The use of social media raises many securities law and compliance challenges for issuers, broker-dealers, and investment advisers. This Compliance Guide summarizes briefly some key principles.
GUIDANCE FOR ISSUERS
In 2000, the Securities and Exchange Commission (the "SEC") adopted Regulation Fair Disclosure ("Regulation FD") in order to address concerns relating to selective disclosure and to promote full and fair disclosure. In its Regulation FD adopting release, the SEC noted that selective disclosure of information bore a close resemblance to insider trading, giving a privileged few an informational edge and the ability to use that benefit at the expense of others.1 This unfair advantage, the SEC noted, might lead to a loss of confidence in the integrity of the capital markets. Regulation FD requires that when an issuer, or a person acting on its behalf, discloses material nonpublic information to certain enumerated persons, such as securities market professionals, where it is reasonably foreseeable that they will trade on the basis of the information, the issuer must distribute that information in a manner reasonably designed to achieve effective broad and non-exclusionary distribution to the public. An issuer must make material nonpublic information available to the public contemporaneously if such information is intentionally disclosed or promptly if such material nonpublic information is unintentionally disclosed. These principles are applicable to social media as we discuss below.
DISSEMINATION OF COMPANY INFORMATION
The SEC's Regulation FD adopting release and Rule 101(e) of Regulation FD state that public disclosure "may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, nonexclusionary distribution of the information to the public."2 In 2008, the SEC issued an interpretive release (the "2008 interpretive release") on the use of company websites to disseminate information to investors in compliance with Regulation FD.3 The SEC reiterated in its 2008 interpretive release that information is public if it is disseminated "in a manner calculated to reach the securities marketplace in general through recognized channels of distribution, and public investors [are] afforded a reasonable waiting period to react to the information."4 In line with this standard, the SEC set forth the following three factors that a company should evaluate when considering whether its website may be used to disseminate material information for Regulation FD purposes:
- whether the company website is a recognized channel of distribution;
- whether posting of information on the company website disseminates the information in a manner making it available to the investors and the markets in general; and
- whether there has been a reasonable waiting period for investors and the markets to react to the posted information.5
Recognized Channel of Distribution
Whether a company's website is a recognized channel of distribution depends on a number of factors. To establish a website as a recognized channel for disclosing information, a company should consider:
- promoting its website, by including its website address in its periodic reports and its press releases;
- informing investors and the market in company communications that the company routinely posts important information about the company on its website, including a reference to the URL of the company's website;
- establishing a pattern of posting important information on its website;
- making investor information readily accessible on its website by providing a separate means of accessing the Investor Relations page on the company's website from the company's main website page, ensuring that the website is designed to direct visitors to important information;
- monitoring the dissemination of information in order to determine the extent to which information reaches intended audiences and the extent to which persons access the company's website for material information about the company; and
- keeping information current and accurate on the company's website.
Companies with a small market following should consider taking extra steps to improve the accessibility of information on their websites. The SEC noted the use of "push" technology, a type of communication that originates with the publisher of the information, such as RSS feeds or releases through other distribution channels, as additional steps to ensure their websites are a recognized channel of communication.
Dissemination of Information
Whether information is disseminated in a manner that makes the information available to the securities market in general depends on the manner in which information is posted on a company website and the timely and ready accessibility of such information to investors and the markets. The SEC identified in its 2008 interpretive release the following factors that should be considered in determining whether information on a company's website is "posted and accessible" and therefore "disseminated"6:
- how the company informs investors and the markets that the company has a website and that such website is where investors and the markets should find company information;
- whether the company has made investors and the markets aware that it will post important information on its website; the company's practice of posting such information on its website;
- whether the company's website is designed for clear and easy access to investor information, and the information is presented in a format that is readily accessible to the general public; and
- the extent to which information posted on the website is regularly picked up by the market and readily available to and reported by the media.
