Tag: Regulation FD

The SEC and Social Media

social-media-expert

Netflix chief executive Reed Hastings got into trouble on July 3, 2012 when he used his personal Facebook page to announce that Netflix had more than one billion hours of online viewing in June. That trouble came from an SEC rule implemented in August of 2000: Regulation FD. That rule was implemented to stop the egregious practice of some companies delivering company news to select recipients ahead of a general announcement. Those select recipients would be able to make money from getting the news ahead of time and trading on the upcoming stock movement.

The SEC issued its report on the investigation of Mr. Hastings and determined not to pursue an enforcement action against him. The SEC publicly released its Report of Investigation to help provide some guidance on the use of social media for public company disclosure.

Personally, I thought Mr. Hastings made a bad decision in using his personal Facebook page to make a company announcement. The information had already been released, but in more technical releases. His personal Facebook page did have 200,000 friends who could see the news, but it was still gated and not available to the general public in a broad and non-exclusionary manner. It was a poor choice, but not one that should subject him or the company to an enforcement action.

Regulation FD is written to be platform neutral. You can release “important” company information as long as it available to everyone at the same time. It applies equally to press releases, company websites, Twitter, Facebook, or the big rock in front of your headquarters.

The key for correct distribution is to let people know where the news will be distributed. You could argue that Steve Jobs’ annual display of the latest gadget from Apple is a distribution channel that everyone knows about. A company could carve company announcements into the stone in front of its headquarters if it so chose.

Mr. Hastings foot-fault was that Netflix had not previously used his personal page as a platform for releasing company news. In early December 2012, Hastings stated for the public record that

“we [Netflix] don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings.”

Hastings errant Facebook post was probably not “important” enough and the Facebook page was probably just public enough that the SEC thought it could not win an enforcement action. I’m sure Hastings and Facebook paid quite a bit in legal fees to address the repercussions of that errant post.

It’s not big news that the SEC has embraced social media. The SEC merely reminded companies that they need to go through the Regulation FD analysis when using social media platforms. The SEC embraced social media a long time ago.

I think Facebook is terrible primary platform for important corporate disclosures. It lacks the workflow and content management tools that any corporate communication professional would want to have. The same is even more so with Twitter. It’s hard to do much with 140 characters, except direct the reader to another website.

To de-emphasize the importance of the SEC guidance, it’s not even released as SEC guidance, a risk alert, or other typical SEC regulatory rulings. It merely restates what Regulation FD says and drops in the word Facebook. Too many social media specialists will merely read the headline.

Even Facebook does not use Facebook for company announcements. This announcement will not change that. Maybe Facebook will see the potential for including content management and compliance tools that will allow companies to embrace Facebook and be in compliance with securities laws.

Sources:

The Problem with Selective Disclosure

If you want to see a classic case of the problems with selective disclosure take a look at the recent SEC case against Presstek, Inc. and its former CFO.

Presstek was having a bad quarter in 2006. The CFO knew that the company would be reporting bad financial performance for the quarter. The CFO told an investor that the results would be bad. The investor immediately sold its shares in Presstek. The next day Presstek publicly released its poor financial performance for the quarter.

Slam dunk.

It’s that kind of selective disclosure that the SEC was trying to prevent when it enacted Regulation FD. It is bad that some investors could preferential treatment to material information and be able to act on that information before the general public.

“This investigation related to matters that occurred prior to the changes in executive leadership which took place in 2007,” said Jeff Jacobson, Presstek’s Chairman, President and Chief Executive Officer. “We feel very strongly about corporate governance and we are pleased to put this legacy issue behind us.”

In addition to the $400,000 settlement with the SEC, Presstek also had to pay a $1.25 million to settle a securities class action case related to the matter.

Even though it was a straightforward violation, the question I have is: How did the SEC find out? Perhaps they noticed the spike in the selling of shares and the purchasing of puts by the investor. Perhaps somebody blew the whistle? Perhaps the company self-reported?

Sources:

SEC Commissioner is a Blog Commenter

So you write a blog post about the fiduciary duty of financial service providers to their clients. Actually, the real story is about the lack of fiduciary duty that brokers have to their customers. Then an SEC Commissioner chimes in.

Tara Siegel Bernard writes for New York Times blog, Bucks: Making the Most of Your Money. On February 16 her post was Will You Be My Fiduciary? Her proposal was to arm consumers with fiduciary rights, regardless of what the law says. Merely ask our provider to sign a fiduciary pledge so they have a contractual obligation to be a fiduciary.

