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New social disclosures are designed to make issuers tattletalesIn other breaking news that many may have missed, Orbitz Worldwide, Inc. recently reported in its most recent 10-Q that a handful of employees of a Hilton-branded hotel were paid wages via direct deposit into bank accounts maintained with Bank Melli. The obvious question is why is Orbitz reporting on seemingly immaterial activities of a third party private hotel company in its public filings? The answer is because the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA) now requires it. 

The ITRA recently added new Iran-related disclosure requirements for public reporting companies under new Section 13(r) of the Securities Exchange Act of 1934, which became effective for SEC periodic reports due on or after February 6, 2013. Among other things, public companies are required to disclose in their periodic reports whether they knowingly engaged in (or any of their affiliates knowingly engaged in) certain “Iran-related activities, ” which generally include dealings involving: 

  • the Iranian government;
  • entities owned or controlled by the Iranian government;
  • persons designated on the OFAC Specially Designated Nationals (SDN) list as representatives of the Iranian government;
  • persons and entities identified on the SDN list as supporters of terrorism or proliferators of weapons of mass destruction;
  • financial institutions that facilitated a transaction for any person or on the SDN list whose property is blocked in connection with certain terrorist-related activities; or
  • Iranian oil resources. 

At first glance, many reporting companies may believe that the new requirements of Section 13(r) would be inapplicable to their business and operations. However, a significant number of public companies are taking a conservative approach with their Iran-related disclosures and are reporting almost anything that is potentially covered by the ITRA. The reason for this conservatism is likely due to two key aspects of the ITRA requirements. 

First, Section 13(r) requires reporting of activity of both the issuer and its affiliates. The term “affiliate” is
Continue Reading Are new Iran-related disclosure requirements turning public companies into tattletales?

Limited SEC guidance moving companies to slowly adopt social mediaPublic companies are beginning to cautiously adopt social media as a disclosure channel. This area has experienced substantial changes lately as the SEC moved from a posture of threatening action against Netflix’s CEO for a post he made on his personal Facebook page to adopting a more relaxed and expansive position. This was really just facing reality given the widespread and growing use and acceptance of social media as a communications mode, but I give the SEC credit for recognizing this and moving to a more reasonable and realistic position. 

As mentioned in my prior blog post, the SEC recently gave some preliminary guidance for the use of social media as a disclosure method. This guidance can be found in this SEC Press Release and in the SEC’s report on its investigation of the Facebook postings made by Netflix’s CEO. While the SEC’s actions didn’t pave the way for widespread disclosure by social media, it at least provided some guidance in this area and gave social media disclosure an initial level of validation and credibility. It was good to see this change in the SEC’s position after it initially took a rather harsh stance on the Netflix CEO’s Facebook post (see my prior blog post). It’s early in this process, but I wanted to see how companies of different sizes and from different industries were handling this process. The announcements of first quarter earnings and quarterly results for many companies seemed like a good opportunity to get a progress report. 

It appears that public companies are initially taking a cautious approach to using social media as a disclosure channel. The companies that I examined seemed to be testing the waters by either using or referring to social media as a disclosure method while still utilizing more traditional forms of disclosure. This is understandable and prudent. Companies are moving slowly here due to the lack of direct guidance and the significant potential downside if a mistake is made. As I mentioned in my prior blog post, Regulation FD still applies to disclosure even when social media is being used. Many companies hedged their bets by using social media while also using conventional disclosure methods as this significantly reduces the risk of a Regulation FD or other disclosure problem. 

Based on some examples that I saw, both new economy and old economy companies are
Continue Reading Social media as a disclosure channel – slow but steady

NetFlix Posting Causes SEC to Give GuidanceThe SEC tiptoed into the twenty-first century as the agency validated the use of social media sites in certain situations for disclosure of information by publicly traded companies. This social media disclosure is subject to some constraints, but it is a positive move for public companies, shareholders and potential investors who are social media users. 

The SEC demonstrated its resistance to the disclosure of information in a social media post at the end of 2012. As I discussed in a prior blog post, the SEC informed Netflix, Inc. and its CEO, Reed Hastings, that it might institute actions against them for violations of Regulation FD in connection with some information that Mr. Hastings had posted on his personal Facebook page. This Facebook post congratulated a Netflix marketing team for achieving a positive performance metric. The post was short and very specific, and it did not contain any other references or information. Netflix did not issue a press release and did not file a Form 8-K or any other disclosure document at that time regarding the information contained in this Facebook post. The company also did not post any information related to Mr. Hastings’ Facebook post on its website or on its corporate Facebook page. 