In public forums, the SEC Staff (the "Staff") has indicated that an effective model for disseminating information in a Regulation FD-compliant manner, at least with respect to earnings announcements, would be to first furnish an earnings release under cover of a current report on a Form 8-K under Item 2.02 and then to post the earnings release on its website.7
Reasonable Waiting Period
A reasonable waiting period for investors to react to website information depends on the circumstances of the dissemination, including the following factors:
- the traffic that the site generates;
- the frequency with which investor-specific information is accessed;
- the steps the company has taken to make investors and the markets aware of the use of the company website as a key source of company information;
- the steps the company has taken to actively disseminate the information or the availability of such information on the company's website; and
- the complexity of the information presented.
In its 2008 interpretive release, the SEC noted that a reasonable waiting period would vary based on the type of company and the information. For example, a reasonable waiting period for simple information posted on a website with heavy traffic that is routinely used by investors would likely be shorter than the waiting period when complex information is posted on a website that has little traffic and is not routinely used by investors.
In April 2013, the SEC issued a Report of Investigation under Section 21(a) (the "21(a) Report") in the course of an investigation of a potential Regulation FD violation arising from a CEO's post on Facebook.8 The SEC emphasized that disclosure of material nonpublic information to a broader group that includes both enumerated and nonenumerated persons would not render Regulation FD inapplicable. As a result, whenever a company discloses information through a social media channel, the company must consider whether that disclosure implicates Regulation FD. The SEC noted that Regulation FD is not intended to interfere with "legitimate, ordinary course business communications" or communications with the press.9 However, an issuer should determine, for example, whether the disclosure includes material nonpublic information and whether the information was disseminated in a manner "reasonably designed to provide broad, nonexclusionary distribution of the information to the public" if the issuer did not file a Form 8-K.
The SEC acknowledged in the 21(a) Report that the ways in which companies may use social media channels are not fundamentally different from the ways in which websites, blogs and RSS feeds are used and that the principles articulated in the 2008 interpretative release could be extended to social media channels.
The SEC noted that an issuer must analyze whether social media channels are recognized channels of distribution. In the 21(a) Report, the SEC noted that personal social media sites of individuals employed by a public company would not ordinarily be assumed by investors to be channels through which a company would disclose material corporate information. The SEC also indicated that, while every situation must be evaluated based on the facts and circumstances, absent advance notice to investors, personal social media sites of public company employees would not be considered Regulation FD compliant, even if such sites have a large number of followers.
To ensure Regulation FD compliance, a company must take steps to alert investors and the markets regarding the channels of communications it intends to use to disseminate material nonpublic information and the types of information that it may disclose through these channels. The steps companies should consider include:
- evaluating which social media channels may be useful to communicate information to investors;
- identifying on its website the social media channels that the company intends to use to disseminate material nonpublic information;
- providing investors and the markets opportunities to subscribe, join or review such channels; and
- alerting investors and the markets of the use of such channels to disseminate material information about the company.
Companies should consider addressing the use of social media in their Regulation FD policies. For example, companies might limit the use of company social media channels to authorized persons. The policy also might address any prohibitions, restrictions or editorial oversight that will govern the use of social media. Company officers, directors and employees should be advised that posting information about the company and its business on company or personal social media channels could potentially implicate Regulation FD. Therefore, such persons must exercise caution when communicating about the company through social media. Companies should monitor the use of all of their social media channels.
1 Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716 (Aug. 24, 2000), available at: https://goo.gl/HZhJp6.
3 Commission Guidance on the Use of Company Web Sites, 73 Fed. Reg. 45,862 (Aug. 7, 2008), available at: https://goo.gl/VQUc4Y.
7 Listed public companies also must consider stock exchange guidelines on the release and dissemination of information. Both the New York Stock Exchange and Nasdaq have policies that require prompt release of material nonpublic information to the public in a manner that is compliant with Regulation FD.
8 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 34-69279 (April 2, 2013), available at: https://goo.gl/LfTZMh.
9 Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716 (Aug. 24, 2000), available at: https://goo.gl/BzvzU2.
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