Corporate Disclosure: The Twitter Effect

However, just as new rules have been promulgated regarding formal corporate disclosures, there has been a concurrent rise in the use of social networking tools ' such as Twitter, Facebook, LinkedIn, personal and corporate blogs and other sites and technologies ' for the sharing of informal corporate and personal information, ranging from advertising campaigns to question-and-answer sessions with investors and “inside looks” at company events. When these communication methodologies form a part of a company's general corporate communications, marketing or investor-relations practices, or are potentially perceived by the public and investors as a formal part of a company's practices, even when initiated by individual employees and executives, questions are raised as to whether information is being disclosed in violation of Regulation FD.

A recent case reported in The Wall Street Journal highlights the seriousness of this concern. An article published on April 27, 2009, noted that 81 Fortune 500 companies sponsor public blogs, 23 of which link to corporate Twitter accounts. The authors singled out one corporate blogger who, during an earnings call, had sent out dozens of what appeared to be unmonitored tweets. The tweets were supposedly direct transcripts of executive statements made during that particular call; however, the messages were not accompanied by any standard securities disclaimers.

Since then, and in subsequent calls, the blogger in question has also issued cautionary language concerning forward-looking statements or non-GAAP financial measures. Nonetheless, given the 140-character limit of a Twitter message, and the fact that it takes approximately a half-dozen tweets (which include hyperlinks to additional cautionary information) in order to issue these disclaimers, it remains unclear as to whether such bite- (or “byte-”) sized pieces of information convey appropriate admonitions under SEC safe harbors.

Given the opportunities for corporate misinterpretation of regulatory rules and exchange-based guidelines, and possible investor misinterpretation of informal communications, companies using social networking tools and Web sites to deliver complex financial information must have a clear understanding of the underlying philosophies of, and standards imposed by, the Web site guidance.

SEC Filings

The SEC's Web site guidance was one of a series of recommendations made by an SEC Advisory Committee on Improvements to Financial Reporting (see, www.sec.gov/about/offices/oca/acifr.shtml). Formed in July 2007, the Advisory Committee's mandate was to suggest methods of improving the reporting of financial information by public companies, including in SEC filings and other communications. In its final report issued in August 2008, it offered a number of recommendations regarding improvements in the delivery of financial information, including the use of interactive data formats in SEC filings and Web site postings, the need for updated best practices from industry groups (such as the National Investor Relations Institute (www.niri.org)), the use of executive summaries to highlight key disclosures in reports, increased disclosure of key performance indicators (extending financial reporting to include more general business reporting) and the need for the SEC to issue clarifications on the greater use of corporate Web sites (see, www.sec.gov/about/offices/oca/acifr/acifr-finalre port.pdf.).

The recommendations in the report led to the development of rules requiring public companies to deliver to the SEC an additional version of their financial information using eXtensible Business Reporting Language (“XBRL”) and to post the same XBRL data on their corporate Web sites. These rules are being phased in over a three-year period, beginning with approximately 500 of the country's largest companies and for fiscal periods ending after June 14, 2009.

The open-standards features of XBRL allow for the development of applications and software that give investors new ways to analyze company financial information. The raw data can only be read using “viewers” that convert the information into readable formats, many of which are similar to existing Web browsers that enable the viewing of HTML files.

All public companies subject to SEC proxy requirements must also comply with its e-proxy delivery rules, which dictate that all proxy materials (including proxy statements, proxy cards, annual shareholder reports and other soliciting materials) must be posted on an Internet Web site (other than the SEC's Web site), on pages free of cookies or other visitor-tracking technology that may compromise a shareholder's anonymity.

The SEC also launched the 21st Century Disclosure Initiative in 2008 (www.sec.gov/disclosureinitiative), aimed at outlining a disclosure system that takes advantage of updated technology, new ways in which shareholders obtain information, and developments in the methodologies used by companies to compile and report information as required by the SEC.

Perhaps the most important recommendation was the need for clear guidance on the use of Web sites and other online communications tools relative to SEC rules forbidding the selective disclosure of material, nonpublic financial information. Previous guidance on Web sites and electronic media was last issued by the SEC in 2000. Since then, the Internet and its uses have changed dramatically. While the SEC sought to encourage the use of Web sites as a means of communicating important information to investors, the new Web site guidance addresses a number of more recent, pressing issues.

