The Securities and Exchange Commission (SEC) is responsible for making sure that publicly traded companies adhere to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This means, among other things, that companies can’t engage in what is known as “insider trading.” Insider trading is problematic because it can originate from information being provided to investors in a way that gives them an unfair advantage that leads to the artificial inflation or deflation of a particular stock.
In the age of social media, the definition of what constitutes this type of unfair information has become increasingly broad thanks to the popularity of social media such as Twitter and Facebook. Many publicly traded companies will release information about the performance of a particular stock or product on its Twitter feed before doing so officially on its website. Frequently, the social media feeds are managed by underpaid, under-qualified individuals who are not fully versed in the legal particulars of the Dodd-Frank act, thus exposing large companies to potentially ruinous lawsuits with only 140 characters or less.
While Tweeting a stock update doesn’t necessarily constitute a breach of the Dodd-Frank act, the SEC does have a few regulations for public companies that have social media feeds. There are three primary rules or areas that companies need to observe when posting. The first has to do with links to third-party content, the second with the use of disclaimers, and the third with the synchronization of information. In most cases, these breaches occur because the investor relations department does not consider social media to be worth monitoring. Greater oversight by this department will result in less legally troublesome posting.
Blanket bans on releasing information doesn’t work, either. Companies must walk a fine line between offering banal social media postings and creating content that can stimulate and invigorate its shareholders without violating the provisions of the Dodd-Frank act. Social media is an inherently positive tool in terms of the information it offers; however, it must be wielded with skill and expertise.
All of these provisions and behavior guidelines are merely the legal definition of what constitutes insider trading or breach of information protocol on the internet. While the SEC has these policies in place, the logistical reality of monitoring every single social media feed of all major publicly traded companies would require a significant number of employees who dedicate their day to nothing but scrolling through updates. This department currently does not exist within the SEC. Companies are “caught” when a particular posted item leads to obvious insider trading. For now, social media feeds are still largely an unregulated domain.
In many ways, the SEC and the public at large are living through a period of transition in terms of what behavior is allowable on the web. In a few years, the kind of mistakes that publicly traded companies frequently make on their social media feeds will receive far greater penalties because the “learning curve” for large companies will have expired. As the SEC gradually steps up its policing of social media, these mistakes will become fewer and far between. Of course, much like the police, the SEC can’t be held responsible for the reckless behavior of a given company, especially when that company is aware of what constitutes illegal behavior, until that behavior infringes on others. The SEC should increase the amount of time it spends educating companies on what constitutes infractions in addition to highlighting instances of problematic postings or links, but it can’t necessarily be expected to watch over companies day and night for any signs of problematic behavior.
However, regardless of the role of the SEC, there is no doubt that the postings and information posted on social media by large companies now will probably have much greater legal repercussions in the future. Large companies such as Walmart may face greater scrutiny and legal challenges based on casual postings made by low-ranking or uninformed employees. In the age of information, it is far too easy to reveal too much.