Securities Exchange Act of 1934

As the use of social media continues to grow, social media is likely to play an increasingly more prominent role in proxy contests. In this context, the recent Compliance and Disclosure Interpretations issued by the SEC’s Division of Corporation Finance provide helpful clarifications on how social media outlets can be used in proxy contests in compliance with SEC regulations.


Activist investors have used social media and have at times been able to “move the market” through social media statements in support of or against a public company. Carl Icahn first used Twitter to express his concerns against Dell Inc.’s buyout in 2013, referencing his interest in Dell in his first Twitter posting. Icahn also made extensive use of social media in the recent eBay, Inc proxy contest, in which Icahn pressured eBay to add two of Icahn’s nominees to eBay’s board of directors and to spin off eBay’s PayPal division. Icahn made multiple statements related to the eBay proxy contest through his personal Twitter account, including a link to an article about eBay’s corporate governance problems, links to letters on Icahn’s website supporting his position and criticizing eBay, and short jabs at eBay that could stand alone within the 140 character limitation of a Twitter post. Similarly, members of eBay’s board also used Twitter to announce their positions against Icahn in the proxy contest (In April 2014, Icahn and eBay reached an agreement that put one of Icahn’s nominees on the eBay board).

In the general effort to inform and persuade shareholders during a proxy contest, social media can be a powerful tool, and it can grab the attention of a larger audience. As Carl Icahn’s example suggests, social media can be used to make statements with a length and tone tailored to a specific social media platform, and to share links to information and analysis that provide more depth and greater disclosure to an interested reader.

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On April 2, 2013, the U.S. Securities and Exchange Commission (SEC) issued guidance in the form of the Report of Investigation under Section 21(a) of the Securities Exchange Act of 1934 which indicates that social media channels—such as Twitter and Facebook—could be used by public companies to disseminate material information, without running afoul of Regulation FD. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 34-69729 (April 2, 2013) (the “21(a) Report”). The SEC emphasized that companies should apply the guidance from its 2008 interpretive release regarding the disclosure of material information on company websites when analyzing whether a social media channel is in fact a “recognized channel of distribution,” including the guidance that investors must be provided with appropriate notice of the specific channels that a company will use in order to disseminate material nonpublic information.

The SEC confirmed in the 21(a) Report that Regulation FD applies to social media and other emerging means of communication used by public companies in the same way that it applies to company websites as discussed in the 2008 Guidance, which clarified that websites can serve as an effective means for disseminating information if investors have been made aware that they can locate the company information on the website.

The 21(a) Report indicates that, while every situation must be evaluated on its own facts, disclosure of material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the social media site may be used for this purpose, is unlikely to qualify as an acceptable method of disclosure under securities laws. In this regard, the SEC notes that it would not normally be assumed that the personal social media sites of public company employees would serve as channels through which the company discloses material nonpublic information.

In analyzing the applicability of Regulation FD to any communications, the SEC notes that while the Regulation FD adopting release highlighted concerns about “selective” disclosure of information to favored analysts or investors, “the identification of the enumerated persons within Regulation FD is inclusive, and the prohibition does not turn on an intent or motive of favoritism.” The SEC also emphasizes that nothing in the Regulation FD would suggest that disclosure of material nonpublic information to a broader group that includes both enumerated and non-enumerated persons, but that still would not constitute a public disclosure, would somehow result in Regulation FD being inapplicable. Rather, the SEC states that “the rule makes clear that public disclosure of material nonpublic information must be made in a manner that conforms with Regulation FD whenever such information is disclosed to any group that includes one or more enumerated persons.” As a result, whenever a company makes a disclosure to an enumerated person, including to a broader group of recipients through a social media channel, the company must consider whether that disclosure implicates Regulation FD, including determining whether the disclosure includes material nonpublic information and whether the information was being disseminated in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” in the event that the issuer did not choose to file a Form 8-K.

Drawing on the reference to “push” technologies (such as email alerts, RSS feeds and interactive communication tools, such as blogs) in the 2008 Guidance, the SEC acknowledged that social media channels are an extension of these concepts, and therefore the guidance should apply equally in the context of social media channels. Given the “direct and immediate communication” possible through social media channels, such as Facebook and Twitter, the SEC expects companies to examine whether such channels are recognized channels of distribution. In particular, the SEC emphasized the need to take steps to alert the market about which forms of communication a company intends to use for the dissemination of material nonpublic information. The SEC notes that without this sort of notice, the investing public would have to keep pace with a “changing and expanding universe of potential disclosure channels.” The ways in which such notice could be provided would include: (1) references in periodic reports and press releases on the corporate website and disclosures that the company routinely posts important information on that website and (2) disclosures on corporate websites identifying the specific social media channels a company intends to use for the dissemination of material nonpublic information (thereby giving people the opportunity to subscribe to, join, register for, or review that particular channel).

