SEC social media guidance for the UK

Social media can be a good platform for releasing company information. In May this year, Yahoo CEO Marissa Mayer announced the company’s acquisition of Tumblr on her own, newly created Tumblr page and this could become the norm, but only if the company and its employees comply with the rules.

In the UK, all companies are subject to due and proper compliance under the Companies Act 2006 and company directors must comply with this legislation, as well as their own company policies on preventing insider trading. For public (listed) companies the Financial Conduct Authority (operating through the Listing Authority of the London Stock Exchange) is responsible for ensuring that company information is accurately and appropriately reported to shareholders and the public. It is essential to have a social media policy which outlines the standards expected of employees, particularly in regulated industries, such as the financial sector and companies can deal with this through authorised press releases, which are reviewed and approved by the board, legal team and compliance departments, before they are issued. If social media is used as a channel for communicating company information globally, the company needs to keep control of the platform to be used and understand any regulations and local laws which might apply to the dissemination.

In the U.S., the Securities and Exchange Commission (SEC) recently issued guidance on the use of social media for companies, updating its 2008 Guidance on the Use of Company Websites (“ 2008 Guidance”).

This update followed an SEC investigation into whether Netflix, Inc. and its Chief Executive Officer, Reed Hastings, had contravened Regulation FD (fair disclosure) and Section 13(a) of the U.S. Securities Exchange Act 1934. Regulation FD applies to selective disclosures made to these groups, outside the issuer:

• Brokers or dealers, or persons associated with a broker or dealer;
• Investment advisors, or persons associated with an investment advisor;
• Investment companies or persons affiliated with an investment company; or
• Holders of the issuer’s securities under circumstances in which it is reasonably foreseeable that the person will trade in the issuer’s securities based on that information.

Under Regulation FD, companies must ensure that when they intentionally disclose material, non-public information, they simultaneously distribute that information to the public. When such disclosures are made inadvertently, they must be distributed to the public as soon as possible afterwards. There is no single standard for companies to follow, but companies should be consistent in their approach to making disclosures, and should not deviate from their usual methods of publication, without considering their obligations under the legislation. The 2008 Guidance states that “whether a company’s web site is a recognised channel of distribution will depend on the steps that the company has taken to alert the market to its web site and its disclosure practices, as well as the use by investors and the market of the company’s web site.”

Prior to the incident which triggered the SEC investigation, Netflix had routinely made company announcements through press releases, letters to shareholders and on its official blog. However, on 3 July 2012, the company’s CEO posted this message on his personal Facebook page:

“Congrats to Ted Sarados, and his amazing content licensing team. Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!”

This statement reported a 50% increase in streaming hours from the company’s January 2012 announcement that it had streamed 2 billion hours over the preceding 3 month quarter. Although Netflix issued a press release announcing the date of its second quarter 2012 earnings on the same day, it did not refer to Reed Hastings’ Facebook post.

The SEC’s investigation focused on whether the company had sufficiently notified investors, the market and the media aware of the means of distribution it planned to use, such that these parties could know where to look for disclosures of material information about the company, or ready themselves to receive it. In this case, neither Reed Hastings, nor Netflix had previously used his Facebook page to distribute company information and the SEC found that the company had not taken any steps to make the public aware that this could be used. Netflix usually directed the public to its own Facebook page, website, blog and Twitter feed.

Although no further action was taken against either the company, or its CEO, the investigation revealed that there was some uncertainty regarding Regulation FD and the 2008 Guidance, as far as the rules apply to information released through social media. Rather than revise the 2008 Guidance, the SEC’s Report of Investigation into the Netflix matter was issued as an update, explaining how the existing guidance extends to social media disclosures.

The SEC recognises and understands that companies can and should use the Internet and other electronic communications to disseminate company information, as it promotes efficiency and transparency. The SEC also stated that it does “not wish to inhibit the content, form, or forum of any such disclosure, and we are mindful of placing additional compliance burdens on issuers.” That said, the investigation and report presented a good opportunity to make these two points:

1. Issuer communications through social media channels require careful Regulation FD analysis comparable to communications through more traditional channels;
2. The principles outlined in the2008 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.

In summary, the Report provides that:

• Issuers should examine whether they are using a “recognised channel of distribution” for communicating with their investors;
• Appropriate notice must be given to investors of the specific channels a company will use;
• Corporate websites should identify any social media channels a company intends to use for the dissemination of material non-public information, to give investors and the markets the opportunity to subscribe, join, register or review them;
• 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 board, non-exclusionary distribution of the information to the public” within the meaning of Regulation FD.

Andrea Ward is a Senior Associate with international law firm, McGuireWoods London LLP.  She can be contacted at award@mcguirewoods.com