Web Site Guidance

The Web site guidance is divided into four parts. The first part concerns compliance with public disclosure requirements under Regulation FD and clarifies how and when information posted on corporate Web sites is considered “public.” Information is considered public if all of the following are in place:

• The company's Web site is a “recognized channel of distribution”;
• Posting information on the Web site “makes it available to the securities marketplace in general”; and
• The information is available online for a sufficient period of time so that it can be absorbed by the market.

The Web site guidance provides information as to how companies can determine whether each of the above-listed conditions can be satisfied. It also provides for the disclosure of information via the company Web site rather than through the filing of Form 8-K with the SEC. In so doing, companies must ensure that such disclosure is allowable under Regulation FD's alternative method of public disclosure, in that it is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”

The second part of the Web site guidance sheds light on the liability framework for information presented on a corporate Web site. In general, the guidance reaffirms that, under existing federal securities laws, companies are liable for statements made online in the same manner that they are liable for statements made by or on behalf of a company, unless appropriate precautions have been taken.

The guidance specifies the following standards for use in limiting potential liability under the antifraud provisions of federal securities laws:

• Previously posted, historical or archived information is not deemed to have been republished or reissued if the information remains available to the public. Likewise, the information is not considered to have been updated unless the company affirmatively restates or reissues such historical or archived information and there is no duty to update such information.
• Hyperlinks to third-party information does not make a company liable under the antifraud provisions, unless the company knowingly links to (or should know that it is linking to) third-party information that is materially false or misleading. When making such links available on the corporate Web site, companies should provide explicit explanations of its use of third-party information, and use appropriate “exit screen notices” or “intermediate screens” to ensure that visitors are aware that the information is from a source other than the company.
• Regarding summary information, companies should take steps to ensure that visitors understand the summary nature of such information and the context of the information.
• Regarding interactive Web site features, companies that use corporation-sponsored blogs or other media for communicating with various stakeholders should implement appropriate controls and procedures to ensure the accuracy of statements made by or on behalf of the company. This requirement does not apply to statements made by third parties through similar media, and companies are not obligated to respond to or correct such statements.

The third part of the Web site guidance notes that required disclosure controls and procedures that apply to the company's SEC filings are not generally applicable to disclosures made on corporate Web sites, except when such disclosures are allowed to be made on the Web site in lieu of an SEC-filed document, such as a waiver from the code of ethics. Nonetheless, the SEC advises companies to adopt appropriate procedures for online corporate disclosures, since they remain subject to the antifraud provisions of the federal securities laws.

Finally, the fourth part of the Web site guidance clarifies acceptable methods of formatting and presenting material information and disclosures on a corporate Web site. In particular, the information need not be “printer-friendly” unless such a presentation is specifically required by the SEC (as in, for example, the SEC's e-proxy rules).

While the SEC's Web site guidance has been criticized for not being particularly groundbreaking, the facts are that relatively few public companies ' larger companies, in particular ' have begun using their Web sites to deliver information that is substantially material. While a number of companies appear to be preparing for such a day (in some cases, noting in current SEC filings that their Web sites contain “significant” amounts of information, including financial information), most tend to use blogs, social networking sites and other media as a means of disseminating primarily non-material information.

Although the clarifications regarding formal, material corporate disclosures are welcome, this does not mean that companies can adopt a laissez faire attitude toward informal corporate disclosures or communications. Public companies should take active steps toward identifying, classifying and handling all forms of communication with stakeholders, including investors, in order to avoid running afoul of federal securities laws through apparently innocuous Twitter messages, Facebook updates, blog postings and other media.

