. We wake up to read the local and national newspapers with apps on our phones and tablets. We keep in touch with friends and family via Facebook. We communicate when we are not with each other through Scrabble-like games such as Words With Friends. We interact with co-workers and colleagues in finance and accounting via Twitter.
Many companies are finding that social media have become important distribution channels for investor communication. An area that has received much attention is how social media interact with securities laws, most importantly, Regulation Fair Disclosure, or Reg FD. Reg FD was adopted by the SEC in 2000, and requires that an issuer not disclose nonpublic information to certain groups, either intentionally or unintentionally, without disclosing the same information to the entire market. The market disclosure is generally made through filing a Form 8-K, Current Report, or by “another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.”
In December 2012, the SEC issued a Wells Notice for violating Reg FD based on a social media communication. Reed Hastings, the CEO of Netflix Inc., posted on Facebook that viewers had downloaded 1 billion hours of streaming video the previous month.
Netflix’s stock rose following his post, which caught the attention of the SEC. The SEC indicated that this information should have been broadly disseminated, versus selectively disclosed to Hastings’s more than 200,000 Facebook followers. This was posted on a personal page.
Netflix responded to the notice in an 8-K, arguing that distribution to 200,000 followers made the announcement "very public."
The situation opens up the question: Is information more widely or appropriately disseminated on Facebook or other social media than through an 8-K filing with the SEC?
Another concern, also in line with the spirit of the regulation: Are social media sites such as Facebook or Twitter appropriate channels for releasing material information? Some might argue that an investor without a computer, let alone a Facebook account, requires access to corporate information. Indeed, one can still use snail mail to request documents filed with the SEC.
Social media are here to stay, but so far, the SEC has not issued any specific guidance on whether social media networks can satisfy the disclosure requirements of Reg FD. The SEC put out a 2008 interpretive release permitting the use of company websites that are “recognized channels of distribution” to disclose certain types of information. The SEC noted that investors are “turning increasingly to electronic media and to company and third-party websites as sources of information to aid in their investment decisions.”
The SEC further noted that the “public” nature of company website disclosure would be determined by whether and when (1) a company website is a recognized channel of distribution, (2) posting on a company website disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the information. If those three criteria are met, posting of the information on the website may meet the requirement of public disclosure under Reg FD. In recent speeches, some SEC staffers have stated that the guidance is equally applicable in determining whether social media communications can meet the requirements of Reg FD.
So what can a company do to ensure that it doesn’t ensnare itself with a potential Reg FD issue associated with social media?
Social media can be a powerful distribution channel for disseminating corporate information for certain industries, if it is managed well and governed appropriately.
Rate this article 5 (excellent) to 1 (poor). Send your responses here.
Colleen Cunningham, CPA, is vice president-controller at Zoetis, a Pfizer subsidiary that develops and manufactures animal medicines and vaccines. Cunningham, the former chief executive of Financial Executives International, also has served as a member of the standards advisory committees of both FASB and the International Accounting Standards Board.