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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 counsel in areas ranging from hiring procedures to trademark protection, they also have in investor relations.
In 2000, the Securities and Exchange Commission (SEC), concerned that companies were giving analysts and large institutional investors private information relative to the financial health of the company, put into effect Regulation Fair Disclosure, or Reg FD.
Reg FD allows a public company to disclose material information by any means reasonably designed to result in broad, nonexclusionary public disclosure. Traditionally, companies have filed such information with the SEC and also paid wire services such as BusinessWire and PRNewswire to issue press releases in order to comply with the disclosure requirements. These 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 a posting on a corporate Web site alone sufficient public notice of material information, nor could it envision the current widespread use of blogs and social media sites such as Twitter.
In 2008, the SEC took a step toward acknowledging the sea change in how people get information that occurred in the intervening eight years. The commission published guidance on using corporate Web sites to disclose material information--but only limited guidance. Essentially, it says 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 Web site is a key source for obtaining material information about the company. It says other factors include how prominently the information is displayed on the Web site, 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.
Belts and Suspenders
As a result, securities lawyers suggest what Hogan & Hartson Partner Daniel Shea calls a cautious "belts and suspenders" approach of using traditional methods of disclosure, in addition to disclosure via the Web or other media.
"The Internet is not a replacement for more traditional means of communication--news releases to the wire services and SEC filings," agrees Littenberg. "Other forms of communication, including social media, may be and increasingly are used in tandem with such primary disclosure methods."
Those other forms include open conference calls and Webcasts anyone can listen to, which satisfy the Reg FD disclosure obligation if, Littenberg says, they are "noticed a reasonable amount of time in advance (by press release) and generally accessible."
Dell and CGI are among companies that Webcast conference calls including earnings reports and future statements. CGI offers a feed that automatically downloads new content to a subscriber's Web browser. Dell offers a video blog (vlog).
In May, the New York Stock Exchange (NYSE), which previously had required a press release for material disclosures, dropped that requirement for companies whose disclosures are in compliance with Reg FD. But the NYSE continues to recommend that companies issue a press release in addition to any other form of disclosure.
The lack of SEC clarity on disclosure via the Web, coupled with the NYSE announcement, leave companies making redundant disclosures that some see as unnecessary in the Internet age.
University of Denver law professor Jay Brown says that rather than a "facts and circumstances" test, the SEC should establish a Web site "safe harbor" setting forth specific conditions of disclosure on the Web that fulfill the requirements of Reg FD.
Brown envisions requirements that a company post on the Web "all SEC filings contemporaneous with filing, material press releases and other disclosures to the market contemporaneous with issuance." But SEC spokesperson John Heine says that no additional regulations or amendments are currently proposed.
If Web disclosure is problematic, newer social media tools open up even more areas of potential risk.
Hogan & Hartson Partner Amy Freed says that Twitter and Facebook are "game changers" in that they provide channels for unauthorized people to disclose material information. "They do not lend themselves to a third-party review of the information [prior to release]," Freed says. "It is just a matter of time before there is an inadvertent leak of alleged nonpublic material information in this manner."
Some disclosure missteps with social media already have occurred. In 2008, an eBay corporate blogger began "tweeting"-- posting updates on Twitter--during eBay's quarterly earnings calls without including required regulatory disclaimers. eBay declined a request for an interview for this story. But notes on the blog suggest that the blogger was called to task by company lawyers and agreed to follow specific rules to comply with disclosure requirements. In October 2009, prior to the third quarter earnings call, he announced he would not be able to provide live tweets. Instead, he provided links to the company earnings release and to listen in on the call.
Some companies use Twitter in conjunction with quarterly earnings calls, but in a carefully controlled way. Prior to the call, they prepare tweets verbatim from the conference call script and including the necessary disclaimers, ensuring that only information mentioned on the call is posted on Twitter.
As companies begin to explore new ways of communicating with their current and potential investors, Littenberg suggests that in-house counsel create a social media disclosure policy and designate individuals to speak on behalf of the company.
He recommends periodic training on Reg FD and other public company compliance topics for the authorized employees and that in-house or outside counsel review potentially sensitive communications in advance of their release. He also suggests that companies prepare for the worst.
"Public companies should have a crisis plan for dealing with Reg FD and other potential communications and disclosure issues," he says.
Once a plan is in place, Freed recommends companies perform 'dry run' simulations of recommended procedures to take following inadvertent disclosures to ensure quick, effective reaction.