This post was authored by Rebecca L. Friedrick. She is a law student at the University of Notre Dame Law School and was a 2012 summer associate at Honigman Miller Schwartz and Cohn LLP.
As individuals increase their use of social media, companies are joining the conversation in increasing numbers. Over the past couple of years, corporations have improved their websites, created Facebook pages, and tweeted. Companies use social media to get in touch with potential customers, investors, and provide information to the world at large. Translating the highly personal nature of social media allows companies to be creative with their message and marketing. This transition will unfold over the next several years as social media continues to change and new models and formats become available.
Social media use by companies is generally placed into two categories. The first–called “push” or “speaking” social media–involves the company creating a message and disseminating it through social media channels. The other–“pull” or “listening” media–occurs when investors or consumers use social media to interact with a company through Twitter hashtags, discussion forums, or Facebook wall posts. This distinction is crucial to sorting out when SEC regulations might apply, as a company can only be liable for statements it or its affiliates make. However, uncertainty remains about whether a forum or Facebook page operated by the corporation turns all information contained in the site into company speech. This would make customer posts corporate speech and increase the potential for corporate liability. This article only explores the potential legal and management consequences of clearly identified push and pull technology, where the speaker is clearly identified.
Current Practices & Trends
In the past five years, companies have substantially increased their social media use. The most common form of social media use is company websites, some of which have interactive forums and provide investor information in reports. Additionally, according to Q4 Web Systems’ 2011 survey, 67% of companies use Twitter for investor relations; 45% use Facebook; 44% use SlideShare; 34% use YouTube; 19% maintain a corporate blog; and 87% have a Linkedin page. As the variety of social media platforms increases, companies are adapting their use based on the strengths of the particular platforms.
For instance, a recent Wall Street Journal article highlighted the CEO of Aetna Inc.’s use of Twitter. He began posting Tweets about his personal life, as a typically tweeter would. However, his company eventually preferred that he out himself as the CEO. He now uses Twitter as the CEO but also tweets about his personal life to attempt to “humanize” corporate leadership. This is an example of the potential of social media to democratize corporations. However, public companies should be careful about what CEO’s are allowed to tweet, because of their access to corporate inside information may lead to inadvertent violations of securities laws, as discussed below.
Another innovative way that companies use social media is through Facebook pages and other sites containing marketing information. Companies use Facebook as a pull source to gather information from consumer and investors about the products and services they provide. For example, Frito Lay has recently launched a research poll to determine what new flavors of Fritos the company should release in the United States, instead of using the usual focus group testing. The company believes that using social media will allow corporations to reach a broader and younger audience to provide insight and sales for future products.
Securities & Exchange Commission Regulations of Public Companies
The Securities and Exchange Commission (SEC) regulates the sale of securities and disclosure of information related to the markets. As an information carrier, social media communications of public companies with securities traded on national exchanges fall under the SEC’s regulatory authority.
While social media can be a force that encourages democratic processes, one of the SEC’s primary concerns is the disclosure of material non-public information in violation of Regulation FD. Regulation FD was created in 2000 to prevent the selective disclosure of information to prominent investors and selectively allow private individuals trading securities access to information. These practices created a similar scenario to insider trading, where companies could leverage information to gain investments and different individuals in the market have access to different levels of information. Regulation FD requires that companies disclose through an SEC filing or in a manner calculated to inform the general public information subject to a selective or incorrect disclosure.
Social media communications can implicate Regulation FD if the disclosure only reaches a narrow audience of individuals included in the regulations limitations, or if the information is partially incorrect. For information to meet public disclosure standard it must be published on a “recognized channel of distribution” and it must be available to the marketplace in general. Perhaps because of the inherently web-centric nature of its business, Google is one example of a company that publishes its filing information only before it files annual reports with the SEC. Many other public companies have historically been less confident that online posting of company information would satisfy broad enough disclosure, and continue to file all the necessary disclosures with the SEC before making them available on private company websites.
An interesting case study in the adaptability of social media is that of Twitter and earnings reports. During the early days of Twitter, some companies re-tweeting earnings announcements about the company more frequently than SEC reports were filed. However, this practice has subsided after further legal analysis. Because re-tweeting can be considered “republication” of the information in the tweet, the liability involved with SEC regulations may attach. Lawyers became concerned that the character limit on Twitter would not allow for sufficient disclosure of an entire fact to avoid the potential for selective disclosure violations, and the length of the tweet makes it impossible to include a disclaimer. Some individuals still tweeting today use multiple tweets in succession to communicate a message, but there is still concern that these tweets could be separated and taken out of context as an individual violation. There is also the potential that Twitter will not yet reach a sufficiently broad audience to count as full public disclosures, and corrections or updates to information might be required in more widely-used forums.
Regulation FD is only implicated when a person covered under the regulation is speaking. Covered persons include companies and senior official or officers, but lower-level employees are less likely to be considered covered person in their private statements. However, one of the primary challenges for companies entering the social media conversation is the casual nature of social media interactions. Often entry or low-level employees will be managing the company’s social media presence, and they must receive training to ensure that what they are posting complies with legal requirements. An important distinction in employee training is what information is permissible for marketing purposes and what might violate SEC regulations. Companies also need to train employees to coordinate release timing with SEC filings. In some cases, information in the reports was published on unlinked portions of websites and unsecured, so a relatively sophisticated web crawler could discover the information without needing to actually hack into the website. Until the SEC provides more clarity to the scope of prosecution of social media conflicts, companies should invest in policy formation and employee training to preempt these potential problems.
Another area where companies have seen success in using social media is the mobilization of shareholders. While company posted information following a proxy statement could be considered a proxy solicitation requiring legends and detailed information impossible to provide in a social media post. However, companies have used social media innovatively as a listening technology that allows officers of a corporate to listen to shareholder perspectives and communicate more effectively based on shareholder interested. Some companies have created secure online shareholder forums that allow the exchange of ideas between shareholders and the company requiring validation to access. This guards the potential risk of dissemination of the information publically, while providing a social media space for shareholders and corporations to interact.
Investors are also beginning to use blogs and other social media to put pressure on companies. This is not an area where a company can easily control what is published, but companies can continue to be aware of what information is available and that social media can be a powerful force in mobilizing shareholders.
Regulations under the Investment Advisors Act & FINRA
In addition to the regulations placed on public companies, under the Investment Advisors Act investment advisors may also inadvertently violate the law through their use of social media. In January 2012 the SEC issued an alert that communications through social media sites fall under the same regulations as non-electronic communication. Particularly, regulation of third party testimonials includes third party posts on Facebook walls, or the use of the “like” button on social media websites. The SEC also noted that recordkeeping obligations continued to apply to social media communications and advised firms to ensure that they had compliance policies in place that include social media sites.
Given these parameters, investment advisors have taken two routes to social media presence. Some have scaled back their operations to avoid potential violations, while others have continued to believe that an online present is necessary to stay competitive. For instance, wealth management firm Balentine uses its Facebook page to build a brand as an investor-friendly company that has a personal side, much like individuals might use Facebook. The content of the page is posted by firm employees, but does not actually discuss investing or the firm’s business. Instead, it focuses on other areas including industry wide investing information, and interesting hobbies and events. By shifting the focus away from particular business information, Balentine aims to avoid the risk of violating SEC regulations while maintaining an active online presence. It is likely that as regulations fail to keep up with the pace of technological evolution, firms will be look to creative solutions to stay relevant and on the right side of the regulations.