In light of the SEC’s guidance, companies should consider whether to specifically address the use of social media in Regulation FD policies, including whether prohibitions, restrictions or editorial oversight should be implemented to govern the use of social media by those persons authorized to speak for the company. This will remain an evolving area that must be continually monitored, as the methods for interacting with shareholders, analysts and others continue to evolve. As with the 2008 Guidance, companies may not be in a position to implement the 21(a) Report’s guidance in such a way that they could do away with more traditional forms of public dissemination, but the guidance may provide more comfort for companies using social media to supplement other more traditional forms of communication. Companies should carefully evaluate what social media channels may be useful for communicating information, and begin providing notice that information about the company may be found on those social media channels, while using those channels as a regular source of information. At the same time, companies should advise individual officers, directors and employees that posting information about the company on social media channels could potentially implicate Regulation FD, and therefore such persons must exercise caution when communicating through social media.

On August 18, 2011, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued Regulatory Notice 11-39 providing guidance to broker-dealer members on social networking websites and business communications.  The notice represents FINRA’s first update to its guidance on social media since the release of Regulatory Notice 10-06 in January 2010. Regulatory Notice 11-39 merely clarifies existing guidance; accordingly, it is not likely to result in major changes to current social media policies of member firms.

Background.  To understand the guidance, it is important first to understand the difference between static and interactive electronic communications.  In 2003, NASD Rule 2210 (on communications) was amended to include participation in an interactive electronic forum in the definition of “public appearance.”  Since then, FINRA rules do not require prior approval of postings by member firms or their associated persons on interactive electronic forums.  In contrast, static communications or postings are regulated as “advertisements” under FINRA rules and, accordingly, are required to be reviewed by a registered principal.  Member firms and their associated persons must distinguish between static and interactive electronic communications.

Recordkeeping.  Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934 and NASD Rule 3110 have long required that a broker-dealer retain electronic communications made by the firm and associated persons that relate to the firm’s business (i.e., business communications).  The posting of content on a website by a member firm or its associated persons is a communication under the FINRA rules and, accordingly, is subject to applicable FINRA recordkeeping rules.  According to FINRA, the determination of whether an electronic communication is related to a firm’s business and subject to recordkeeping, is a facts and circumstances assessment.  Neither the type of device or technology used to transmit the communication nor the ownership of the device is relevant. Finally, with respect to recordkeeping rules, the requirements are the same for both static and interactive electronic communications.

Analyzing a communication is therefore inherently subjective.  FINRA notes that autobiographical information, such as location of employment and job responsibilities, might not be a business communication when included in a resume sent to a potential employer.  However, listing products and services provided by a firm would constitute a business communication.  Compliance departments must develop policies and procedures to help guide their personnel through the subjective nature of these determinations rather than leaving it to the discretion of individual associated persons or deciding on a case-by-case basis.

FINRA cautions member firms that neither they nor their associated persons may sponsor media sites or use communication devices that automatically erase or delete content.  The automatic deletion of content precludes compliance with the recordkeeping requirements.  FINRA also cautions that, although third-party posts are generally not attributed to a firm or an associated person, the recordkeeping rules require retention of communications received by a firm or an associated person relating to its business and, thus, third-party posts may be subject to recordkeeping obligations.  Firms need to make sure that their associated persons that maintain social media sites do not use the sites for business purposes, and that such associated persons have adequate training and education regarding third-party posts, FINRA rules and firm policies. If the particular social media sites have the relevant compatibility, firms should consider requiring that associated persons include static legends on their media sites warning readers that neither the applicable member firm nor the associated person is responsible for third-party content.

Supervision.  NASD Rule 3010 provides that member firms must establish and maintain a system to supervise the activities of each registered representative, registered principal and other associated person, and that the system must be reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules.  If an associated person wants to use a social media site for business purposes, FINRA rules require that a registered principal should review the site prior to its use, to the extent that the content is static.  A site should only be approved for use for business purposes if the registered principal has determined that the associated person can and will comply with all applicable FINRA communication rules, federal securities laws and individual firm policies.

FINRA notes that a registered principal must review an associated person’s proposed social media site in the form in which it will be launched and notes that some firms require review by a registered principal of the associated person’s initial posting on an interactive forum within the site.  Postings on an interactive forum generally do not require prior approval under FINRA rules but, according to FINRA, review of the initial post allows the registered principal to review the site in its final design.  Member firms should continue to supervise the site, from time to time, for compliance with applicable rules and federal securities laws after launch.

