How The SEC Regulates Social Media

By Angie Mohr | February 12, 2012 AAA

The Securities and Exchange Commission (SEC) regulates public companies and investment advisors to ensure that the public's best interests are being maintained. Many of the regulations deal with the disclosure of information to the public, requiring that it is transparent and fair to all investors. The rise of social media sites, such as Twitter and Facebook, offer up new challenges to these regulations. No longer is information a passive, one-way trip from company to investor. Rather, it is interactive and shared with many interested parties. The SEC continues to develop updated requirements and regulations that reflect the new information age.

SEE: The Banking System

Same Across the Board
The main tenet of public company disclosure is that information about the company's earnings and operations must be disseminated to all parties simultaneously. This regulation ensures that all potential investors can act based on the same information. When companies activate social media outlets, they must ensure that they are not violating that regulation by sharing information with only those using the platform.

Because of the interactivity, companies also need to ensure that investors, or third parties, don't have access to post incorrect or non-public information in social media that others may attribute to the company itself. For example, if a Facebook user posts on the wall of a public company that they heard the company was merging with another, other readers may interpret that as truth, rather than rumor. To avoid this, companies must either monitor their communications and respond officially to this type of posting, or remove the ability for others to post altogether.

SEE: How To Tell If A Company's In Trouble.

Trail
The challenges for investment advisors are even greater. Registered advisors must make certain that their communications with their clients and potential clients do not violate the client's privacy. Interactive communication via social media rather than face-to-face or through email can easily cross this line, or appear to. If, for example, an advisor answers a client's investing question on Twitter with an answer tailored to their financial situation, it may be viewed by the SEC as violating the privacy of the client. Investment advisors are also required to keep copies of correspondence with clients and this also applies to social media. Advisors who don't have procedures to capture this communication may fall afoul of the rules.

Hackers
An issue with social media that all companies face is the risk of being hacked. This is also a possibility on corporate websites, but social media exposes the company to new risks. Hacker organizations, such as Anonymous and LulzSec, target specific companies and take over the websites, Twitter feeds and Facebook pages. In January 2012, Anonymous claimed responsibility for taking over the website and Facebook fan page of Sony Pictures in an apparent retaliation for the company's support of the Stop Online Piracy Act. Both platforms were recovered quickly by Sony, but were vulnerable for a period of time. If the hackers wanted to, they could have pulled private information from private messages on Facebook, or could have posted damaging information on the company's wall.

The Bottom Line
Social media brings new security and communication vulnerabilities to all companies. Existing SEC regulations apply to all of a company's communications, including these platforms. The SEC recommends that all public companies and investment advisors review their policies and procedures to ensure that they are adequately monitoring their social media outlets. As more companies begin to use these outlets, the SEC will have to adapt their regulations to meet the new reality.

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