Social Securities: How to Make Sense of Reg FD and New Disclosure Channels

By Evan Pondel, PondelWilkinson Inc.

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The trading day is only five minutes old, and word is spreading on Twitter that the FBI is raiding a certain public company. The company’s investor relations representatives soon find themselves on the receiving end of a barrage of calls from frenzied portfolio managers attempting to debunk what they just read in 140 characters or less.

The company’s stock is down 10 percent, Bloomberg reporters are calling for comment, and the said company’s executives have yet to weigh in on the rumor because they live in California where stars are still visible in a predawn sky.

This is not a hypothetical scenario. It actually happened earlier this year to a company with a market capitalization of more than $9 billion. The rumor was eventually proven false and the stock corrected itself in a couple of hours, but such an instance is indicative of the power and influence of social media on capital markets.

Now add to the mix the Securities and Exchange Commission’s recent endorsement of social media as viable disclosure channels, and publicly traded companies of all shapes and sizes are beginning to listen to conversations that can make or break a 52-week high in a nanosecond. Welcome to the world of hashtags and cashtags, where investors, executives, SEC counsel and IROs are trying to make sense of this new social media soup.

“I would not make a blanket statement and say that social media are good for all public companies. Rather, I’d say they can be useful tools,” said Elizabeth Blankespoor, assistant professor of accounting at the Stanford Graduate School of Business, who recently coauthored a study that found tweeting can improve the liquidity of smaller, lesser-known companies. “But there are always pitfalls when keeping control of data, and the SEC’s announcement on social media was pretty cautionary about selective disclosure.”

And perhaps rightly so. Most public companies think in terms of 10-Ks, 10-Qs, 8-Ks and the like when it comes to disclosure, in addition to issuing news releases on wire services, such as Business Wire, PR Newswire, GlobeNewswire and Marketwired. But to understand how social media fit in with these more tenured disclosure channels, it’s probably useful to revisit the rudiments of why and how companies began disclosing information in the first place.

Fair Disclosure The Securities Act of 1933, often referred to as the “truth in securities” law, required that investors receive information regarding securities being offered for sale. That could take the form of a registration statement or prospectus. In 1934, the SEC began requiring companies with more than $10 million in assets whose securities are held by more than 500 owners to file “annual and periodic reports,” which are also known as 10-K and 10-Q filings.

Stock exchanges also began recommending disclosure channels to satisfy “immediate release policies.” To this day, the New York Stock Exchange recommends that companies send press releases to Dow Jones & Company, Inc., Reuters and Bloomberg to “insure adequate coverage.”

Despite these disclosure channels, the SEC grew more suspicious in the late 1990s that companies were dribbling out “insider” information to analysts and institutional investors. On August 21, 2000, the SEC adopted Regulation FD (fair disclosure) against a backdrop of media reports about insider trading scandals. The crux of the rule: to ensure that public companies disclose material information to all investors at the same time.

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To do that, Reg FD states that companies can make public disclosures by filing or furnishing a Form 8-K, or by disseminating information “through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”

Reg FD 2.0Even today, these methods mostly consist of issuing a press release with a wire service, posting information about a conference call on a company’s website, and hosting webcasts. But the SEC’s recent announcement regarding social media marks a key development in the annals of disclosure now that it’s OK to tweet material information, as long as investors are told in advanced that a company will be doing so.

All along, people thought that Netflix CEO Reed Hastings was going to get in big, big trouble for disclosing information on his Facebook page. Instead, Hastings’ alleged disclosure blunder served as a catalyst to the SEC’s endorsement of social media.

So what does this mean for the investor relations community?

What it does not mean is that executives, IROs, chief marketing officers, and anyone else who represents a public company and dabbles in social media should start tweeting market-moving information. “It’s a matter of common sense and consistency,” said Howard Lindzon, founder and chief executive officer of StockTwits. “Reed Hastings took a lot of arrows for doing what he did.”

