Investors are being harmed by public companies reporting earnings early on Twitter, making selective disclosure on Facebook, and other reckless uses of social media, regulators warn.
The Canadian Securities Administrators (CSA) published a staff notice on Thursday outlining the results of a regulatory review that looked at public companies’ use of various forms of social media. As a result of that review, the regulators are warning that investors may have suffered as a result of major stock price moves caused by disclosure made through social media, including early, selective, or misleading, disclosure.
For example, the CSA found firms making misleading statements, or linking to other sources of information — such as analyst reports — that were misleading. The CSA also found firms publishing “material forward-looking information,” such as revenue and earnings projections, on social media without ensuring the information was generally disclosed.
“Forward-looking information provides key information to market participants on future prospects and, as a result, it was not surprising to see significant share price increases in several cases when this information was selectively disclosed on social media,” the CSA’s report says, noting that regulators also found firms providing information about the timing for a new product launch, or making other significant announcements, only on social media.
“We had concerns in all of these cases because some investors may have received the information and been aware of it when forming an investment decision, whereas other investors may not have been aware of the selective disclosure,” the CSA says.
In addition, regulators found firms making disclosure on social media without supplying adequate context when using non-GAAP financial measures, which could result in investors being misled.
“Our review revealed concerns about how issuers are using social media websites, including specific instances where deficient social media disclosure may have resulted in material stock price movements and investor harm,” says Louis Morisset, chairman of the CSA and president and CEO of the Autorité des marchés financiers, in a statement. “We expect issuers to adhere to high-quality disclosure practices, regardless of the venue of disclosure, and encourage issuers to implement a strong social media governance policy.”
The CSA reports that its review prompted 30% of issuers to improve their disclosure, including taking down social media postings, filing additional disclosure with regulators, and pledging to improve disclosure and governance practices.
The review, which was carried out in Alberta, Ontario, and Quebec, examined the social media disclosure of 111 issuers on various websites, including Facebook, Twitter, Instagram, YouTube and LinkedIn. It also reviewed company postings on corporate websites, blogs, and message boards.
The regulators found that 72% of companies are using social media, but that 77% of issuers “had not developed specific policies and procedures, which would promote internal governance and compliance with securities law in relation to their use of social media.
“Reporting issuers must constantly be aware of the securities reporting obligations that their social media activities may trigger, even if these activities are not directly intended to communicate with investors,” the CSA says. “Given that investment decisions are made on material information, it is critical for issuers to adhere to high quality disclosure practices regardless of the venue used for dissemination.”
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