Further Recommendations

In addition to the detailed guidance noted above, specific recommendations include the following:

• Review, update and circulate the company's Regulation FD and corporate communications policies, with particular focus on limiting the number of individuals authorized to speak on behalf of the company, ensuring that authorized spokespersons are fully aware of information that is and is not yet public (and when they may communicate this information), keeping complete records of public disclosures, and using safe harbor cautionary statements when making or affirming forward-looking statements (particularly on Web site pages and disclaimers).
• Date all documents, including those published online, and move outdated or older materials to an archive section of the Web site that contains clear disclaimers of any duty to update historical information.
• Provide advance notices and descriptions of upcoming postings, in order to avoid potential confusion with unauthorized or third-party communications and to set a standard regarding formal, material disclosures. Be sure to publish current press releases prominently on the investor-relations page in order to minimize the number of “clicks” required to access such documents.
• When establishing its Web site as a “recognized channel of distribution,” a company should establish clear waiting periods between online posting of information and when such information can be repeated in private (to ensure that the information has been sufficiently absorbed by the market), consider using “push” technologies to ensure that information is circulated throughout the market, and avoid over-reliance on, or overuse of, summaries or the dissemination of incomplete information. With regard to potential publication of financial statements in XBRL format, consider how the company will maintain maximum control over its strategic messages, the use of internal or third-party XBRL viewers and other tools, and the use of data tag extensions that may increase comprehension of nonstandard line items in statements of financial results and conditions.

Conclusion

Social networking and other communications media are opening up new worlds of opportunity in the exchange of information and ideas. However, businesses should also remain vigilant to potential violations of federal securities laws and antifraud statutes that may arise in the course of such interactions. In gaining a better understanding of the SEC's recently issued Web site guidance, and through the implementation of appropriate compliance policies and standards, companies can communicate more effectively with investors and other stakeholders, while minimizing the risks associated with both formal and informal disclosures of sensitive corporate information.

In May, the New York Stock Exchange implemented new rules allowing for the use of corporate Web sites as a primary vehicle for disseminating material company information. Coming several years after the Nasdaq Stock Market made a similar change, the NYSE's amended Immediate Release Policy no longer requires ' but continues to encourage ' NYSE-listed companies to use press releases as the primary means of distributing material information (see, www.sec.gov/rules/sro/nyse/2009/34-59823.pdf). With certain restrictions and conditions, companies may instead disclose such information to investors via any Regulation FD-compliant method, which may include the use of corporate Web sites and other advanced communications technologies (see, www.sec.gov/rules/final/33-7881.htm).

The move has been widely seen as needed and as an inevitable nod to the emergence of the Internet as one of today's main communications tools for both businesses and individuals. The new rules also follow on the heels of guidance issued by the Securities and Exchange Commission (“SEC”) in 2008 (see, www.sec.gov/rules/interp/2008/34-58288.pdf) on how company Web sites can serve as a primary means of public communication without violating the SEC's general antifraud rule, Rule 10b-5 (see, www.law.uc.edu/CCL/34ActRls/rule10b-5.html), or Regulation FD. (See, “Commission Guidance on the Use of Company Web Sites,” Aug. 1, 2008, available online at www.sec.gov/rules/interp/2008/34-58288.pdf.) Rather than changing SEC regulations, the Web site guidance is considered to be an updated interpretation of existing law as it applies to the risks and opportunities inherent in these emerging technologies.

Social Networking

However, just as new rules have been promulgated regarding formal corporate disclosures, there has been a concurrent rise in the use of social networking tools ' such as Twitter, Facebook, LinkedIn, personal and corporate blogs and other sites and technologies ' for the sharing of informal corporate and personal information, ranging from advertising campaigns to question-and-answer sessions with investors and “inside looks” at company events. When these communication methodologies form a part of a company's general corporate communications, marketing or investor-relations practices, or are potentially perceived by the public and investors as a formal part of a company's practices, even when initiated by individual employees and executives, questions are raised as to whether information is being disclosed in violation of Regulation FD.

A recent case reported in The Wall Street Journal highlights the seriousness of this concern. An article published on April 27, 2009, noted that 81 Fortune 500 companies sponsor public blogs, 23 of which link to corporate Twitter accounts. The authors singled out one corporate blogger who, during an earnings call, had sent out dozens of what appeared to be unmonitored tweets. The tweets were supposedly direct transcripts of executive statements made during that particular call; however, the messages were not accompanied by any standard securities disclaimers.

Since then, and in subsequent calls, the blogger in question has also issued cautionary language concerning forward-looking statements or non-GAAP financial measures. Nonetheless, given the 140-character limit of a Twitter message, and the fact that it takes approximately a half-dozen tweets (which include hyperlinks to additional cautionary information) in order to issue these disclaimers, it remains unclear as to whether such bite- (or “byte-”) sized pieces of information convey appropriate admonitions under SEC safe harbors.

