Tuesday, April 23, 2013

What is Regulation FD and Does it Prohibit the Use of Social Media?

Regulation Fair Disclosure (known as “Regulation FD”) was enacted in 2000 by the Securities and Exchange Commission (the “SEC”) to prohibit selective disclosure of material non-public information by the public companies or persons acting on their behalf to a selected group of outsiders (often market professionals, analysts or major investors) where it is reasonably foreseeable that they would trade on that information before it is made available to the general public. The Regulation requires that if such selective disclosure has been made, then the company must promptly disclose that same information to the public. Public disclosure was typically made by filing Form 8-K with the SEC and/or issuing a press release.

Given the development of the Internet and proliferation of company websites, the SEC said in its 2008 interpretive guidance that it was possible to disseminate the information by posting it on the company’s website, so long as it was viewed as the corporate “recognized channel of distribution.”  This would depend on the “steps that the company has taken to alert the market to its website and its disclosure practices, as well as the use by investors and the market of the company’s website.”   The guidance offered a non-exhaustive list of factors to be considered in evaluating whether the website is a “recognized channel of distribution.”  Mainly, the inquiry focused on the question of whether the company has made its shareholders, investors and the market in general aware that it was going to use its website as its main channel of news distribution.

The advance of technology and social media has continued to test the boundaries of Regulation FD. On July 3, 2012, the Netflix CEO Reed Hastings posted on his personal Facebook page that Netflix monthly viewing exceeded 1 billion hours for the first time. There was no simultaneous press release or Form 8-K filed. Reed Hasting’s Facebook page had over 200,000 followers at the time of the post, including equity research analysts, shareholders, reporters and bloggers. It was the first time that Mr. Hasting’s personal page was used to announce Netflix news and Netflix did not previously inform its shareholders that Hasting’s Facebook page would be used to disclose material information about the company. Previously, Netflix used press releases, its website, Twitter feed and blog to release information about Netflix. So, did this posting violate Regulation FD?

The SEC launched an investigation, and on April 2, 2013 issued a report announcing that it determined not to pursue an enforcement action in this matter given that there was confusion regarding the application of Regulation FD to social media.  In its report, the SEC advised all public issuers that they need to analyze their every single communication, whether it is made through the website, blog, email alert, twitter account or Facebook page, for compliance with Regulation FD. Companies need to identify for their shareholders and investors which communication channels they will use to disseminate material information. For example, companies can do so by simply including the company’s website address (or Facebook page address, etc.) in their periodic reports and press releases. Also, the companies’ websites can identify the steps that the public needs to take to receive important updates (such as subscribing, joining a group, or “liking” a page). The SEC noted, however, that posting material information on a personal Facebook page without prior notice to the public that the page would be used for this purpose is unlikely to pass the Regulation FD muster, regardless of the number of followers. The use of personal Facebook page should not be a channel for the company’s dissemination of material corporate information.

In conclusion, below are a number of steps that public companies may consider taking:
  • Review every single communication for Regulation FD compliance; 
  • Decide which communication channels the company is going to use to disclose its corporate information; 
  • Prepare a short disclosure notice summarizing these communication practices going forward; 
  • Add this notice to the company’s periodic reports, press releases and website in order to provide advance notice to the public; and 
  • In light of the Netflix investigation, avoid using personal websites or personal social media pages to disseminate corporate information.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.

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