Friend Me? SEC Approves Communication through Social Media

Posted by Austin Ke on April 30, 2013

As we highlighted at the end of last year, the SEC issued a Wells notice to Netflix Inc. regarding a post by Netflix CEO Reed Hasting on his personal Facebook page.  On April 2, 2013, the SEC issued a report of investigation (PDF) stating that the SEC would not pursue enforcement action against Netflix and addressing the application of Regulation FD to a public company’s use of social media websites (the “Report”).  

In approving a public company’s use of social media channels, the Report confirms that the SEC’s August 2008 Guidance on the Use of Company Websites (PDF) applies to social media channels and further highlights that “the investing public should be alerted to the channels of distribution a company will use to disseminate material information.”  The SEC further noted in the Report that “in light of the direct and immediate communication from issuers to investors that is now possible through social medial channels, such as Facebook and Twitter, we expect issuers to examine rigorously the factors indicating whether a particular channel is a ‘recognized channel of distribution’ for communicating with investors.”

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Are Facebook Posts Fair Disclosure?

Posted by Michael H. Newman on December 06, 2012

Netflix and its CEO Reed Hastings received a Wells notice from the SEC on December 5 relating to a social media post that Mr. Hastings made on his Facebook page back in July.  A “Wells notice” is a letter that the SEC issues to individuals or companies to warn them that the SEC intends to bring an enforcement action against them.  In this case, the SEC staff has informed Netflix that they are recommending that the SEC bring a civil action against Netflix for a Facebook post by Mr. Hastings related to Netflix members reaching one billion hours a month in video streaming.  The SEC is asserting that Netflix violated Regulation FD (Fair Disclosure) as a result of this posting.

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Providing Projections to Investment Banks in the Face of Regulation FD

Posted by Jess C. Frey on June 02, 2011

It is not uncommon for an officer of a company to speak to investment bankers regarding financing options or capital-raising strategies for his company.  In connection with these discussions, the officer will typically provide the investment bankers with projections or other material nonpublic information.  How can an officer do so without running afoul of the selective disclosure requirements of Regulation FD?

Regulation FD addresses selective disclosure by companies.  The regulation provides that when a company, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons, it must make public disclosure of that information.  The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional; for an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a non-intentional disclosure, the issuer must make public disclosure promptly.  Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.

There are exclusions from coverage under Regulation FD.  For example, there is an exclusion (Rule 100(b)(2)(ii) of Regulation FD) for communications made to any person who expressly agrees to maintain the disclosed information in confidence.  This exclusion recognizes that companies and their officers may properly share material nonpublic information with outsiders, for legitimate business purposes, when the outsiders are subject to a confidentiality agreement.  Moreover, the SEC Division of Corporation Finance staff has published several Regulation FD Compliance and Disclosure Interpretations that state that an express agreement to maintain the information in confidence is sufficient for an issuer to rely on the exclusion in Rule 100(b)(2)(ii) and not be subject to Regulation FD's requirement to publicly disclose the information provided.

OUR TAKE:  Companies should require investment banks to sign confidentiality agreements―whether as part of the engagement letter or a separate agreement―before sharing material nonpublic information with them.  Companies should not rely simply on an oral understanding or a duty of trust or confidence when a written agreement can clearly establish the confidentiality and nondisclosure obligations, especially when an investment bank may have competing interests in a transaction.

GLOBAL BUSINESSES, GLOBAL PROBLEMS - DISCLOSING CATASTROPHIC EVENTS

Posted by Rick Jordan on May 04, 2011

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The impact of the March 2011 earthquake and resulting tsunami in Japan and the region has caused many U.S. issuers to scramble, for example, to replace their manufacturing and supply capacities and otherwise respond to the crisis.  Retail companies especially have suffered, as Japanese consumers struggle to repair their shattered homes and care for loved ones rather than buying the latest products or technology on the market.

Back in the United States, executives and their consultants have responded by analyzing current and potential business disruptions, leaving company counsel to help determine what disclosure obligations, if any, the issuer may have with the SEC.

