Social Media, Public Disclosure and the SEC

In view of the ever-increasing use of social networking sites as a form of general communication, such as Facebook and Twitter, the SEC forewarns public companies that corporate communications policies and procedures need to encompass disclosures that may occur in the social media realm. According to the SEC, these kinds of communications must be monitored for compliance with Regulation FD’s restrictions on the disclosure of material non-public information.

Background. On April 4, 2013, the SEC issued a Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934, which clarifies that a public company may use social media to disseminate material non-public information in compliance with Regulation FD so long as the social medium used is a recognized channel of distribution for such information by the company. The Report of Investigation stems from an inquiry the SEC launched into a post by Netflix CEO Reed Hastings on his personal Facebook page stating that Netflix’s monthly online viewing had exceeded one billion hours for the first time. Netflix did not report this information to investors through its website or in a press release or Form 8-K filing, and a subsequent company press release later that day did not include this information.

Netflix’s stock price increased from $70.45 at the time of the Facebook post to $81.72 at the close of the following trading day. Neither Hastings nor Netflix had previously used his Facebook page to announce company metrics, and they had never before taken steps to alert investors that Hastings’ personal Facebook page might be used as a medium for communicating information about Netflix.

While the SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix, its Report of Investigation clarifies that public company communications made through social media channels could constitute selective disclosures and, therefore, require careful Regulation FD analysis.

Regulation FD. Regulation FD prohibits public companies from disclosing material non-public information to certain financial industry professionals and stockholders, unless also disclosing it in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” This ensures that all investors have access to the same information at the same time. In 2008, the SEC issued guidance that a public company may disclose material non-public information on its website in compliance with Regulation FD if the company’s website is a “recognized channel of distribution” of information. Acknowledging that social media had “rapidly proliferated” since 2008, the SEC asserts that the ways in which companies may use social media channels today, are not fundamentally different from the ways in which the websites, blogs, and RSS feeds addressed by the 2008 guidance were used.

In this regard, the 2008 guidance listed a number of non-exclusive factors that would be instructive as to whether a public company’s website constitutes a recognized channel of distribution and therefore would satisfy Regulation FD requirements for broad and non-exclusionary dissemination of information, including whether the company has made investors and the markets aware that it will post important information on its website and whether it has a pattern or practice of posting such information in that manner. The central focus is whether the public company has made investors, the market, and the media aware of the channels of distribution it expects to use with respect to the dissemination of material information about the company, so that these parties know where to look for this information or what they need to do to be in a position to receive this information.

According to the SEC, the principles outlined in that 2008 guidance—and specifically the concept that the investing public should be alerted to the channels of distribution a company will use to disseminate material information—apply with equal force to corporate disclosures made through social media channels.

Recommendations. Disclosure on designated social media outlets should be coordinated as part of a company’s overall investor communication strategy. Companies should consider the following, among other issues, in connection with the recent guidance:

• Companies should consider whether disclosure in addition to or instead of conventional means (press release; Form 8-K) would be advantageous to them and then develop a policy establishing one or more social media outlets through which it would disclose material nonpublic information, who would be responsible for posting information, how the information would be posted and indicating that disclosure of material nonpublic information relating to the company in other social media outlets is prohibited. Ideally, this policy would be part of a broader disclosure policy aimed at compliance with Regulation FD, securities law and stock exchange reporting requirements and antifraud considerations.
• If a company determines to use one or more social media outlets, it should identify these social media outlets and the means for accessing them in the company’s periodic reports, press releases and on the company’s website for a period of time prior to using the social media outlets as the initial or sole source of information, in order to alert investors to watch those social media outlets for important news and information about the company.
• Companies should consider whether the desired social medium is freely accessible to all. Any social medium used must disseminate the information in a manner that provides unfettered access by the public to the information by subscribing to, joining, registering with or monitoring the social medium.
• Companies utilizing social media for corporate communications should implement controls to ensure that all social medium communications on behalf of the company are true and complete and that the company controls the timing to comply with Regulation FD and to avoid premature disclosure.

For more information about social media compliance matters, please contact the author of this alert, Robert B. Murphy at 202-906-8721, D. Richard McDonald, who leads Dykema's Public Company practice, at 248-203-0859, or any of the attorneys listed to the left. 

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