Photo of Joe BrennanBy Joe BrennanMay 30 2017
Business Law

Trump Might Like Twitter But Securities Regulators Don’t Comply with Securities Laws When Using Social Media

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Executive Summary:  While the use of social media has become a fixture in our daily lives to the point where the current President of the United States uses it several times a day to announce in 140 characters or less his then current musings on everything from economic policy to the suitability of his replacement on “Celebrity Apprentice”, it is not yet suitable as either the sole or first means of public disclosure of material information by Canadian public companies. Further, material information disclosed on social media must be held to the same factual and balanced standard as when it is disclosed by traditional means. That doesn’t mean you can’t use social media, it just means that you have to use it properly. 

The general rules of thumb for the use of social media (including company websites) by a Canadian public company are:

1. First Use Traditional Disclosure Methods – First disclose material information via traditional methods (i.e. news release disseminated by a recognized newswire service with broad reach) to ensure it is “generally disclosed” to the public before posting it on the company’s social media site.

2. Factual and Balanced Disclosure - Information posted to the company’s social media sites must follow the same content criteria as information posted by the company using traditional methods:

a. Avoid including unnecessary details, exaggerated reports or promotional commentary.

b. A company’s press release should contain enough detail to enable the media and investors to understand the substance and importance of the change it is disclosing.

c. Unfavourable news must be disclosed just as promptly and completely as favourable news (companies that disclose positive news but withhold negative news could find their disclosure practices subject to scrutiny by securities regulators).

d. Announcements of material facts should be factual and balanced.

e. Do not make a statement that is misleading or untrue, or which does not state a fact that is necessary to make the statement not misleading and would be expected to have a significant effect on the market price of a security.

3. Social Media Policy - Adopt a company policy setting out the internal rules and procedures for the use of social media by company personnel in order to ensure the company’s use of social media is in compliance with the company’s disclosure obligations under Canadian securities legislation. 

Detailed Information:

CSA Review of Public Company Use of Social Media

The securities regulatory authorities in Alberta, Ontario and Québec recently conducted a review of  the disclosure provided on social media by 111 reporting issuers. This included a review of information provided on websites such as Facebook, Twitter, YouTube, LinkedIn, Instagram and GooglePlus, amongst others. They also reviewed the disclosure issuers posted on their own websites, including on any message boards or blogs hosted on those websites.

Their results identified the following three key areas where issuers are expected to improve their disclosure practices:

  • Selective or early disclosure when some investors receive material information through social media that other investors do not receive because it is not generally disclosed.
  • Misleading and unbalanced social media disclosure where information is not sufficient to provide a complete picture or is inconsistent with information already disclosed by issuers on SEDAR.
  • Insufficient social media governance policies in place to support social media activity.

Disclosure Requirements under Canadian Securities Laws

1. Fundamental Principal of Equal Access to Information: As the Canadian Securities Administrators state in National Policy 51-201: “It is fundamental that everyone investing in securities have equal access to information that may affect their investment decisions … Selective disclosure occurs when a company discloses material non-public information to one or more individuals or companies and not broadly to the investing public. Selective disclosure can create opportunities for insider trading and also undermines retail investors’ confidence in the marketplace as a level playing field.”

2. Tipping and Insider Trading: A “material fact” means a fact that would reasonably be expected to have a significant effect on the market price or value of the securities of the company.

Securities legislation prohibits a reporting issuer and any person or company in a special relationship with a reporting issuer from informing, other than in the necessary course of business, anyone of a material fact before that information has been generally disclosed. This prohibited activity is commonly known as “tipping”.

Securities legislation also prohibits anyone in a special relationship with a reporting issuer from purchasing or selling securities of the reporting issuer with knowledge of a material fact about the issuer that has not been generally disclosed. This prohibited activity is commonly known as “insider trading”.

3. Generally Disclosed: Securities legislation does not define the term “generally disclosed” but insider trading court decisions have held that information has been generally disclosed if:

a. the information has been disseminated in a manner calculated to effectively reach the marketplace; and

b. public investors have been given a reasonable amount of time to analyze the information.

For some information, such as that typically included in financial statements and MD&A, the public filing of such information on SEDAR in compliance with securities law requirements may satisfy the “generally disclosed” requirement. For other information, the issuance of a news release disseminated through a recognized newswire service with a sufficiently broad distribution network may be required. 

In National Policy 51-201, the Canadian Securities Administrators “recognize that many companies prefer news release disclosure as the safest means of satisfying the “generally disclosed” requirement” and “recommend as a “best practice” a disclosure model centred around news release disclosure of material information, followed by an open and accessible conference call to discuss the information contained in the news release.”

4. Disclosure Standards - Factual and Balanced: With respect to the public disclosure of material information, the Canadian Securities Administrators have on several occasions summarized their expectations regarding the standard that Canadian public companies must meet in order to be in compliance with securities legislation:

a. Do not make a statement that is misleading or untrue, or which does not state a fact that is necessary to make the statement not misleading and would be expected to have a significant effect on the market price of a security.

b. Announcements of material facts should be factual and balanced.

c. Unfavourable news must be disclosed just as promptly and completely as favourable news (companies that disclose positive news but withhold negative news could find their disclosure practices subject to scrutiny by securities regulators).

d. A company’s press release should contain enough detail to enable the media and investors to understand the substance and importance of the change it is disclosing.

e. Avoid including unnecessary details, exaggerated reports or promotional commentary.

Use of Social Media

Using social media to disclose material information is fine but is must be done in compliance with the company’s disclosure obligations under Canadian securities law. 

Since not all participants in the marketplace will have equal access to, or follow, the social media platforms used by the company, social media cannot be the first or the sole source of disclosure of that material information since the use of social media will not satisfy the requirement that the information be “general disclosed”. Material information should first be disclosed via traditional means (i.e. a news release sent to a newswire service for adequate dissemination) before it is posted on a company’s social media sites.

Also don’t just post the good stuff and don’t post anything that would be materially misleading to potential investors. Information posted to the company’s social media sites needs to follow the same content criteria as information posted by the company using traditional means of dissemination such as a news release:

  • Do not make a statement that is misleading or untrue, or which does not state a fact that is necessary to make the statement not misleading and would be expected to have a significant effect on the market price of a security.
  • Announcements of material facts should be factual and balanced.
  • Unfavourable news must be disclosed just as promptly and completely as favourable news (companies that disclose positive news but withhold negative news could find their disclosure practices subject to scrutiny by securities regulators).
  • A company’s press release should contain enough detail to enable the media and investors to understand the substance and importance of the change it is disclosing.
  • Avoid including unnecessary details, exaggerated reports or promotional commentary.

Recommended Social Media Policy

In Staff Notice 51-348, the Canadian Securities Administrators recommended that every issuer adopt a strong social media governance policy with consideration of at least the following items:

  • Who can post information about the issuer on social media.
  • What type of sites (including personal social media accounts vs corporate) can be used.
  • What type of information about the issuer (financial, legal, operational, marketing, etc.) can be posted on social media.
  • What, if any, approvals are required before information can be posted.
  • Who is responsible for monitoring the issuer’s social media accounts, including third party postings about the issuer.
  • What other guidelines and best practices are followed (for example, if an employee posts about the issuer on a personal.

Invitation for Discussion:

At Nerland Lindsey LLP, we advise numerous public companies on all aspects of Canadian securities law. If you are a public company in need of guidance on your continuous disclosure obligations or corporate governance practices, please do not hesitate to contact one of the lawyers in our business law group.  We would be happy to assist you on this exciting journey.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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