SEC Publishes Electronic Media Guidelines
Tough Twitter Terrain or Tantalizing Tweets? By Michael Kozubek
The Internet and social media have changed the way people get information of all kinds, and investment information is no exception. But just as technologies have raised new legal issues for in-house attorneys in areas ranging from hiring procedures to trademark protection, so they have with investor relations.
In 2000, the Securities and Exchange Commission (SEC), concerned that companies were giving analysts and large institutional investors information that was not available to the public, put into effect Regulation Fair Disclosure, or Reg FD.
SEC Reg FD and conforming NYSE and NASDAQ rules allow a public company to disclose material information by any means reasonably designed to result in broad non-exclusionary public disclosure, which can include a press release, Form 8-K filing, conference call, press conference, webcast or, in certain circumstances, disclosure on a company’s website.
Traditionally, companies have paid wire services such as BusinessWire and PRNewswire to issue press releases containing material information in order to comply with the disclosure requirements. Such releases immediately become widely available on the Web, and also form the basis for stories distributed by financial news services such as Bloomberg and Reuters.
At the time Reg FD was implemented, the SEC did not think Internet usage was broad enough to make disclosure on the Web alone sufficient public notice of material information, nor could it envision the current widespread use of weblogs or blogs and social media sites like Twitter transmitting status updates (tweets) to cell phones and instant messengers. But are such methods legal if used to disclose material information not yet public?
In 2008, the agency took a step toward acknowledging the sea change in how people get information that occurred in the intervening eight years. The SEC published an interpretive release providing guidance on using corporate Websites to disclose material information—but it still took a cautious approach. Essentially it said that for some companies in some circumstances, disclosure via the corporate Web site is sufficient. But the agency also recognized that simply posting information on the Web does not mean anyone necessarily knows it is there.
Thus, the guidance focuses mainly on the need for corporations to inform shareholders and others that its website is a key source for obtaining material information about the company. They also involve how prominently the information is displayed on the website, how easy it is to access, and how current and accurate the information is.
In other words, according to the SEC, whether Web-based disclosure meets the requirements of Reg FD depends on “facts and circumstances.”
“No bright-line test exists,” says Michael Littenberg, partner at Schulte Roth & Zabel
“In addition to a press release, a periodic filing under the Securities Exchange Act of 1934 (usually an 8-K, but in some cases a 10-K, 10-Q) satisfies the requirements of Reg FD”, according to Littenberg. Other methods like open conference calls and webcasts that anyone can listen to also satisfy the Reg FD disclosure obligation “if these are noticed a reasonable amount of time in advance (i.e., by press release) and generally accessible”, says Littenberg.
In May, the New York Stock Exchange, which previously had required a press release for material disclosures, dropped that requirement for companies in compliance with Reg FD. But the NYSE continues to recommend that a press release be issued in addition to any other form of disclosure.
Belt and Suspenders
In the absence of clear SEC rules, and in light of the NYSE policy, most securities attorneys advise companies to use the safe approach—releasing material information on the wire services, whether or not they also post it on the Web or spread the word through Twitter or corporate blogs.
Hogan & Hartson partner Daniel Shea recommends a cautious “belt and suspenders approach in publishing previously unreleased material information.” “More than one method can be chosen -- for example, using the still primary disclosure device of issuing a press release to the wire services prior to filing the information on Form 8-K with the SEC,” recommends Hogan & Hartson partner Amy Freed.
“The Internet is not a replacement for more traditional means of communication-- news releases to the wire services and SEC filings,” Littenberg says. “Other forms of communication, including social media, may be and increasingly are used in tandem with such primary disclosure methods.”
Safe Harbor Suggested
University of Denver Law Professor Jay Brown says that rather than be subject to a "facts and circumstances" test, companies would benefit by the SEC establishing a Website “safe harbor,” setting forth uses that fulfill the requirements of Reg FD. Brown suggests provisions could include requiring a company to post on the Web “all SEC filings contemporaneous with filing, material press releases and other disclosures to the market contemporaneous with issuance, and create a separate section or clear link that provided information required by Reg FD.” But SEC spokesperson John Heine says that no regulations or amendments to the 2008 Guidelines are currently proposed.
