Back in 2000, the U.S. Securities and Exchange Commission adopted Regulation FD (Reg FD) on the selective disclosure of information by publicly traded companies. Reg FD holds that when a public company discloses material nonpublic information to certain individuals or entities — including stock analysts or shareholders—the firm must make public disclosure of the information—to provide full and fair disclosure of relevant information to the marketplace.
This means that if a corporate executive has a private conversation and shares insider information with someone who will potentially trade on non-disclosed information, the SEC may come a-calling.
To avoid violating the regulation, the company may promptly file the information with the SEC or publicly release it by another means to reach the public on a broad, non-exclusionary basis, like a press release.
A Social Media Teachable Moment
On Thursday, the SEC “called” by sending a formal notice to a company and its Chief Executive Officer over a post he made to his Facebook page this past summer relating to the company’s performance—a posting that relayed financial information about the company’s performance that, allegedly, had not previously or subsequently been publicly disclosed by the company.
(A Well’s Notice allows the executive and the firm the opportunity to persuade the Commission that it should not take any further action.)
Interestingly, the company made a securities filing with the SEC, an 8-K, to announce that the SEC was potentially going to institute proceedings and/or bring a civil injunctive action against the company and the executive for violations of Regulation Fair Disclosure over the CEO’s Facebook posting, which it hadn’t cured by filing an 8-K or other form of public disclosure… An 8-K, for those not up on their securities parlance, is a “current report” companies must file with the SEC to announce major events that shareholders should know about, which supplements annual reports (10-K’s) and quarterly reports (10-Q’s).
Or Maybe Not So Teachable
But, in a right-back-at-you move, the executive took to Facebook again to answer the SEC’s concerns: “SEC staff questions a Facebook post,” he wrote, “Fascinating social media story.” He also pointed to the resulting press coverage, in which reporters and bloggers repeated his comments about the company. And said that posting a message to the page’s then-200,000 followers was “very public” and that furthermore, “we think the fact [disclosed] was not ‘material’ to investors.”
So the issues are:
- Was the information disclosed material and
- If so, is a Facebook posting broad public dissemination such as would satisfy Reg FD (or, the posting and follow-on 3rd party disclosure).
If the answer to one is no, then Reg FD is not relevant as it only applies to material non-public information.
If the answer to one is “yes,” then an affirmative answer to part two still lets the executive and his company off the hook because there is no selective disclosure.
If the answer to one is “yes,” but the answer to part two is “no,” then SEC may proceed against them. Under Reg FD, the SEC can seek injunctive relief, like a cease-and-desist order, monetary penalties and required disclosure of the violation. The good news is that there is no private cause of action for failing to comply with Reg FD, so a company’s shareholders can’t sue on the basis of a Reg FD violation.
As it currently stands, the SEC has not found a Facebook posting to satisfy the public dissemination prong similar to a Form 8-K.
Since 2000 when Reg FD was adopted, the SEC has only brought roughly a dozen enforcement actions. Civil penalties against individuals have ranged from $25,000 to $50,000; penalties against companies have gone from $250,000 to $1 million.