Perhaps to her surprise, she got a comment from Elisse Walter, Commissioner, Securities and Exchange Commission:

This well-written, easy-to-understand proposal captures the way that all financial professionals should treat investors. It recognizes that all financial professionals should be subject to a fiduciary duty. And in a simple and straightforward way it articulates the scope of the duty and cuts through what has become non-productive debate on this issue.

This articulation allows us to move on to another critical issue: financial professionals are unfortunately subject to different obligations when they are performing virtually identical services for investors. For example, a person cannot start a brokerage firm unless she demonstrates to a securities regulator that she has the expertise and operational capacity to engage in the type of business she proposes to start. No equivalent process exists for investment advisers. And, the law requires an adviser to disclose to his client the full range of circumstances where their interests may conflict, while the law governing brokerage firms does not impose that blanket obligation.

These are only two examples of the obligations that should be harmonized. I’m ready to see us get on with that work.

According to a message I got from Mark Story, the SEC’s Director of New Media, it’s only the second time that a senior-level SEC official has commented in a public forum.

The first was when former SEC Chairman Christopher Cox commented on a blog post by Jonathan Schwartz: Sunlight on a Cloudy Day….

It looks like an SEC Commissioner posts a blog comment every three and half years. Plan ahead for 2013.

Actually, I’m surprised that the SEC Commissioners have commented at all. I recognize that high-level government officials have to be much more cautious about what they say in a public forum. They run into a similar problem with the dissemination of information that public companies have with Regulation FD. Surprisingly (or not), that just so happens to be the subject of that first SEC comment.

New Compliance and Disclosure Intepretations for Regulation FD

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As part of the Updates to Compliance and Disclosure Interpretations, the SEC has published new compliance and disclosure intepretations for Regulation FD.

I found these CD&I’s particularly interesting in light of the SEC’s loss in the Cuban case. The SEC seems to be providing a better roadmap for disclosure of information.

Here are a few questions that caught my eye, with a snapshot of the answer. Go to the compliance and disclosure interpretations for Regulation FD for the full answer.

Question 101.03: Can an issuer ever review and comment on an analyst’s model privately without triggering Regulation FD’s disclosure requirements?

Answer: Yes. . .

Question 101.04: May an issuer provide material nonpublic information to analysts as long as the analysts expressly agree to maintain confidentiality until the information is public?

Answer: Yes.

Question 101.05: If an issuer gets an agreement to maintain material nonpublic information in confidence, must it also get the additional statement that the recipient agrees not to trade on the information in order to rely on the exclusion in Rule 100(b)(2)(ii) of Regulation FD?

Answer: No. An express agreement to maintain the information in confidence is sufficient. If a recipient of material nonpublic information subject to such a confidentiality agreement trades or advises others to trade, he or she could face insider trading liability.

Question 101.06: If an issuer wishes to rely on the confidentiality agreement exclusion of Regulation FD, is it sufficient to get an acknowledgment that the recipient of the material nonpublic information will not use the information in violation of the federal securities laws?

Answer: No. The recipient must expressly agree to keep the information confidential.

Question 101.09: Can an issuer disclose material nonpublic information to its employees (who may also be shareholders) without making public disclosure of the information?

Answer: Yes. Rule 100(b)(1) states that Regulation FD applies to disclosures made to “any person outside the issuer.” Regulation FD does not apply to communications of confidential information to employees of the issuer. An issuer’s officers, directors, and other employees are subject to duties of trust and confidence and face insider trading liability if they trade or tip.

Question 101.10: If an issuer has a policy that limits which senior officials are authorized to speak to persons enumerated in Rule 100(b)(1)(i) – (b)(1)(iv), will disclosures by senior officials not authorized to speak under the policy be subject to Regulation FD?

Answer: No. Selective disclosures of material nonpublic information by senior officials not authorized to speak to enumerated persons are made in breach of a duty of trust or confidence to the issuer and are not covered by Regulation FD. Such disclosures may, however, trigger liability under existing insider trading law.

Corporate Blogs and Tweets Must Keep SEC in Mind

ebayink

Richard Brewer-Hay made it into the Wall Street Journal and even got his photograph included. Who is he? He is part of the next wave of investor relations professionals who are using web 2.0 tools to provide investors with company information. In 2008, Richard started using a blog as part of eBay’s investor relations: eBay Ink Blog.