Current Compliance and Disclosure Interpretations (C&DI’s) reflect the views solely of the staff of the Division of Corporation Finance of the SEC and intended as general guidance. They are not rules, regulations, or statements of the 5-member Commission. However, Brown says: “Companies follow them both because they might receive some weight by courts if litigation occurs and because, as the views of the staff, they are considered highly persuasive. It is highly unlikely (although not impossible) that the Enforcement Division would ever bring a case against a company that was conforming to staff views.”
An August C&DI states that if a transcript or re-play of a conference call is made available after it has occurred, for instance via the issuer's website, “we encourage issuers to indicate in the notice [of the conference call] how, and for how long, such a record will be available to the public.”
In another August C&DI the SEC staff states: “A meeting that is open to the public but not otherwise webcast or broadcast by any electronic means is not a method of disclosure ‘reasonably designed to provide broad, non-exclusionary distribution of the information to the public.’”
In May the New York Stock Exchange (NYSE) implemented new rules allowing for the use of corporate Web sites as a primary vehicle for disseminating material company information. The Nasdaq Stock Market has had a similar rule for several years. The NYSE's amended Immediate Release Policy no longer requires, but continues to encourage, NYSE-listed companies to use press releases as their primary means of distributing material information.
Some missteps in the use of social media have already occurred. Last year an eBay employee began "tweeting" -- posting updates on Twitter -- about eBay's quarterly earnings calls and other matters without including regulatory disclaimers until eBay’s lawyers found out. Now some companies prepares such tweets ahead of time with necessary disclaimers derived from the conference call script, ensuring that only words communicated on the conference call are posted on Twitter.
Littenberg states “because tweets are limited to 140 characters, many companies use successive tweets to lengthen their messages, especially securities law legends. Some public companies also maintain a Twitter page on the Web that contains a record of past tweets by authorized company representatives, as well as the company’s Twitter policy,” says Littenberg.
Though companies like CGI and Dell webcast conference calls including earnings reports and future statements, others are hesitant to use such methods of communication in the absence of more detailed guidelines from the SEC. CGI offers a feed which automatically downloads new content to a subscriber’s Web browser. Dell offers a video blog (vlog).
After its initial Twitter stumble, eBay has taken an apparent technology backslide by currently providing neither a webcast nor tweets of its earnings calls. Instead the company allows a viewer to share a link to a written press release on a variety of social media services.
eBay declined our request for an interview for this article.
Littenberg urges that “policies be established concerning which individuals are authorized to speak on behalf of companies, and that these communications be monitored for legal compliance.” He recommends creating social media disclosure policies and informing employees about the company’s policy toward their use of Twitter, blogs and other channels for discussing company business.
Littenberg makes three other recommendations to In-house counsel:
“1) There should be periodic training on Reg FD and other public company compliance topics for employees that are authorized to speak on behalf of the company.
2) Internal or external counsel should review potentially sensitive communications in advance of their release.
3) Public companies should have a crisis plan for dealing with Reg FD and other potential communications/disclosure issues.”
In order for companies to respond quickly and efficiently, Freed recommends “companies perform ‘dry run’ simulations of recommended procedures to take following inadvertent disclosures.”
Sidebar or Online Exclusive
Partner Amy Freed says “the company cultivated a culture of compliance and had policies in place to prevent violations including clearly delineated authorized spokespersons for corporate communications and required pre-review.” The SEC stated in its settlement release that the company provided “extraordinary cooperation with the staff's investigation.”
Hogan & Hartson partner Shea refers to the company’s training in Black as a “living, breathing policy without which it may have faced liability.” (Black consented to a $25,000 penalty.)
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