The SEC alleged that Mr. Hastings’ Facebook post may have violated Regulation FD, which generally requires a company to disclose material information to all investors at the same time, so that no investor is disadvantaged by learning about such information later. At the time of the post, Mr. Hastings had over 200,000 Facebook friends. His post was also picked up and published in blogs and news outlets. Mr. Hastings and Netflix expressed the view that the language contained in Mr. Hastings’ post was not selective disclosure because of the wide distribution of this information both through Mr. Hastings’ Facebook network and the republishing of this information by other social media and news outlets. They also took the position that the information disclosed was not material. Netflix eventually disclosed these events and the possible SEC actions in a Form 8-K filed on December 5, 2012, and Mr. Hastings commented on them on his personal Facebook page. 

The SEC then conducted an investigation of Mr. Hastings’ actions and their impact on Netflix and its investors. The results of this investigation were made public in Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934:  Netflix, Inc., and Reed Hastings, Release No. 69279 (April 2, 2013) and a related SEC press release. In a somewhat surprising move, the SEC
Continue Reading SEC relaxes restrictions on social media postings (but Regulation FD still applies)

Cybersecurity legislationSenator Jay Rockefeller (D., West Virginia), the most vocal proponent of cybersecurity legislation, has renewed his focus on cybersecurity legislation. He has sponsored previous cybersecurity-related legislation, but has been unable to implement any meaningful legislation in this area. His prior sponsorship of the proposed Cybersecurity Act of 2012 initially seemed to draw support in the Senate, but it encountered strong opposition from the United States Chamber of Commerce. The Chamber strongly criticized this proposed legislation and went so far as to state that the Chamber would include senators’ votes on this proposed legislation in its annual “How They Voted” survey. In any case, this proposed legislation was not passed in 2012. 

One of the strongest aspects of the Chamber’s resistance to this proposed legislation was the assertion that American companies would be strongly opposed to the legislation.  To confirm the positions of American companies on this issue, Senator Rockefeller sent a letter to the CEOs of all Fortune 500 companies on September 19, 2012. The Senator’s office has now received responses to this letter and the majority staff summarized them in a January 28, 2013 Memorandum. 

Approximately 300 companies responded to the Senator’s letter. The companies that responded were predominantly larger members of the Fortune 500. According to the Staff Memorandum, the overall responses of the companies were favorable to potential cybersecurity legislation (with some important caveats). 

Based on the Staff Memorandum, there appears to be general support from the responding companies for a voluntary cybersecurity compliance program. The companies’ main objections appear to be concern about the
Continue Reading Cybersecurity legislation continues to move forward

Regulation FD EnforcementThis is the third part of our Securities Law 101 series.  Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law.  We hope that this series will prevent some of the most common mistakes management teams make.  We will periodically publish posts examining different aspects of securities law. 

In the wake of the SEC recommending an enforcement action against Netflix, Inc. and its CEO for social media postings that potentially violate Regulation FD, public companies must increasingly ensure that they understand, and comply with, their obligations under Regulation FD.

So what is Regulation FD?  Adopted by the SEC in 2000, Regulation FD (a/k/a Regulation Fair Disclosure) prohibits companies from selectively disclosing material nonpublic information to analysts, institutional investors, and others. Citing instances of selective disclosure to certain institutional investors and/or securities analysts and the resulting profits or avoidance of loss that come at the expense of those without knowledge of the disclosure, the SEC intended to promote full and fair disclosure of information by issuers.  

Under Regulation FD, when an issuer, or person acting on its behalf, discloses material nonpublic information to certain people (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), the issuer must publicly disclose that information.  Importantly, where a disclosure is intentional, the issuer must simultaneously make public disclosure of the nonpublic material information. However, where the disclosure is non-intentional, the issuer must “promptly” make public disclosure.  The required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public such as press releases disseminated by a wire service. 

Regulation FD does not define what is considered “material,” but
Continue Reading Securities Law 101 (Part III): Watch your mouth! Regulation FD’s impact on (selective) disclosure

Campaign diclosure rules to create administrative nighmareAs first reported by Professors  Lucian Bebchuk and Robert J. Jackson, Jr. in their recent posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation, the SEC may take action to issue proposed rules on corporate political spending disclosures by public companies as early as the second quarter of this year. This is according to the most recently updated Current Unified Agenda and Regulatory Plan, where the SEC appears to have preliminarily scheduled a notice of proposed rulemaking on this subject for April. Realistically, the fact that these rules are scheduled on this regulatory agenda is probably not very significant and may have gotten there as a means to temporarily appease shareholder rights advocates that have recently been pressing for these disclosures. Additionally, considering that the current four-person commission is equally divided on the political front, it is not likely that anything significant will come out of the SEC in the near future until a replacement for Mary Schapiro is appointed and confirmed. 