As issuers continue to respond to the crisis in Japan and the region, and other catastrophic events, such as the recent tornados in the southern United States, the following may help navigate applicable U.S. securities laws:

  • Risk Factors – Risk factors generally describe the most significant factors that may affect the issuer’s business or future performance.  The SEC requires disclosure of risk factors in companies’ Annual Reports on Form 10-K, and any material changes to those factors must be disclosed in subsequent reports, such as Quarterly Reports on Form 10-Q.  When catastrophic events occur, companies should review their risk factors and consider what, if any, changes are appropriate.  It may be worthwhile to review the filings of other companies in similar industries to gauge how others have responded and disclosed these events.
  • Current Reports on Form 8-K – A catastrophic event generally will not result in a Form 8-K disclosure obligation.  Depending on the potential impact of the catastrophic event, however, issuers should consider permissive disclosure—either directly on Form 8-K or by press release that is then filed as a Form 8-K exhibit.  In addition, as the implications of these events evolve, and companies are forced to engage new suppliers, manufactures, sourcers and other market participants, or modify arrangements with these participants, corresponding disclosure may be required on Form 8-K.

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PUBLIC COMPANIES SHOULD REQUIRE CREDIT RATING AGENCIES TO AGREE TO CONFIDENTIALITY AGREEMENTS OR PROVISIONS

Posted by Jess C. Frey on February 02, 2011

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC amended Regulation FD (PDF) to eliminate exemptions for disclosure of material nonpublic information to credit rating agencies.  Regulation FD provides that when a company (or a person acting on behalf of a company) discloses material nonpublic information to certain persons, it must publicly disclose that information.  The purpose of Regulation FD is to limit the selective disclosure of material nonpublic information by requiring that information is not slectively disclosed to market professionals (or anyone else) without being disclosed to the public first or at the same time.  While legislative changes in 2006 removed certain credit rating agencies from the purview of Regulation FD, a number of credit rating agencies are still covered by Regulation FD.  Thus, public companies should take the necessary precautions and plan accordingly by using confidentiality agreements or provisions to protect material nonpublic information disclosed to credit rating agencies. 

OUR TAKE:  Before engaging in discussions with representatives of credit rating agencies, public companies should require credit rating agencies to either enter into written confidentiality agreements or add confidentiality provisions to their engagement letters.

Use of Company Web Sites to Disseminate Information

Posted by Rick Jordan on November 09, 2010

In a recent posting on his New York Times DealBook blog, Andrew Sorkin explores whether companies that use their Web sites to disseminate earnings releases and other news give savvy investors a market advantage.  Sorkin expresses doubts about the practice and argues that it hinders investors’ ability to readily locate market moving information.  

The practice is consistent with an SEC interpretive release (PDF) which provides guidance on how to provide information to investors on company Web sites in compliance with federal securities laws. 

OUR TAKE:  If your company is exloring whether to use its Web site in lieu of some other disclosure mechanism, such as a press release, to make any required public disclosure, you should carefully review the SEC guidance to ensure that the disclosure is sufficiently "public."  Toward that end, you may find our client alert on the topic helpful.

Issuer and Officers to Pay Penalties for Regulation FD Violations

Posted by Gardere Wynne Sewell LLP on October 26, 2010

On Oct. 21, 2010, the SEC announced enforcement actions against Office Depot, Inc. and its chief executive officer and former chief financial officer in connection with violations of the SEC’s Regulation FD, which restricts selective disclosure of material nonpublic information by public issuers. 

The SEC found that near the end of its second quarter in 2007, Office Depot investor relations made a series of one-on-one calls with analysts in which they signaled, but did not directly state, that Office Depot would not meet analysts’ expectations for the quarter.  Analysts then lowered their estimates for the quarter.  The SEC alleged that the communications were selective disclosures in violation of Regulation FD.  The CEO and CFO orchestrated the calls, but were aware of the changes in the analyst estimates.  Office Depot and the two executives agreed to settle the charges without admitting or denying the findings and allegations. 

Office Depot will pay a $1 million penalty, and the executives will each pay $50,000.  The company’s settlement included unrelated charges that it overstated earnings in 2006 and 2007.  The CEO and CFO also agreed to cease and desist from future violations of Regulation FD.

On Oct. 26, 2010, the Wall Street Journal reported that Office Depot’s CEO reached a mutual agreement with the board of directors to step down.

OUR TAKE:  Investors must receive information at the same time and Issuers will violate Regulation FD whether selective disclosure is express or indirect.  Issuers should ensure that executives and investor relations staffs are educated about Regulation FD and their compliance responsibilities, including the recognition of inadvertent selective disclosure, whether express or indirect.