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SEC sets rules for disclosures using social media

Companies can use Facebook, Twitter and other social networks to disseminate information provided they meet certain requirements

Michael J De La Merced 

Chief executives can now feel free to post, blog or tweet - as long as they inform investors about their social media strategy first.

The Securities and Exchange Commission on Tuesday outlined new disclosure rules that clarify how companies can use Facebook, Twitter and other social networks to disseminate information provided they meet certain requirements. Still, the new move may reduce spontaneity because companies may limit their communications to official corporate accounts and file the information with the agency at the same time.

With the decision, the SEC is playing catch-up to the new era of social media.

In December, the regulator warned Netflix that it could take action against the company for a 43-word message that the company's chief executive, Reed Hastings, posted in his personal Facebook feed. In the note, Hastings congratulated his team for exceeding one billion hours of video watched in a single month.

But the federal agency raised concerns that the post violated Regulation Fair Disclosure, commonly known as Reg FD, which requires a company to publish material information to all investors at the same time. While Hastings's announcement was made on his publicly available Facebook page, which had over 200,000 followers, the information was not subsequently disclosed in a securities filing or news release.

At the time, Hastings and Netflix said that his message was both immaterial and readily available to investors, having been picked up by a number of blogs and news media outlets. "We use blogging and social media, including Facebook, to communicate effectively with the public and our members," Hastings wrote - on his Facebook page, naturally - after disclosing the investigation last year.

Now, the SEC seems to be relaxing its stance.

After an investigation of several months, regulators said that companies could treat social media as legitimate outlets for communication, much like corporate Web sites or the agency's own public filing system called Edgar. The catch is that corporations have to make clear which Twitter feeds or Facebook pages will serve as potential outlets for announcements.

"They did a really good job of splitting the baby," said Thomas A Sporkin, a former SEC enforcement official and now a partner at Buckley Sandler.

In developing its rules, the agency also let Hastings avoid sanctions for his Facebook post. Neither the chief executive nor Netflix incurred any penalties since receiving the so-called Wells notice from the agency in December.

Instead, the regulator issued what is known as a report of investigation, used on the rare occasion when it wants to issue broad guidance from a specific investigation. As part of its release, the agency reiterated its goal for Reg FD, namely making sure that investors receive important information at the same time.

"One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information," George S Canellos, the agency's acting enforcement chief, said Tuesday in a statement.

"Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don't know that's where they need to turn to get the latest news."

Hastings is not the only corporate executive to face trouble over his social media habits.

Last year, the fashion retailer Francesca's Holdings fired its chief financial officer, Gene Morphis, for his frequent use of Facebook and Twitter. Among his posts, from March 7: "Board meeting. Good numbers=Happy Board."


In a news release last May, Francesca's cited "improper" communications of company information through social media as the reason for letting Morphis go.

As in the past, the SEC is treading carefully in its corporate disclosure policies. In 2008, the regulator clarified that corporate web sites alone could qualify as wide disclosure if investors already knew that those pages could be sources of material information. The Netflix inquiry raised concerns that the commission felt could be addressed more broadly, according to a person briefed on the matter.

"The SEC had to ask itself, How do we adopt a 2000 regulation to 2013 when social media is commonplace?" Sporkin said, referring to the year Reg FD was enacted. "That obviously wasn't even a thought back when this was written."

© 2013 The New York Times News Service

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First Published: Thu, April 04 2013. 00:12 IST
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