If something does miraculously materialize, it would be an interesting move by the SEC considering that rules required to be adopted under the Dodd-Frank Act have yet to be fully implemented almost three years after the bill was signed into law in 2010. This fact was emphasized in Commissioner Gallagher’s recent comments to the U.S. Chamber Center for Capital Markets Competitiveness. In those comments, Commissioner Gallagher specifically noted that “the SEC, like other regulators, is now dealing with the problem of rushed, inadequate rule proposals that were pushed out in a bid to meet arbitrary congressional deadlines.”  With the backlog of Dodd-Frank and JOBS Act rules, why would the SEC even bat an eyelash at a rules proposal with no Congressional mandate? 

In any case, there’s no question that campaign contribution disclosure has been a hot topic, particularly in the wake
Continue Reading Proposed campaign contribution disclosure rules may be coming as early as April (but not likely)

The use of social media as a public company information channel encountered a roadblock on December 5, 2012 as Netflix, Inc. and its CEO, Reed Hastings, both received Wells notices from the SEC regarding a prior Facebook post that Mr. Hastings had made. A Wells notice is a notification from the SEC that it intends to recommend enforcement action against a company or individual. This notice also gives the affected parties an opportunity to explain why such an action is not appropriate. 

Mr. Hastings’ July 2012 Facebook post congratulated the company’s content licensing team for exceeding a milestone in monthly viewing hours. It also contained a positive prediction regarding future monthly viewing hours. Netflix did not issue a Form 8-K, a press release or any other disclosure at the time of this post. Mr. Hastings has made a habit of posting company information on his Facebook page. Here is the post that is the subject of the Wells notice:

 FD issue for Netflix

Netflix filed a Form 8-K regarding this matter on December 5, 2012. According to this 8-K, the Wells notices indicated that the SEC staff intended to recommend that the SEC institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and Mr. Hastings for violations of Regulation FD, Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 and 13a-15 under the 1934 Act. Mr. Hastings also provided a statement that was attached as an Exhibit to this Form 8-K. The statement clearly indicates his feeling that the SEC’s application of Regulation FD is incorrect here. 

Regulation FD prohibits selective disclosure of material information. This regulation was enacted to prevent public companies from selectively releasing material information to certain shareholders or other parties without broad distribution. For example, Regulation FD prevents a company from selectively providing information to certain friendly investment analysts or major shareholders before it is publicly. The policy behind this rule is that all investors should have equal access to material information. 

Regulation FD is conceptually a good rule, as it helps to level the playing field among investors and interested parties. The real problem in the social media context is that
Continue Reading Netflix CEO’s Facebook post leads to possible Regulation FD action by SEC – Time for some changes

Campaign contribution disclosure rulesPetition and comment letters urging the SEC to create rules requiring public companies to disclose their political contributions may finally be gaining some traction.  We previously blogged about this petition, which was submitted by a group of ten law professors in response to the Supreme Court’s opinion in the Citizens United v. Federal Election Commission case, asking the SEC to consider adopting rules that would require public companies to make disclosures about their political contributions. We also blogged about SEC Commissioner Luis Aguilar’s subsequent comments during a speech stating that the SEC should consider rules requiring this type of disclosure. Until recently, the SEC had not taken any action to consider issuing rules in this area. 

However, according to a Wall Street Journal report from November 8th, the SEC’s Division of Corporate Finance is now considering recommending that the agency’s commissioners propose rules mandating public companies to provide disclosure to shareholders regarding the uses of corporate resources for political purposes. Such rules, of course, would not be inconsistent with the recent trend toward mandating social disclosures in public company filings, like the conflict mineral rules which were recently adopted in August of this year. Although many have argued that these types of social disclosure rules
Continue Reading Are political contribution disclosure rules for public companies coming in the near future?

How public companies should handle social mediaSocial media use has experienced a meteoric rise. According to Tweetsmarter (a social media blog), the top five social media sites (Facebook, Twitter, LinkedIn, Google+ and Pinterest) have 1.8 billion users. Many companies have also embraced social media use as a cheap and efficient channel for the dissemination of information. Good examples here include Best Buy’s Facebook page and Whole Foods’ Twitter account.

While social media is a very powerful force in marketing and branding, public companies face significant potential problems from its use.  A public company’s posting of information on a social media site is equivalent to any other written information that is disclosed by other means. If material nonpublic information is disclosed via a social media channel, the company will face the same securities law issues that it would face from any other disclosure made through other means. Accordingly, public companies must consider the possible impacts of social media use and take steps to control and mitigate the potential negative effects of social media use.

While there is no perfect solution to the potential problems that social media use creates for public companies, I have assembled the following list of guidelines and best practices for public companies in the social media area:Continue Reading Careful with that tweet! Social media considerations for public companies