Insider Trading: The SEC's Interest in Social Media Activity

On a recent fall evening, I found myself attempting to explain to one of my tween aged children (whose head was firmly down, eyes fixated on the glow of Instagram emanating from her mobile device) that she was born around the same time as (or earlier than) the social media sites she's using. When I pointed out that humans still managed to share and communicate information fairly well before the times of social media, I was met with a blank stare – and a “Really? That is hard to imagine.” (Yes, I understand that my comment was likely akin to the statement of prior generations that parents or grandparents walked miles to school in the snow.) In that moment I found it difficult to fathom just how quickly and tightly social media has been woven into the fabric of our communication and lives in a matter of a few short years.

While some of us may be struggling navigate a social media driven world on a personal level, it seems our regulators are grappling with a similar task on a larger scale – catching up regulations and guidance to reflect a world where a core form of information sharing and distribution occurs now online via social media platforms and discussion forums.

It’s no secret that the Securities and Exchange Commission has long been (in social media years) interested in determining the impact of social media posts on the markets. In late August of this year, the Commission solidified that interest when they released a solicitation for a “Social Media Monitoring Subscription,” which seeks bids from small businesses to deliver a mechanism that would monitor social media sites like Facebook and Twitter and flag key words. The monitoring system would then alert SEC staff by sending an email with reference to the flagged content. It’s not just social media sites that are of interest to the SEC for monitoring purposes, but discussion forums and message boards as well.  In a recent interview with Squawk Box, SEC Commissioner Robert Jackson said, in acknowledging the need for federal regulators to provide more information about how insider trading rules apply to social media, "If you're wondering whether it might be time for us to clarify this, I am, too…we have issued some guidance in the area, but it's quite old."

Insider Trading Defined...A Long Time Ago

One of the main questions surrounding social media (and other forum or message board) posts in the world of publicly traded companies and their insiders, centers on the longstanding definition of insider trading. For years we’ve defined inside information as that which is “material” and “nonpublic.” In a world where CEOs and top executives are using social media platforms to communicate with shareholders and the broader world, the question arises as to whether these platforms are broad enough to consider material information to be publicly disseminated. If information is shared via one of these platforms, does it need to also be disclosed elsewhere? Are more controls needed to ensure more consistent practices in using these platforms? These are the questions that beg more guidance from the SEC, and it seems the time is nearing for the Commission to provide an update.

Personal Tweets Don't Eliminate Company Responsibility

Another question that arises with social media use by company insiders goes beyond the release of actual hard facts information, and that is “What are the guidelines for other statements on those platforms that may be more speculative or opinion based in nature?” In recent weeks, automotive and energy company Tesla and its CEO Elon Musk found themselves in hot water with the SEC after Musk tweeted about potentially taking the company private. An SEC press release on the matter (“Elon Musk Settles SEC Fraud Charges; Tesla Charged With and Resolves Securities Law Charge” SEC Press Release 2018-226, September 29, 2018) further explained the issues of concern:

“According to the SEC’s complaint against him, Musk tweeted on August 7, 2018 that he could take Tesla private at $420 per share — a substantial premium to its trading price at the time — that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote.  The SEC’s complaint alleged that, in truth, Musk knew that the potential transaction was uncertain and subject to numerous contingencies.  Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.  According to the SEC’s complaint, Musk’s misleading tweets caused Tesla’s stock price to jump by over six percent on August 7, and led to significant market disruption.

According to the SEC’s complaint against Tesla, despite notifying the market in 2013 that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla and encouraging investors to review Musk’s tweets, Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings.  Nor did it have sufficient processes in place to that Musk’s tweets were accurate or complete.”

In a settlement with the SEC over the matter, both Tesla and Musk agreed to a number of remedies, including paying a collective $40 million in fines ($20 million to be paid by Musk personally) and agreeing that Musk would step down from his role as Chairman the board of Tesla for three years (still retaining his CEO position). Tesla also agreed to changes in their board composition aimed at improving their corporate governance.

While not every company may have a CEO as Twitter savvy or vocal as Tesla’s Musk, there are takeaways from this situation that companies should consider when navigating their own social media nuances. Tesla, like several companies, had taken the step to previously announce that the CEO’s Twitter account would be used to announce material information. However, although that disclosure had been made via an 8-K years earlier, the SEC asserts that there were no controls or procedures around evaluating outbound tweets made by the CEO to determine if they were appropriate or required further disclosure.  While the SEC admittedly needs to provide updated guidance in this area, the Tesla case seems to indicate that the SEC is willing to hold companies accountable for the personal social media posts made by their employees/executives, particularly if the company had previously endorsed that personal social media platform as a means of distributing company related information.

The impact of social media on insider trading is likely to be an area of focus over the coming months and years. Companies should be looking at how their current insider trading practices address social media posts, in addition to preparing for the likelihood of additional procedures and controls in this area. 

-Jennifer