The Securities and Exchange Commission issued guidance yesterday that permits public companies to disclose material information such as earnings through social channels such as Facebook and Twitter as long as investors have been alerted about which social media will be used to disseminate such information. The SEC guidance related to an investigation that it has completed concerning a post by Reed Hastings (Netflix’s CEO) on his personal Facebook page that contained (arguably) material information regarding Netflix’s performance.
So, is the SEC guidance a good thing or a bad thing and what is impact do we expect this guidance to have on shareholder communications?
The fact is that the SEC is embracing social media and encouraging companies to use social channels to disseminate information is a very good thing. Companies benefit by disclosing information as broadly as possible. Using social channels in addition to a company’s IR Room and press releases to distribute material information ensures more engagement with a broader audience. We encourage our customers and other public companies to complement their disclosure of material information by using social channels in addition to press releases, their IR website, emails, etc.
That said, similar to the guidance that the SEC provided regarding web disclosure back in 2008, yesterday’s statement by the SEC was ambiguous and could be read to permit disclosure of material non-public information solely through social media channels. This would not be a good thing for companies, investors, capital markets, analysts, traders, journalists, PR Newswire or anyone else, and we think that it is highly unlikely that companies will use social channels as their sole means of disclosing material information.
What does this mean for our customers?
In 2000, the SEC has clearly stated that the purpose of Regulation Fair Disclosure is to promote broad and simultaneous disclosure of material information. All investors must have an even playing field. Selective disclosure is not a good thing and is prohibited by RegFD. Given that the internet and social channels have become a central part of everyone’s lives, the SEC’s 2008 guidance demonstrated the SEC wants to encourage companies to use their IR websites as a core part of their overall disclosure strategy… and social media is now rolled into this guidance.
Companies that use their IR website as the sole means of disclosure run the risk of uneven disclosure that may disadvantage certain types of investors. The SEC has been clear that the idea that investors might have hunt down the information rather than getting it easily through a broader distribution is far from ideal. Additionally, law firms have consistently been advising their clients that the simplest way to mitigate RegFD is to push the information to investors using press releases. Better safe than sorry.
Broad and simultaneous disclosure makes it simple for constituents (journalists, bloggers, trading systems, investors, etc.) to engage with and act upon the material information. This benefits public companies that are disclosing the relevant information. This is one of the main reasons that less than a handful of companies have embraced web-only disclosure despite that the SEC opened the door to it in 2008. Companies have repeatedly indicated to us that web-only disclosure does not make sense because it does not make any sense to restrict disclosure to one form of communication that may limit your audience. NIRI’s December 2012 study on the topic reported the exact same. We can wisely assume the same to hold true regarding disclosure exclusively through social channels.
Our customers also recognize that limiting disclosure of material information to social media channels presents obstacles to trading a company’s stock due to simultaneity getting the relevant information into Bloomberg terminals, flash desks, algo trading systems, etc. It also introduces simultaneity getting the information onto Yahoo! Finance and other key sites. Disclosing exclusively through their IR website and/or social media introduces obstacles here. Companies want to promote trading and liquidity and they want to make the jobs of journalists, traders, portfolio managers and others easier, not harder.
Company counsel and outside counsel are likely to continue to recommend that companies disclose material information through press releases and other channels. RegFD is based on the foundation of broad and simultaneous disclosure. Limiting disclosure to a company’s website or social channels makes it riskier for a variety of investors to get information simultaneously. Additionally, as red-flagged by popular legal blogger Brok Romanek, yesterday’s guidance was stated in an SEC Enforcement Report.
Social channels don’t offer their “users” Service Level Agreements: they have zero responsibility for news distribution. We have all experienced “Whale Fail” on Twitter. There are also concerns regarding fraud and relatively minor security around social channels. While many ways exist to protect against fraud – the best possible way is to disseminate through a trusted, secure source like PR Newswire. We authenticate and protect non-public material information.
Finally, our customers have consistently told us that they like the fact that for a fair price, not only do they receive superior distribution, they have a professional editor proofreading their earnings release and catching mistakes that could be damaging to the company and to the individuals handling the releases.
We applaud the SEC for embracing social media and we should encourage our customers to leverage their social channels to complement their disclosure efforts.