As noted in our firm’s April 9 alert, the SEC has issued guidance on the use of social media in a manner that complies with Regulation Fair Disclosure (Reg FD).
This guidance comes through the SEC’s 21(a) Report resulting from an investigation of a posting on the personal Facebook page of Reed Hastings, the CEO of Netflix. Click here for access to the SEC’s report. The report was released on April 2, 2013 and states that:
- Communications through social media channels, like Facebook or Twitter, are subject to Reg FD in the same manner as communications on the company’s website; and
- Issuers can use social media channels to distribute material company information so long as the company notifies investors in advance that it will use this form of communication.
This alert provides an analysis of the SEC’s action regarding Netflix’s CEO and addresses the practical implications for companies with respect to implementing Reg FD guidance.
Regulation Fair Disclosure
Reg FD is intended to level the trading playing field, so that all investors have access to the same material company information.
Reg FD applies when an issuer discloses material, non-public information to certain enumerated persons, including securities professionals and shareholders where it is reasonably foreseeable that they will trade on the basis of the information. Reg FD requires the simultaneous public disclosure of this information where the disclosure is intentional and public disclosure promptly afterward where the disclosure is unintentional.
Last year, a posting on the personal Facebook page of Reed Hastings, the CEO of Netflix, led to an SEC investigation. The price of Netflix stock increased 16 percent by the end of the next trading day after this posting, and then decreased after Netflix announced second quarter earnings. The SEC’s report states that Hastings did not consult with other officers, Netflix’s legal department or Netflix’s investor relations department before the posting. Netflix did not file an 8-K or issue a press release disclosing the information in the posting. Hastings’ personal Facebook page had not been used to disclose material non-public company information before, and Netflix had not taken action to alert the public that Hastings’ personal Facebook page would be used in this way. However, at the time of this posting, Hastings’ personal Facebook page had more than 200,000 subscribers.
The investigation focused on whether this posting was in compliance with Reg FD.
The SEC provided guidance in 2008 regarding how Reg FD applies to information on company websites. Click here to access that 2008 guidance. In its investigation, the SEC found that many market participants were not sure whether and how the 2008 guidance would impact their use of social media. This perceived confusion may be a reason the SEC did not pursue a Reg FD case against Netflix and its CEO.
Now that the SEC has clearly stated its position, it is unlikely that the SEC will take a pass on future cases.
Although the SEC guidance in the report provides a clear path to Reg FD compliance when using social media, significant practical issues remain.
First and foremost, issuers should be aware of the principles set forth in the SEC's 2008 guidance in determining whether the issuer's social media platforms constitute Reg FD-compliant environments. The prior guidance focuses on whether the company's website is a recognized channel of distribution (e.g., was the website listed on period reports or press releases was there a pattern of posting material information on the website), whether the information is posted in a manner that is calculated to reach investors, and whether the information was posted for a sufficient time period to be received by investors. If as a result of that analysis, the website was deemed to be a Reg FD-compliant forum, an issuer could post material non-public information on the website before engaging in selective disclosures. A similar analysis is necessary for social media channels.
Any social media channel that will be used to distribute material non-public company information needs to be specifically identified as such in advance. That notice will need to identify the type of information which will be available on that social media channel.
That social media channel will also need to be reviewed for problematic content and formatted to include any desired disclaimers.
In addition, issuers will need to have controls in place to make sure that material distributed through a social media channel is reviewed and cleared in advance, like other company public information.
The report does not protect disclosures on a social media channel that has not been identified in advance by the issuer. As a result, it remains critically important that issuers have controls in place to prevent employees, officers and board members from creating a Reg FD problem through a social media posting.