Recent Wells Notice is a watershed. For the first time ever, the SEC's Enforcement Division has issued a Wells Notice on a communication made through social media. The December 2012 notice informs Netflix that the Enforcement Division is recommending a Reg. FD action against the company and its CEO because of a Facebook post by the CEO. Regulation FD prohibits public companies from deliberately or accidentally disclosing material nonpublic information to less than the entire market. By failing thus far to issue any guidance on whether companies and officers that use social media to reach consumers and investors may satisfy Reg. FD, the SEC has made it risky for those who do communicate by this means. The need for guidance is urgent, attorneys Christopher Garcia and Melanie Conroy assert. One 2010 study found that 79 of the Fortune 500's biggest 100 companies used one or more of the four most popular social-media websites, and a 2012 study reported by Forbes anticipates that the percentage of CEOs participating in social media will grow from 16% in 2012 to 57% by 2017.
Companies can dig up old guidance. SEC staff has been referring companies to a 2008 interpretive release for guidance on how Reg. FD impacts the use of corporate websites to disseminate information to the market. The release states that information posted on a company's website would be considered a public disclosure for purposes of Reg. FD (and the 1934 Act) if the website is recognized as a distribution channel, posting makes the information generally available to the market, and a reasonable waiting period for a response by investors and the market has elapsed. Although the chief counsel for the Division of Corporation Finance in 2011 opined-sensibly, in the authors' view-that the 2008 release applies equally to social media channels, the SEC must determine whether those channels have become what the SEC recognizes websites to be: customary, reliable, and widely accepted places to post information. Few companies may be able to satisfy the first part of the release's three-part test. To meet the "customary" requirement, the company should probably inform investors, in every SEC filing and news release, that the company uses social media for disclosure, assuming it actually does. In fact, annual reports direct investors seeking more information to websites most of the time but to Twitter and Facebook accounts rarely.
Editor's Note: The SEC released on April 2nd a Report of Investigation on the Netflix situation discussed above. As the SEC's release about it notes, "disclosure of material, nonpublic 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 an acceptable method of disclosure under the securities laws."
FD faces a bucketful of trouble. The lack of SEC guidance imperils Reg. FD's purpose, which is to promote the efficient, fast, and uniform distribution of key market information. The SEC must make the rules clear when it decides whether the Netflix Facebook post satisfies Reg. FD. Until then, directors ought to learn how their companies are using social media (e.g., for marketing or customer outreach) and ascertain from management whether the company's Reg. FD compliance policies have been modified to reflect that use. SEC guidance might also help those accused of insider trading, for whom an important defense is that the material information at issue was adequately distributed to investors through appropriate public media. That defense would be available if the SEC decides that the company's social-media communications fall under Reg. FD.
The referenced working paper, Insights: Corporate & Securities Law Advisor, published by Aspen Publishers, 76 Ninth Avenue, 7th Floor, New York NY 10011. To subscribe, call (800) 638-8437; or visit www.aspenpublishers.com/product.asp?catalog_name=Aspen&product_id=SS08943524.