On April 2, 2013, the Securities and Exchange Commission (SEC) issued a report of investigation (the Report), which clarifies that companies may use social media platforms to announce material non-public information in compliance with Regulation Fair Disclosure (FD) as long as investors have been advised of which platforms will be used to disseminate such information.
BACKGROUND ON REGULATION FD
In 2000, the SEC adopted Regulation FD to combat selective disclosure by public companies to certain investors, which could give those investors an unfair advantage over other investors that did not have access to the new material information. On August 7, 2008, the SEC issued Commission Guidance on the Use of Company Web Sites (the 2008 Guidance), which clarified that a company makes public disclosure when it distributes information “through a recognized channel of distribution.” Since the 2008 Guidance, and particularly in the last year, the use of social media by public companies and their insiders, executives and employees has triggered the SEC to issue additional guidance on the use of emerging technologies such as social media platforms for purposes of complying with Regulation FD.
Specifically, the Report stems from an investigation into a posting on Reed Hastings’s personal Facebook page on July 3, 2012, announcing that Netflix had streamed one billion hours of content in the month of June. During the course of the investigation, SEC staff learned that there is uncertainty concerning how Regulation FD and the 2008 Guidance apply to disclosures made on social media platforms.
DISCLOSURE METHODS IN THE UNITED STATES AND CANADA
Regulation FD does not require the use of any one particular method of disclosing important non-public information to meet the “through a recognized channel of distribution” requirement, and the 2008 Guidance sets out some of the factors that can cause a company’s website to constitute a recognized channel of distribution. This is notably different from the requirements applicable in Canada set out in National Policy 51-201 Disclosure Standards (NP 51-201), which require dissemination of all material non-public information by way of either (i) a press release distributed through a widely circulated news or wire service; or (ii) announcements made through press conferences or conference calls that interested members of the public may attend or listen to either in person, by telephone or by other electronic transmission (including the Internet), so long as the public is provided with notice of the date and time and other prescribed information relating to the conference or call by way of news release.
In the U.S., general disclosure can be satisfied if the company has made investors, the market and media aware of the channels of distribution it expects to use so that parties know where to look for disclosures of material information about the company. In Canada, the regulators have not yet adopted any equivalent to Regulation FD.
COMPANY-MAINTAINED SOCIAL MEDIA ACCOUNTS
Companies are increasingly maintaining social media accounts on Twitter, Facebook, LinkedIn and other platforms to reach shareholders, investors and stakeholders. While the 2008 Guidance was specifically directed at the use of corporate websites, these social media platforms are created, populated and updated by the issuer. The Report notes that “the ways in which companies may use these social media channels, however, are not fundamentally different from the ways in which the websites, blogs and RSS feeds addressed by the 2008 Guidance are used.” The 2008 Guidance also commented on various interactive tools and “push” technologies such as email alerts and RSS feeds that are similar to the tweets and posts on social media platforms. Therefore, the Report suggests that the 2008 Guidance continues to provide relevant framework for applying Regulation FD to evolving social media channels of distribution.
In Canada, there is anecdotal evidence of a growing concern among issuers about the lack of guidance from Canadian securities regulators on use of social media platforms for disclosure. The current framework in Canada, while not specifically targeted at these social media channels, can still be applied to media such as Twitter and Facebook. Companies can use the guidance set out in NP 51-201 and the Electronic Communications Disclosure Guidelines published by the TSX as a framework for appropriate disclosure on company social media platforms.
INDIVIDUALS' SOCIAL MEDIA ACCOUNTS
Mr. Hastings’s Facebook page is only one example of a growing number of insiders, executives and employees using social media to discuss company-specific updates and news. The Report states “… disclosure of material, non-public information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to qualify as a method 'reasonably designed to provide broad, non-exclusionary distribution of the information to the public' within the meaning of Regulation FD.”
While in the U.S. companies can take steps to bring an executive’s personal social media account within Regulation FD by directing investors to those accounts, in Canada, the use of social media by executives for company-related disclosure increases the risk of selective disclosure by a reporting issuer. A simple tweet or post identifying an executive’s current location could tip the marketplace to the potential for news of a pending transaction or a statement suggesting particular results could be determined to be selective disclosure by the securities regulators. Canadian reporting issuers would be unable to defend that executive in the way they might be able to under Regulation FD. Therefore, Canadian companies should determine their risk appetite and whether they feel it is appropriate for executives, insiders and employees to share company-related news via their individual social media accounts.
The Report is meant to clarify the application of Regulation FD to disclosures made by social media channels, and reflects the SEC’s encouragement of companies seeking out new forms of communication to better connect with shareholders. Reporting issuers in Canada must be mindful that no equivalent to Regulation FD exists in the Canadian securities regulatory framework, and companies must continue to use traditional dissemination tools to satisfy the requirement to generally disclose all material non-public information. Companies may wish to ensure that their corporate disclosure policy sets up the appropriate mechanism for disseminating news such that dissemination on social media channels occurs after the news release is disseminated.
While an individual’s social media account can be a recognized channel of distribution in certain circumstances under Regulation FD, no equivalent exists in Canada. Companies should also be aware of social media use by insiders, executives and employees. A decision should be made whether individuals may make company-related disclosures through personal accounts, and if such disclosures are determined to be permissible, companies should put procedures in place to mitigate the risk of selective disclosure. The use of a social media policy and appropriate training of individuals are some of the procedures a company may employ to mitigate such risks.