Are Asian-Pacific regulators keeping up with trends?
The rise of social media has been quite phenomenal, given the use of sites such as Twitter and Facebook, which have generated high traffic among users, especially through the use of mobile devices. This topic has been generating a huge debate among financial professionals in the North American and European markets, and regulators over fair investor access to information, namely Regulation Fair Disclosure (Regulation FD) in the United States. The issue of securities regulation has been quite prominent lately as a result of the aftermath of the Global Financial Crisis (GFC) of 2008-2009, and the existing regulations such as the Dodd-Frank Bill, which was passed by the US Congress in 2011. In this article, I shall discuss in brief a US Securities and Exchange Commission (SEC) case that result in a report that involved the use of social media by public-listed corporations, and whether corporate disclosure laws apply to social media. In addition, I shall examine how the use of social media by corporations is going to impact securities regulation in the Asia-Pacific region.
The SEC case (Document release no. 69279/April 02, 2013) arose when SEC’s Division of Enforcement launched an investigation into whether Netflix, Inc. (Nasdaq GS: NFLX), and its Chief Executive Officer (CEO), Reed Hastings (“Hastings”) violated Regulation FD (17 C.F.R. 243.100 et seq.) when, on July 03, 2012, through the use of Hastings personal Facebook page, it announced that NFLX had streamed 1.0 billion hours of content during the month of June. The news release was not accompanied with a concurrent release of the information by NFLX through its own web site or Facebook page, or a Form 8-K (a SEC filing meant for corporate press releases). The question over such disclosure was whether this news release constitutes a violation of Regulation FD, where corporate sensitive information are not allowed to be distributed to a selected group of investors, analysts, and management, but should instead make it available to the public in a timely manner, and there is no one is being disadvantaged by the unfair access to the news information.
The Netflix case culminated to a final SEC report on April 02, 2013, where it officially stated that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD), so long as investors have been alerted about which social media will be used to disseminate such information.
Since the April 02 announcement by the SEC, it has sparked off a lot of discussions and debates regarding the use of social media as means of communication with investors. There are questions as to how non-social media users will be to get a fair access to the information, including whether there will be attempts by corporations to “follow the letter of the rule, but violate the spirit of the law”, and engaging in regulatory arbitrage practices that minimise exposure to the stringent securities regulatory laws.
In the context of the Asia-Pacific region, and the level of corporate transparency, the issue of the use of social media as means of investor communications has so far been muted. Some of the reasons could be the existing tough securities regulations in developed Asian economies such as Singapore, Hong Kong, etc., and other reasons could be that Asian corporations have not been keeping up to the level of technology and sophistication in the use of social media as tools for investor communications as seen in the Western economies. For example, in the context of Singapore, there are many efforts being initiated by investor rights groups such as Securities Industry Association of Singapore (SIAS), together with the Singapore Exchange (SGX) in advocating for more corporate transparency. However, the issue of the use of social media has not been vigorously debated among the investor community. Perhaps, I believe that this issue will soon be the major forefront in highlighting the need for fair access of corporate information by all parties concerned if corporations were to undertake future investor communications completely through the social media, rather than through official securities filings.
In a GovernanceMetrics International report on the world rankings for corporate governance, published on September 27, 2010, in a ranking of 10 companies, New Zealand came out tops in the Pacific region rankings, with an average rating of 6.70, followed by Australia (194 companies) with an average rating of 6.65. In the Asia region, Singapore (52 companies) came out tops with an average rating of 4.82, followed by Malaysia (28 companies), with an average rating of 4.21. The top corporate governance rating in was cited in the report was United Kingdom (394 companies) with an average rating of 7.60. However, these ratings do not explicitly imply that countries with higher average corporate governance ratings tend to command better transparency in its dealings with various stakeholders. Instead, I believe that it serves an indication of how policy makers, together with corporations, and stakeholders jointly enforce tough corporate transparency laws in order to preserve the overall integrity of the financial markets. The relevancy of social media was not addressed completely throughout these rankings, which I believe will be something that the personnel at GovernanceMetrics International will be taking a closer look in its publication of future reports.
In conclusion, I believe that regulators will eventually keep up with the level and usage of social media technology. Given the vast volumes of detailed information that is mandated to be disclosed to investors, there are questions as to whether some investors, especially those in the retail investor community, will be interested in combing the necessary information on a busy work day or a weekend. Corporations recognised that the usage numbers through social media websites such as Facebook and Twitter have been steadily increasing, and it could act as an ideal medium of choice for release of corporate information. However, there are questions as to fair access, especially with the non-social media users, and how will corporations able to release such information through sites such as Twitter where there is a maximum word length of 140 characters per post.