Given the opportunities for corporate misinterpretation of regulatory rules and exchange-based guidelines, and possible investor misinterpretation of informal communications, companies using social networking tools and Web sites to deliver complex financial information must have a clear understanding of the underlying philosophies of, and standards imposed by, the Web site guidance.

SEC Filings

The SEC's Web site guidance was one of a series of recommendations made by an SEC Advisory Committee on Improvements to Financial Reporting (see, www.sec.gov/about/offices/oca/acifr.shtml). Formed in July 2007, the Advisory Committee's mandate was to suggest methods of improving the reporting of financial information by public companies, including in SEC filings and other communications. In its final report issued in August 2008, it offered a number of recommendations regarding improvements in the delivery of financial information, including the use of interactive data formats in SEC filings and Web site postings, the need for updated best practices from industry groups (such as the National Investor Relations Institute (www.niri.org)), the use of executive summaries to highlight key disclosures in reports, increased disclosure of key performance indicators (extending financial reporting to include more general business reporting) and the need for the SEC to issue clarifications on the greater use of corporate Web sites (see, www.sec.gov/about/offices/oca/acifr/acifr-finalre port.pdf.).

The recommendations in the report led to the development of rules requiring public companies to deliver to the SEC an additional version of their financial information using eXtensible Business Reporting Language (“XBRL”) and to post the same XBRL data on their corporate Web sites. These rules are being phased in over a three-year period, beginning with approximately 500 of the country's largest companies and for fiscal periods ending after June 14, 2009.

The open-standards features of XBRL allow for the development of applications and software that give investors new ways to analyze company financial information. The raw data can only be read using “viewers” that convert the information into readable formats, many of which are similar to existing Web browsers that enable the viewing of HTML files.

All public companies subject to SEC proxy requirements must also comply with its e-proxy delivery rules, which dictate that all proxy materials (including proxy statements, proxy cards, annual shareholder reports and other soliciting materials) must be posted on an Internet Web site (other than the SEC's Web site), on pages free of cookies or other visitor-tracking technology that may compromise a shareholder's anonymity.

The SEC also launched the 21st Century Disclosure Initiative in 2008 (www.sec.gov/disclosureinitiative), aimed at outlining a disclosure system that takes advantage of updated technology, new ways in which shareholders obtain information, and developments in the methodologies used by companies to compile and report information as required by the SEC.

Perhaps the most important recommendation was the need for clear guidance on the use of Web sites and other online communications tools relative to SEC rules forbidding the selective disclosure of material, nonpublic financial information. Previous guidance on Web sites and electronic media was last issued by the SEC in 2000. Since then, the Internet and its uses have changed dramatically. While the SEC sought to encourage the use of Web sites as a means of communicating important information to investors, the new Web site guidance addresses a number of more recent, pressing issues.

Web Site Guidance

The Web site guidance is divided into four parts. The first part concerns compliance with public disclosure requirements under Regulation FD and clarifies how and when information posted on corporate Web sites is considered “public.” Information is considered public if all of the following are in place:

• The company's Web site is a “recognized channel of distribution”;
• Posting information on the Web site “makes it available to the securities marketplace in general”; and
• The information is available online for a sufficient period of time so that it can be absorbed by the market.

The Web site guidance provides information as to how companies can determine whether each of the above-listed conditions can be satisfied. It also provides for the disclosure of information via the company Web site rather than through the filing of Form 8-K with the SEC. In so doing, companies must ensure that such disclosure is allowable under Regulation FD's alternative method of public disclosure, in that it is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”

The second part of the Web site guidance sheds light on the liability framework for information presented on a corporate Web site. In general, the guidance reaffirms that, under existing federal securities laws, companies are liable for statements made online in the same manner that they are liable for statements made by or on behalf of a company, unless appropriate precautions have been taken.