The challenge for public companies is finding the right person to manage social media. Understanding the basics of Reg FD, as well as having the ability to drum up catchy and informative tweets is not easy. Lindzon said companies should assess social media as a plumber would assess the piping in a house. “Simple and efficient plumbing is key. But you first have to learn how to use the products,” he said.

Lindzon offered the following tips when testing the waters with social media:

• Do not engage social media because you think it could make your stock price go up;• Share links and track those who read them;• The “when” and “where” isn’t as important, as how you do it and consistency;• Allocate the right amount of time; and• Diversify your use of channels.

Targeting the Right AudienceOne of the biggest draws of social media is that they are essentially free distribution channels, which is enticing when companies spend several thousand dollars a year in wire distribution fees. But experts say companies shouldn’t be so quick to relinquish traditional means of issuing news releases.

“The mistake people are making about social media is that these channels are somehow a replacement for our old established system,” said Bradley Scott, senior product manager at SNL IR Solutions. “Unless you are completely confident as a company that everyone will want to ingest your social media, you need to think about social media as an ‘and’ not an ‘or.’”

Many would-be consumers of social media are unable to view certain websites because their employers block them. Institutional investors aren’t always inclined to habitually check Twitter for company news, either. A buy-side portfolio manager who runs a half-a-billion dollar hedge fund and prefers to remain anonymous said he seeks out information from social media only when a stock is moving.

“Anyone who trades simply because of a bunch of hooey on Twitter isn’t a very sophisticated investor,” said the portfolio manager, who uses his Bloomberg terminal to access companies’ tweets.

Bottom line: Companies must know their target audience when using social media, and Bradley Scott at SNL recommends the following to ensure companies are getting close to the bull’s-eye:

• Listen to where social media conversations are happening; • Ask your investors what social media channels they are using;• Make sure your company is ready to commit to social media;• Be consistent with access to social media links throughout a company’s website; and• When you implement a social media policy, stick with it.

Instituting a Social Media PolicyAs far as communications policies go, the subject of social media has yet to receive as much attention as, let’s say, crisis communications. Less than half of employers have formal social media policies, according to a survey of 470 companies released last year by the Society for Human Resource Management. But as more employers engage in social media, instituting a policy of what can and can’t be said on Twitter, Facebook and other channels is absolutely imperative.

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About a year ago, the chief financial officer of a fashion retailer was fired after tweeting the following about his company’s board meeting: “Board meeting. Good numbers=Happy Board,” according to the Wall Street Journal.

“Trying to stop social media is like trying to stop the ocean’s tides from coming in, so you have to figure out how to use it responsibly and safely,” said Hillel T. Cohn, a partner at law firm Morrison & Foerster. in Los Angeles, who specializes in securities regulatory matters. “First and foremost, companies have to consider whether social media fit the nature of their business.”

And if they do, Cohn recommends the following:

• Set up a social media policy that permits official corporate communication to be conveyed through specified social media accounts, not personal accounts;• Ensure that social media communications are consistent with other public statements;• Determine whether disclaimers are necessary, such as forward- looking statements;• Identify someone who will monitor social media communications; and• Avoid misleading language.

That isn’t easy when a social media account has been hacked. The false Associated Press tweet that sent the Dow Jones Industrial Average plunging in April is a harsh reminder that the threat of being hacked may outweigh the benefits of engaging in social media.

“The reality is, most companies will just have to accept the risk of hacking and be prepared to deal with the consequences,” Cohn said.

Technology heavyweight Dell has been proactive in its embrace of social media. The company publishes its “Global Social Media Policy” on its website with the following principals: “Protect Information; Be Transparent and Disclose; Follow the Law, Follow the Code of Conduct; Be Responsible; and Be Nice, Have Fun and Connect.”

Ultimately, the onus will increasingly fall on investor relations professionals to determine whether engaging in social media is worth the risk, but it is difficult to resist the temptation when Warren Buffet, a.k.a. the William Shakespeare of shareholder letters, opens a Twitter account and tweets, “Warren is in the house”.

Evan Pondel is president of PondelWilkinson Inc., a Los Angeles-based investor relations and strategic public relations firm. He can be reached at epondel@pondel.com.

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