Fortune: Investors Respond to SEC on Social With a Definitive 'Dislike'
BY CYRUS SANATI
The SEC showed up late to the social media party with its new guidance, and investors now have more questions than answers about how companies can share material information.
FORTUNE -- Wall Street will need a bit more clarity on the SEC's new social media policy before anyone feels comfortable enough to hit the "like" button. While many on the Street accept that social media has become a somewhat reliable outlet to distribute company information, there is still widespread confusion as to what sites are appropriate and how such messages can and should be relayed to the public.
This shouldn't be much of a surprise given how vague current rules are as to how and when companies can disseminate material information to investors over the internet. It may be time for the agency to design or at least designate some sort of centralized digital distribution outlet that can serve as a depository for all informational releases.
The last time the SEC issued guidance on the digital distribution of company information was back in 2008. Back then social media giants like Twitter and Facebook (FB) were in their infancy. As the SEC snoozed, companies and their leaders took to social media to inform and entertain their friends, followers and fans. Last summer, Reed Hastings, the chief executive of Netflix (NFLX), gave his followers more than just your usual online coupon. He posted on his public Facebook page that Netflix's monthly viewing had exceeded one billion hours for the first time, representing a 50% increase in streaming hours from the last time the company had reported its monthly viewing numbers to the public. Those investors who bought Netflix stock right after Hastings's post were rewarded with a massive return on their money. Shares in Netflix increased from $70.45 at the time of the Facebook post to $81.72 by the close of trading on the following day.
The SEC began a probe of the Netflix debacle right after it occurred and on Monday announced that it had decided not to pursue "enforcement action" in the matter. It then took the opportunity to "clarify" its position as it relates to social media and its uses as a tool to disseminate nonpublic information under Regulation Fair Disclosure, known on the Street at Reg FD.
This much maligned, yet necessary, SEC regulation was put into force in 2000 to make sure companies disseminate material information to the public in an equal and fair manner. It was meant to stop so-called "selective disclosure" in which companies would inform their big investors about what was going on in the company before smaller investors were given the news.
The big trouble with Reg FD is that it doesn't really specify what constitutes an appropriate means of relaying information to the public. In general, though, there are three digital distribution channels that seem to pass the test: posting a press release to a company's website; sending out a press release over the wires; and filing a form 8-K with the SEC (which would be posted on the SEC's EDGAR website). Hastings didn't do any of those things before sharing the Netflix viewing numbers on his Facebook page.
But instead of clarifying things, the SEC (and the following media coverage) has made things worse. A whopping 77% of CFOs and investor relations professionals do not think the SEC has given enough guidance on how to use social media to disclose company information, according to a snap survey conducted by KCSA, the public and investor relations firm. Around 69% of the companies surveyed by KCSA say they would like to use social media to disclose company information but only 38% of those surveyed use it as part of investor relations.
There has been a lot of misinformation posted about the SEC's guidance - one in particular is that companies can only use one official social media outlet to relay their information. In actuality they can use as many as they want as long as they are considered to be a "recognized channel of distribution," as described in the SEC's original 2008 guidance on the dissemination of information via the web. In general that means a company needs to inform investors (somehow) that it will be posting important information using that particular digital distribution channel (whether it be a company website or Instagram) and that they would be frequently updating that information in a timely manner.
"It is reasonable to ask companies to tell the public in advance which social media sites they will use to make corporate announcements," Francis J. Aquila, the head of Sullivan and Cromwell's General Practice Group (and prolific tweeter @FAquila), told Fortune. "It may be confusing at first, but sooner rather than later it will all workout. Less spontaneous for sure, but that is probably not a bad thing when it comes to corporate disclosure."
But while it is easier for media professionals and avid social media users, like Aquila (and me), to believe that everything will work itself out, there are still a number of professionals who aren't as media savvy who have raised legitimate concerns.
"If you are an institutional investor, will you have to "like" all of the Facebook pages of the companies you invest in? Or start following them on Twitter?" asks Stanley J.G. Crouch, the chief investment officer of Aegis Capital, the $2bn asset manager. "Another key question is - does it give even more advantage to the big guys in terms of the algorithms and the artificial intelligence they employ for High Frequency Trading to parse words and gain advantage?"
There is a chance that the companies will choose different social media platforms to release company information, indeed forcing investors to sign up for all of them and possibly even hire analysts whose sole job is to watch them like a hawk.
The term social media is vague - it seems that every website is trying to be "social" in some way or another. Off the top of my head I can think of eight: Facebook, Twitter, Google Plus (GOOG), LinkedIn (LNKD), YouTube (maybe), Reddit, Pinterest, Myspace and Instagram. Indeed, there are dozens and dozens of social other media websites - many I haven't even heard of. Some of the big ones I left out, like, Tencent QQ and Google's Orkut, have millions of members in China and Brazil, respectively, but have little, if any, following in the U.S.
The use of social media by companies is primarily a way to advertise but anything they say, whether it be written in Chinese on QQ or in Portuguese on Orkut, could end up having a material impact on investors. For example, problems could arise if a U.S. company with a large presence in China, like Coca-Cola, chooses to post something on its QQ page about launching a new product in the country. That isn't very "tweet worthy" to Coca-Cola's U.S. audience, but it would certainly be of interest to those who own Coca-Cola's stock.
"Centralized information, ease of access to data and immediacy are what research analysts and institutional investors crave in terms of managing news flow," says Robert Fagin, Director of Research at Cowen and Company. "Given the SEC's statement, tools will undoubtedly be created to harness the power of Twitter in service of those goals, particularly to filter useful information from noise." MORE: How Mary Jo White can win over her skeptics
Reg FD was supposed to level the playing field but society has since changed fields. The only way to make sure all investors have access to material information is to require companies to report all regulatory filings, press releases, tweets and posts to one centralized website. Once the information appears on that website then companies can be free to post and tweet whatever they want, whenever they want. Investors could subscribe to the full feeds of whatever companies they want.
Social media has morphed in the past five years from a curious phenomenon to a necessary outlet for news and information. Companies have used it successfully to perk up their brand, attract new customers and report news. As such, companies have an obligation to let their investors know what they are saying at all times. The SEC has tried to address that with its social media guidance but as with all of their guidance concerning digital information, they fall short of ensuring a level playing field. A centralized one-stop shop is crucially needed in today's digital world. Let's hope the SEC hears our tweets on this.
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