U.S. Securities and Exchange Commission Building U.S. Securities and Exchange Commission Building
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A message to corporate executives and their public-relations minders: One in a trillion may no longer be a reasonable guarantee of anonymity.

The Securities and Exchange Commission (SEC) is confronting the difficult challenge of how to keep an eye on and sort through a fire hose of social media posts, which easily number more than a trillion every year—and only accelerating. Just weeks after Tesla founder Elon Musk tweeted in August that he had secured funding for a private buyout of the electric car maker, the commission said it was actively looking for an off-the-shelf tool to track posts.

The desired tool would provide “emailed alerts to SEC staff based on keyword searches for relevant topics with the ability to monitor social media sites, including but not limited to Facebook, Twitter, Instagram, YouTube, Google+, and LinkedIn,” according to the notice of solicitation. It would also check message boards and news sites.

Finding a solution appears to be a matter of urgency for the commission. Within a month, it awarded the contract to Talkwalker, a Luxembourg-based company that provides social-media monitoring solutions. Talkwalker's products, according to its website, can “monitor potential issues with instant and predictive alerting and unique AI-Powered Sentiment.” Except in this case, the regulator, rather than the regulated, will be the one monitoring potential issues.

SEC staff would train the tool on the online utterances of corporate executives to make sure they are complying with the array of statutes, rules, and guidance governing how and when public companies may release market-moving information. The Form 8-K and the SEC's EDGAR filing system have clearly reached their limits amidst the countless new avenues through which corporate messaging reaches investors.

Musk in October settled charges brought by the SEC that his assurance on funding for the going-private transaction was fraudulent. That was not the first time a social-media post stirred the SEC to action: Back in 2012 Netflix CEO Reed Hastings posted on his personal Facebook page that Netflix had surpassed one billion hours of content streaming in a single month. Earlier that year, the company had announced the same metric—at a substantially lower volume—in a letter to shareholders filed as an exhibit to an 8-K.

In both cases, Wall Street considered the information released to be material, with both Tesla's and Netflix's shares increasing markedly as the news hit the markets. Though the SEC ultimately passed on taking official action against Hastings—his statement on Facebook was truthful and broadly disseminated—it released an investigative report into Hastings' post to provide guidelines for other companies and executives who might consider using social media to make potentially market-moving company announcements. The Hastings report represented the SEC's official application of Regulation Fair Disclosure (Reg. FD) to the world of social media.

With the bid solicitation process complete, public company executives should assume that it is only a matter of time before the SEC is actively wielding a powerful tool that will be reviewing the content and dissemination of tweets and other social media posts, while assessing their overall compliance with Reg. FD, the Hastings Report, and the implications of the Musk settlement.

Musk's tweet gave the SEC a set of facts that paved the way for it to make a definitive statement on what executives should not do on social media. With the new web-crawling tool on the horizon, executives must assume that, in the not too distant future, the SEC will actively search for and review all of their posts. This developing capacity raises the precarious question of how to implement policies and procedures that place restraints on people who are often not used to them; forcing CEOs and other corporate executives to submit to proper vetting by trained and empowered personnel is no easy task. That is especially true for social media, the power of which often derives from an immediacy and perceived intimacy that no Form 8-K can replicate.

But the consequences of the failure to develop these procedures are real: While Musk's fast fingers cost him $20 million, the penalty for the next wayward tweet could be higher.

 

Before joining Buckley Sandler LLP as a partner, where he represents clients in securities and whistleblower matters, Thomas A. Sporkin spent 20 years with the SEC's Enforcement Division, most recently as Chief of the Office of Market Intelligence. Ian Acker is an associate at Buckley Sandler where he assists clients in securities matters, government enforcement actions, and litigation.