Compliance Week: Companies Prepare for Disclosure on Social Media


It's rare that guidance from the Securities and Exchange Commission on disclosure gets companies excited, but a recent notice from the agency that companies may now use social media sites to release material information has caused quite a stir.

That doesn't mean, however, that companies are rushing to release earnings over Facebook or Twitter. "Companies are looking to see how it will play out," says Laurie Green, a partner with the law firm Holland & Knight. "I think there are some pitfalls. Social media is an informal, quick way to get information out, but there are liabilities that go with it."

The road to the SEC's new guidance began in December when Netflix CEO Reed Hastings boasted of improved viewership numbers on his personal Facebook page. The Commission, in response, issued a Wells notice on the grounds he may have violated Regulation Fair Disclosure (Reg FD), enacted in 2000 to ensure that companies weren't favoring insiders or favored analysts when relaying market-moving news.

In April, the SEC ruled that Hastings had violated the spirit of Reg FD, but that no further action would be taken. In doing so, the Commission took the opportunity to clarify that companies can use social media outlets to announce material information, so long as investors have been alerted about which channels will be used and all posts comply with Reg FD requirements. The ruling expanded upon 2008 guidance for corporate communications made via company Websites.

In response, several companies, including Netflix, GE, Zynga, Nielson, Dell, AutoNation, DLH Holdings, MMR Global, and Spectra Energy filed 8-K statements detailing their intention to disseminate investor information on their social media feeds. Some of them went as far as to indicate official channels for disclosure.

The approach detailed by these companies has varied. Zynga, for example, takes a cautious approach. "We are notifying investors, the media, our players, and others interested in the company that in the future, we might choose to communicate material information via social media channels and it is possible that the information we post on social media channels could be deemed to be material information."

Nielsen Holdings took a similar approach: "From time to time, Nielsen may use its Website and social media outlets as channels of distribution of material company information. Financial and other material information regarding the company is routinely posted and accessible on our Website, our Twitter account, and our iPad App."

DLH took a more direct approach: "Presently, DLH will use its official Twitter feed to communicate company information in conjunction with traditional sources."

While other companies carefully consider how, or if, they will utilize social media channels for disclosure, a few advised best practices, as well as plenty of warnings, are emerging.

Some corporate communication specialists, for example, say companies should wait for further guidance from the SEC on the topic before they start tweeting out earnings projections. The SEC needs to "set the record straight in terms of what public companies need to do to ensure that no matter what channel they choose to communicate through, they will be in compliance with Reg FD," says Jeff Corbin, CEO of KCSA Strategic Communications, a firm that specializes in investor relations.

Among the advice he thinks companies should follow and the SEC should codify are:

  • In their annual report filed on Form 10-K with the SEC, every company should clearly indicate all channels through which it intends to disclose material information. This should include traditional newswire services, social media, and any other communications channels.
  • If a company wishes to change channels, it should either do so in its next Form 10-K or through the filing of an amended Form 10-K. A company must use all communications channels specified.
  • All material news announcements must be posted to a company's investor section of its corporate Website. If a company does not have such a section, it must create one, as Websites in general are a well-accepted repository for almost all companies' information.

Corbin says companies that embrace social media should do so in a very deliberate way and start by conducting an audit to see where investors want to get information. "Once the audit is done, they need to come up with a very strict policy that everyone at the company buys into," he says.

Consistency is paramount, Corbin says, criticizing how Netflix approached investor outreach, even after being chided by the SEC. Although it did release an 8-K to detail what social media outlets it plans to use-among them a company blog and Hasting's personal Facebook page-it failed to distribute recent earnings on all of those channels. In his view, every piece of material news should be disseminated through both traditional sources of disclosure and all of the newly articulated channels.

The SEC needs to "set the record straight in terms of what public companies need to do to ensure that no matter what channel they choose to communicate through, they will be in compliance with Reg FD."

-Jeff Corbin,
CEO, KCSA Strategic Communications

channel of distribution of information "There's not a cut and dried definition of that, but important components are the notice, actually using that channel, and having people look to that channel," says Daniel Webb, a partner with the law firm Simpson, Thacher & Bartlett. "You can't put a notice out there but leave that channel on the shelf."

Determining which social media outlets work best as a recognized channel of distribution is an important step, says Stephen Quinlivan, a lawyer with the law firm Leonard, Street & Deinard. He says companies should also consider the audience of the current social media outlets they have. "If you are American Airlines, you might have 3 million followers [on Twitter], but what if they are all people looking for airfare sales, not investors?" he says.

Training is an imperative when it comes to investor outreach, says Louis Somma, a lawyer with Ropes and Gray. "For investor relations matters you must have a team or a person who is monitoring it and you have to have a social media policy so that people know what is OK and not OK," he says.

Where it can get tricky is when executives, especially the CEO, want to develop an online personality and relay information completely on their own. "They don't want to be monitored by some compliance officer," Somma says. "In a way, it isn't any different than making statements at conferences that they shouldn't be making. You just have to educate them."

"Make sure the executives understand that those sorts of communications through personal channels will be deemed in the SEC's eyes to effectively be communications on behalf of the company," Webb says. "Treat them like any other communication with a group of investors."

Training should ensure that "functions outside of IR and finance are aware of topics, metrics, or other types of information that could potentially be material to investors," Webb adds. "You want to make sure whoever is managing the customer-facing Twitter account knows the hot button topics they need to run by legal before sending tweets out."

The nature of social media is that "you have to be somewhat informative and entertaining" to attract an audience, but "on the other hand not do anything stupid," Quinlivan says. "That is a rare combination."

Policies should be created to dictate who is allowed to post on behalf of the company, what topics they can or cannot discuss, and when they must remain silent (during a proxy contest, amid earnings blackout periods, or in the midst of a merger or acquisition).

Somma says companies must also keep abreast of disclosure standards imposed by exchanges. The NYSE, for example, recently sent a letter to member companies detailing its expectations in light of the SEC's guidance. Among its disclosure requirements are that 10 minutes advance notice be provided prior to the dissemination of any material information that might affect trading. The exchange also demands a full listing of how news will be distributed, the ability to monitor those outlets to ensure that it was done so properly, and the right to temporarily halt trading if there are problems or a need for further review.

As they jump into the social media fray, companies need to think through the limitations of specific social media outlets, says David Peinsipp, a partner in the San Francisco-based law firm Cooley and the corporate counsel who crafted Zynga's 8-K disclosure.

"There are forward-looking statement disclaimers and offsetting lines put in after good news that lead investors back to risk factors in the company's general filings," he says. "How are you going to do all that on Twitter? How are you going to reconcile anything that is not GAAP? There are companies that rely heavily on bookings or adjusted EBITA as their primary investor-following metrics. How are they going to do that in just 140 characters?"

"There are definitely inherent limitations," he adds. "It would be great if the SEC comes out and says, clearly and without equivocation, that putting a link to the forward-looking disclaimer on your Website or reconciliations is perfectly acceptable."

Somma expects the SEC to offer leeway for companies as they adopt new social media policies. "The SEC's own headline was 'social media ok for company announcements,'" he says. "I think that's very telling about their attitude toward it. I don't think we're going to see enforcement where people are on the edges of a developing use of this, unless something is egregious. They are likely going to give people some leeway to develop the practice."

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