Financial Disclosures on Social Media Sites Raise Questions of Fairness and Security
On April 2, the Securities and Exchange Commission outlined new disclosure rules that clarify how companies can use Facebook, Twitter and other social networks to disseminate information provided they meet certain requirements. The SEC said that companies must inform investors in advance that those will be the outlets used to disseminate financial reports. Some have heralded the move as bringing the SEC into the 21st century and catching up with the new era of social media. Others have criticized it including Warren Buffett’s Berkshire Hathaway-owned Business Wire.
Business Wire said that the SEC's rule "poses a disservice to the investment community” explaining that it threatens increased fragmentation of price-sensitive information, privacy concerns as users are required to register to gain access to material news, security risks that may adversely affect market stability, and the loss of simultaneity -- and the "level playing field" -- that is at the core of Regulation Fair Disclosure, commonly known as Reg FD.
Business Wire supports the use of social media tools, web posting on company web sites and blogging as supplemental platforms to communicate material information, but it believes that a broadly disseminated news release -- distributed simultaneously and in real-time via a legitimate news wire service -- is still the most effective way to maximize investor outreach, and to inclusively serve the needs of all market participants.
The use of social media to post financial information first came on the SEC’s radar last December when the regulator warned Netflix that it could take action against the company for a 43-word message that the company’s chief executive, Reed Hastings, posted in his personal Facebook feed. In the note, Mr. Hastings congratulated his team for exceeding one billion hours of video watched in a single month.
But the SEC raised concerns that the post violated Reg FD, which requires a company to publish material information to all investors at the same time. While Mr. Hastings’s announcement was made on his publicly available Facebook page, which had over 200,000 followers, the information was not subsequently disclosed in a securities filing or news release.
At the time, Hastings and Netflix said that his message was both immaterial and readily available to investors, having been picked up by a number of blogs and news media outlets. “We use blogging and social media, including Facebook, to communicate effectively with the public and our members,” Mr. Hastings wrote — on his Facebook page, naturally — after disclosing the investigation last year.
It seems the SEC is willing to allow “the tail to wag the dog” on this matter. From an ethical perspective, one obvious problem is reliance on social media alone will likely negatively impact market fairness and investor awareness. Potential also exists for the misuse of sensitive information and, I believe, hacking into the social media sites to change the reported information. Finally, I fail to see how the new rule protects investors’ interests and need for full and fair disclosure, the mandate for the SEC in its role as market regulator.
Blog posted by Steven Mintz, aka Ethics Sage, on April 15, 2013