What does the SEC do to cage “Tweeters”?

SEC Cages TwitterWhat does the SEC do to cage “Tweeters”?

Overview: What is the SEC?

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.

  • The endorsement of third-party content can technically constitute a breach of the Dodd-Frank act if the content provides outsider analysis of a stock performance. If the company “likes” this analysis on Facebook, for example, this action could be construed as an endorsement of that position and the likely results of a particular action taken on the stock. However, if a clear explanation is given as to why the link has been provided and why the company has chosen to feature that link, problems can frequently be avoided.
  • Disclaimers and warnings must also be deployed in a consistent manner on social media. Occasionally using a disclaimer on certain posts and then neglecting to use it on others can also get a company into legal hot water. Employees must be instructed in how to use disclaimers on particular posts so that the company has a clear policy that investors and lawyers will appreciate. Twitter is a particular challenges in this regard because of the limited number of characters. It is frequently difficult to squeeze in a disclaimer in this limited space, but it is the best way for companies to protect themselves against potential legal harm.
  • Synchronization poses its own unique set of problems, but is perhaps the easiest aspect of social media to manage. IR departments may consider authorizing the release of certain information, such as stock updates, and making sure that the information is released simultaneously through all communication outlets, including the official website. This requires a tighter leash on what is and what is not posted on social media feeds, but it is an adjustment that is well worth the investment of time. Releasing information through one channel and neglecting to release it through other channels can be interpreted as a method of providing information to a select audience, even if that information is released over a publicly accessible website such as Twitter.

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.

Is the SEC Protecting Consumers Against Insider Trading?

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.