Richard then saw Twitter as a useful tool for sending out investor relations information. eBay’s lawyers even gave it their blessing. (After they found out about it and required some disclosure language.) The first big test was the March 11 shareholder meeting where he live tweeted from the audience, broadcasting the meeting beyond the four walls of the room.

The Securities and Exchange Commission laid the groundwork for this approach in the August 2008 Guidance on the Use of Company Website [Release 34-58288] (.pdf) The SEC stated that: “We acknowledge the utility these interactive web site features afford companies and shareholders alike, and want to promote their growth as important means for companies to maintain a dialogue with their various constituencies.” At today’s Society of American Business Editors and Writers convention in Denver, Mary Schapiro noted that the SEC favors greater and broader disclosure [using Twitter and other tools to communicate with investors] but that it hasn’t come to a resolution on the new technology.”

The first step is the analysis of whether and when information is “public” for purposes of the applicability of Regulation FD. In the guidance, the SEC laid out a three part test for “companies to consider whether and when: (1) a company web site is a recognized channel of distribution, (2) posting of information on a company web site disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information.”

The next step is to consider whether and when postings on their web sites are “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” (Rule 101(e)(2) of Regulation FD.

Lastly, the company needs to keep in mind that the antifraud provisions of the of the federal securities laws, including Exchange Act Section 10(b) and Rule 10b-5 are applicable to the content of its web site.

It was great to see eBay’s effort being lauded in the WSJ. It is strange that other companies have not joined the trend. I would guess that there is a lack of business results associated with the transition from web 1.0 to web 2.0. To make the transition, an investor relations professional would need to show that one of the following is true:

  • Increase in share price
  • Reduction in securities and shareholder litigation
  • Reduced costs
  • Increase in revenue

I think it is hard to show that they could achieve any one of these goals. Perhaps you could show that the content management of a blog is less expensive and easier to maintain than a commercial product. WordPress (which powers Compliance Building) is free and offers great content management tools.  You would also need to make the transition from using the public relations news wire services to the blog platform in order to comply with the selective disclosure rules of Regulation FD.

Personally, I think it is the better way to go. Companies can better control the message by using their own website to communicate with investors. But you nee people like Richard to prove the value proposition. We also need the SEC to take a better position on using these tools.

Are there other companies making the most of web 2.0 and joining the Investor Relations 2.0 movement?

See:

Corporate Governance of Public Web Sites

Jane K. Storero and Yelena Barychev of The Legal Intelligencer and Law.com authored an article that the system of reviewing and monitoring information posted on a company Web site should be part of the disclosure controls included in the enterprise-wide risk management system established by the company: Corporate Governance of Public Web Sites.

This article describes methods of effectively complying with the SEC guidance related to company websites: Commission Guidance on the Use of Company Websites (Release 34-58288, August 7, 2008).

That release gave some guidance as to whether a company’s website is a means of public dissemination of information under Regulation FD.

It also addresses how the anti-fraud provisions of the federal securities laws can be applied to a statements made on the internet.  One issue is whether historical information is considered “republished” each time the material is accessed on the company’s website. If they are considered republished, then the company would have a duty to update the materials.

As a general matter, we believe that the fact that investors can access previously posted materials or statements on a company’s web site does not in itself mean that such previously posted materials or statements have been reissued or republished for purposes of the antifraud provisions of the federal securities laws, that the company has made a new statement, or that the company has created a duty to update the materials or statements.

The release also notes that hyperlinks to third party information could be implicated as part of the anti-fraud provisions. The key is the context of the hyperlink. If explicit approval or endorsement is plainly evident, then the hyperlink to a third party statement can be found to be a implicit approval of the statement in the hyperlinked web page.

The release also endorses the use of blogs:

We acknowledge the utility these interactive web site features afford companies and shareholders alike, and want to promote their growth as important means for companies to maintain a dialogue with their various constituencies. As we noted in the Shareholder Forum Release, companies may find these forums “of use in better gauging shareholder interest with respect to a variety of topics,” and the forums “could be used to provide a means for management to communicate with shareholders by posting press releases, notifying shareholders of record dates, and expressing the views of the company’s management and board of directors.”

Statements made on a blog or forum will not be treated any differently than any other statements made by the company for purposes of anti-fraud provisions.