The guidance specifies the following standards for use in limiting potential liability under the antifraud provisions of federal securities laws:

• Previously posted, historical or archived information is not deemed to have been republished or reissued if the information remains available to the public. Likewise, the information is not considered to have been updated unless the company affirmatively restates or reissues such historical or archived information and there is no duty to update such information.
• Hyperlinks to third-party information does not make a company liable under the antifraud provisions, unless the company knowingly links to (or should know that it is linking to) third-party information that is materially false or misleading. When making such links available on the corporate Web site, companies should provide explicit explanations of its use of third-party information, and use appropriate “exit screen notices” or “intermediate screens” to ensure that visitors are aware that the information is from a source other than the company.
• Regarding summary information, companies should take steps to ensure that visitors understand the summary nature of such information and the context of the information.
• Regarding interactive Web site features, companies that use corporation-sponsored blogs or other media for communicating with various stakeholders should implement appropriate controls and procedures to ensure the accuracy of statements made by or on behalf of the company. This requirement does not apply to statements made by third parties through similar media, and companies are not obligated to respond to or correct such statements.

The third part of the Web site guidance notes that required disclosure controls and procedures that apply to the company's SEC filings are not generally applicable to disclosures made on corporate Web sites, except when such disclosures are allowed to be made on the Web site in lieu of an SEC-filed document, such as a waiver from the code of ethics. Nonetheless, the SEC advises companies to adopt appropriate procedures for online corporate disclosures, since they remain subject to the antifraud provisions of the federal securities laws.

Finally, the fourth part of the Web site guidance clarifies acceptable methods of formatting and presenting material information and disclosures on a corporate Web site. In particular, the information need not be “printer-friendly” unless such a presentation is specifically required by the SEC (as in, for example, the SEC's e-proxy rules).

While the SEC's Web site guidance has been criticized for not being particularly groundbreaking, the facts are that relatively few public companies ' larger companies, in particular ' have begun using their Web sites to deliver information that is substantially material. While a number of companies appear to be preparing for such a day (in some cases, noting in current SEC filings that their Web sites contain “significant” amounts of information, including financial information), most tend to use blogs, social networking sites and other media as a means of disseminating primarily non-material information.

Although the clarifications regarding formal, material corporate disclosures are welcome, this does not mean that companies can adopt a laissez faire attitude toward informal corporate disclosures or communications. Public companies should take active steps toward identifying, classifying and handling all forms of communication with stakeholders, including investors, in order to avoid running afoul of federal securities laws through apparently innocuous Twitter messages, Facebook updates, blog postings and other media.

Further Recommendations

In addition to the detailed guidance noted above, specific recommendations include the following:

• Review, update and circulate the company's Regulation FD and corporate communications policies, with particular focus on limiting the number of individuals authorized to speak on behalf of the company, ensuring that authorized spokespersons are fully aware of information that is and is not yet public (and when they may communicate this information), keeping complete records of public disclosures, and using safe harbor cautionary statements when making or affirming forward-looking statements (particularly on Web site pages and disclaimers).
• Date all documents, including those published online, and move outdated or older materials to an archive section of the Web site that contains clear disclaimers of any duty to update historical information.
• Provide advance notices and descriptions of upcoming postings, in order to avoid potential confusion with unauthorized or third-party communications and to set a standard regarding formal, material disclosures. Be sure to publish current press releases prominently on the investor-relations page in order to minimize the number of “clicks” required to access such documents.
• When establishing its Web site as a “recognized channel of distribution,” a company should establish clear waiting periods between online posting of information and when such information can be repeated in private (to ensure that the information has been sufficiently absorbed by the market), consider using “push” technologies to ensure that information is circulated throughout the market, and avoid over-reliance on, or overuse of, summaries or the dissemination of incomplete information. With regard to potential publication of financial statements in XBRL format, consider how the company will maintain maximum control over its strategic messages, the use of internal or third-party XBRL viewers and other tools, and the use of data tag extensions that may increase comprehension of nonstandard line items in statements of financial results and conditions.

Conclusion

Social networking and other communications media are opening up new worlds of opportunity in the exchange of information and ideas. However, businesses should also remain vigilant to potential violations of federal securities laws and antifraud statutes that may arise in the course of such interactions. In gaining a better understanding of the SEC's recently issued Web site guidance, and through the implementation of appropriate compliance policies and standards, companies can communicate more effectively with investors and other stakeholders, while minimizing the risks associated with both formal and informal disclosures of sensitive corporate information.