SEC’s New Social Media Guidance: Sensible, Fair, Inevitable
Give the SEC a lot of credit…the headline they chose for their press release yesterday about public companies using social media could not have been more clear: “SEC Says Social Media OK for Company Announcements if Investors Are Alerted.”
With those words, and a full report here, the commission has blessed the inevitable modernization of corporate communications. After much of the investment world has already moved to social media, now companies and their officers can feel safe to participate too. In my opinion this was a very sensible and fair decision because nothing can enrich the way information is distributed, or level the playing field for all investors like today’s technology. This decision should be a boon for transparency, and no doubt will have far-reaching implications for companies, Wall Street, and individual investors alike.
The issue came to the forefront last December when Netflix CEO Reed Hastings inadvertently mentioned some company metrics on his Facebook page. Netflix stock made a big move that day, causing some to balk (particularly institutions from what I hear) that his posting was inappropriate and ran afoul of the SEC’s fair disclosure rules. As a result, SEC sent Netflix a warning that it would investigate the matter, prompting most people to presume the agency would censure Hastings and use this as an opportunity to limit the use of social media going forward. I wrote here why I thought that would be a huge step backwards.
However, as is often the case on Wall Street, the smart money turned out to be wrong, and rather than censuring Hastings, today the SEC came down on his side and that of social media.
What The Decision Says
As I interpret the SEC’s report, these are the two key takeaways:
First, social media, like e-mail, can be viewed as an extension of a company’s website and, therefore, is a fair way to disseminate information. In fact, the report examines this issue in relation to extensive guidance the commission had already previously published in 2008 addressing the use of web sites, blogs and RSS feeds by public companies. Today they concluded that the use of social media is not fundamentally different than those things.
Second, in order to comply with the rules, companies need to provide advance notice to the market of each of the channels they plan to use for disseminating information in the future so that all investors will know where to look for it. To use the Reed Hastings case as an example, the SEC appears to be saying that the company simply needs to periodically disclose that Mr. Hastings has a Facebook page, and that he might discuss Netflix’s business there from time to time.
What This Means for Companies
Companies now don’t need to fear social media, they can embrace it. This was a big concern after the SEC sent their warning to Mr. Hastings last December. Since many viewed his Facebook post as being innocuous (it wasn’t even intended for investors), the worry was that almost anything could be held against CEOs for what they said online, so many chose not to go online at all. Now with today’s guidance, corporate officers are in the clear as long as investors know where to find them in advance.
Does this mean companies should disclose important news exclusively through social media?…obviously not. However, it does mean that you don’t need to worry about every inadvertent thing you say online.
This is a good thing for companies because communicating with the public is a natural component of doing business these days. To be prevented from doing so would have put public CEOs at a huge disadvantage to their private competitors who faced no such restrictions. It will also be good from the investment side of things because social media will enrich a CEO’s relationship with investors and, for those who do it right, increase trust and build a better understanding of their business.
What This Means for Wall Street
How this affects Wall Street perhaps might be the most interesting part of the story to watch. For starters, Wall Street has in many ways played the middleman between companies and investors, so where they fit into this new paradigm (especially as it pertains to distributing information) is becoming less clear. There have been some much-discussed articles lately about how Twitter is disrupting many of the services Wall Street traditionally provides. Now that the SEC is telling companies it’s OK to take a more direct approach to communicating, that will become an even more pronounced issue.
One thing is for sure, today’s guidance makes it clear that Wall Street will have to embrace social media if it wants to keep a leading role. The big banks have actually been very reticent to do so up to this point because of strict compliance rules. As commentator Josh Brown (@reformedbroker) described here, you might be surprised to see that if you walk into many trading desks these days, you are likely to find traders glued to their cell phones because they can’t access social media on company equipment. If those firms don’t want to be left behind, that will obviously have to change after today.
What This Means for Investors
Individual investors are big winners today, in my opinion. As I wrote back in December, I believe social media is an equalizer, and acts as a counter to the perhaps unfair and asymmetrical way news had previously been distributed to some investors. If carried out in an appropriate manner, social media will only improve transparency. The individual investor has the most to gain from that. This is great news all around for those investors who embrace it.
Overall, I think today’s decision by the SEC was sensible, fair, and eventually inevitable. I hope we will look back on it one day as an important catalyst in the way investing has evolved for the better. While many like me were bracing for a different outcome, the SEC deserves a lot of credit for taking a step forward today. I am excited to see how this plays out.