FINRA explained that interactive content may become static through different acts and that such a change in format would change the treatment of such communications under the rules (for example by taking a “comment” on a Facebook post and copying it as a static Facebook “status update”).  FINRA also cautioned firms that, as with any other advertisement under FINRA rules, a registered principal must review material changes to previously approved static posts.  Associated persons will need to monitor their sites and registered principals must supervise appropriately to ensure continued compliance.

FINRA also cautions that a firm must follow up on “red flags” that indicate noncompliance by its associated persons.  FINRA explained that some firms require that associated persons certify annually, or more frequently, that they are in compliance with supervision rules.  It also explained that some firms perform random spot checks of websites to monitor firm policy compliance.

Third-Party Links, Third-Party Posts, and Websites.  FINRA explains that a firm may not establish links to third-party sites that the firm knows, or has reason to know, contain false or misleading content, and should not do so when there are red flags to that effect.  Further, FINRA advises that under applicable communication rules, a firm may become responsible for content on third-party sites if the firm has adopted or becomes entangled with the content on the third-party sites.  A firm may be deemed to be entangled with a third-party site if, for example, the firm participates in the development of content on the third-party site.  Also, a firm may be deemed to adopt third-party content if it indicates on its site that it endorses the content on the third-party site.  Many social media sites allow third parties to “recommend” a person and allow users to request recommendations.  Member firms should consider prohibiting associated persons from soliciting recommendations.  Otherwise, the firm may be deemed to have “adopted” the third-party recommendation.

Firms should consider making sure that links to third-party sites are only accessible through a new window, and that a legend appears on the screen warning the reader that he or she is leaving the firm site and disclaiming any responsibility for third-party content.  It is unlikely that such legends will shield a member firm from sanction by FINRA, if applicable, but posting such legends may be effective for limiting liability relating to customer claims.  Firms should make sure that their policies relating to social media sites address links to third-party sites.

In addition to adoption and entanglement, if a member firm cobrands a third-party site, it will effectively adopt the content of the entire site.  A member firm may co-brand a site by, among other things, placing the firm’s logo prominently on the site.

FINRA explains that an associated person may respond to business-related posts by a third-party on the associated person’s personal social media site as long as the associated person’s firm does not have a policy prohibiting the use of personal social media sites for business purposes.  This principle applies to all business-related, but not personal, posts.  For example, the associated person may respond to questions regarding securities through his or her site unless prohibited by the applicable member firm.  FINRA notes that some firms allow their associated persons to post a non-substantive response to a third-party post and allow pre-approved statements that associated persons may use as a response that direct the third-party to a firm-approved communications medium, such as the firm’s e-mail system.

FINRA also provides some comfort for firms that have a policy of deleting inappropriate third-party content.  A firm that has a policy of routinely blocking or deleting certain types of content will not be deemed to have adopted similar content that was neither blocked nor deleted.

Data Feeds.  FINRA cautions that firms must manage data feeds inputted into their websites.  As data feeds may contain inaccurate data, firms must be familiar with the proficiency of the vendor providing the data and its ability to provide accurate data.  Managing data feeds involves understanding the criteria used by vendors in collecting or calculating the data, regularly reviewing the data for red flags and promptly taking necessary measures to correct any inaccurate data.

Accessing through Personal Devices.  FINRA explains that firms may permit their associated persons to use personal devices to access firm business applications and to perform firm business activity.  However, FINRA cautions that a firm must be able to retain, retrieve and supervise business communications regardless of the ownership of the device.  According to FINRA, it is a good idea for a firm to require that, if possible, separate applications on a device be used for business communications to facilitate retrieval of the business communications without retrieving personal communications.  FINRA also notes that an application that provides a secure portal into a firm’s communications system is preferable, especially if confidential customer information is shared.  If a firm has the ability to separate business and personal communications on a device, and has adequate policies and procedures regarding usage, the firm will not be required to (but may voluntarily) supervise personal communications on the device.

Conclusion.  Regulatory Notice 11-39 reaffirms FINRA’s general expectations of member firms with respect to business communications.  FINRA stressed repeatedly that member firms must have policies and procedures in place that cover the firms’ compliance efforts with the communication rules, and that the policies and procedures must include training and education.  Of course, the firms’ training and education must include training on the firms’ policies relating to social media and the need to continuously monitor such sites.  Firms should also consider continuous refresher courses for their associated persons to make sure they remain vigilant of the need to consider how continuously changing technologies may be treated under the rules.