Nearly 25 years ago, the SEC adopted Regulation Fair Disclosure (Reg FD). The regulation prohibits public companies or persons acting on their behalf from selectively disclosing material, nonpublic information to certain persons outside the company, including holders of company securities. Since then, most public companies have established and maintained policies and practices designed to ensure compliance with the regulation. A recent SEC enforcement action serves as a reminder that changing technologies and approaches to investor communications are still presenting new compliance challenges, and a failure to refresh and diligently comply with policies can have serious consequences.
On September 26, 2024, the SEC announced that it had charged online gaming and sports betting company DraftKings Inc. (DraftKings) with selectively disclosing material, nonpublic information to investors who followed or otherwise viewed the company CEO’s social media accounts, without disclosing that same information to all investors, in violation of Reg FD. DraftKings agreed to pay a $200,000 civil penalty to settle the charges.
What Did DraftKings Do?
On July 27, 2023, DraftKings’ outside PR firm published a post on the company CEO’s personal X (formerly Twitter) account. According to the SEC, the post disclosed that the company continued to see “really strong growth” in states where it was already operating and expected “really strong growth even without new states opening.” DraftKings’ PR firm posted a similar statement that same day on the CEO’s LinkedIn account. At the time, DraftKings had not yet disclosed its second quarter 2023 financial results or otherwise publicly disclosed some of the information contained in the posts. Within a half hour of the X account post, DraftKings’ communications staff recognized the error and instructed the PR firm to remove the social media posts, which were taken down shortly thereafter. The SEC alleged that since some but not all of DraftKings shareholders follow the CEO’s personal X and LinkedIn accounts, posting this content on the CEO’s personal X and LinkedIn accounts constituted selective disclosure.
It is particularly noteworthy that the X and LinkedIn posts violated several of DraftKings’ own policies. According to the SEC order, DraftKings’ Social Media Policy prohibits sharing “any potentially or actual confidential or financial / performance information about the Company” via social media except if an employee receives prior written approval from the DraftKings communications team. In addition, the policy reportedly prohibits the use of social networks, “including corporate blogs, employee blogs, chat boards, Facebook, Twitter and the like to disclose material, nonpublic information [,which] may be considered selective disclosure,” and provides that, during the company’s “quiet period,” DraftKings’ authorized spokespersons are prohibited from discussing financial or operational results or guidance.
DraftKings made no public announcements of the selectively disclosed information until August 2, 2023, when the company issued its second quarter earnings release followed by its quarterly earnings call the next morning. Both in the release and on the call, DraftKings and its CEO and CFO confirmed and emphasized the importance to the company of the growth in existing markets. The SEC found that the official second quarter earnings release and related statements confirmed the materiality of the information disclosed in the X and LinkedIn posts.
Reg FD Violations
As a result of the conduct described above, the SEC found that DraftKings violated Reg FD. Whenever an issuer or person acting on its behalf discloses material, nonpublic information to company security holders or other specified persons, the regulation requires the company to also disclose the information to the public. In the case of non-intentional selective disclosure, Reg FD requires the public disclosure be made “promptly,” which the regulation defines to mean “as soon as reasonably practicable (but in no event after the later of 24 hours or the commencement of the next day’s trading on the New York Stock Exchange) after a senior official of the issuer . . . learns that there has been a non-intentional disclosure by the issuer or person acting on behalf of the issuer of information that the senior official knows, or is reckless in not knowing, is both material and nonpublic.” The SEC determined that DraftKings failed to make the required prompt, public disclosure, and found that the company’s selective disclosure of material, nonpublic information without making a prompt public disclosure constituted a violation of Reg FD.
Strategies for Avoiding Violations
No company is immune from the type of mistakes that landed DraftKings in the SEC’s crosshairs. However, the enforcement action serves as a useful guide for avoiding those mistakes. Here are some key takeaways:
Tend to Your Disclosure Policies
Most companies have in place Reg FD (or similar) disclosure policies to guide corporate disclosures and avoid Reg FD violations. But simply having a policy in place is not enough. As part of the SEC settlement with DraftKings, the SEC gave the company 30 days to provide training to all employees who have responsibilities relating to corporate communications regarding Reg FD and the company’s Reg FD Policy. Companies should regularly circulate their disclosure policies to employees, make them accessible on an ongoing basis, and provide regular Reg FD training to insiders (including directors) who may have corporate communications responsibilities. In addition, companies should review their policies from time to time to ensure that they reflect changes in technology and other communications trends, along with relevant SEC guidance.
Take Precautions When Using Third-Party PR Firms
The use of third-party PR firms is a common, useful and sometimes necessary practice. However, as was the case in the DraftKings matter, companies should expect that they will be held responsible for the actions of their PR firms.
Similar to company insiders, companies should ensure that their third-party PR firms are well familiar with their disclosure policies and agree to comply with them. Any communications made by firms on behalf of the company should be closely monitored and evaluated for the presence of material, nonpublic information. Companies that have provided their PR firms with access to personal social media accounts of their CEOs or other company insiders should make clear the circumstances under which those accounts may be used.
Closely Monitor and Evaluate Company Communications for Reg FD Issues
Inadvertent disclosures happen even where sound policies are established and insiders are properly trained in Reg FD compliance. Indeed, inadvertent disclosures are specifically contemplated under Reg FD. Perhaps the most significant issue in the DraftKings matter was the company’s failure to identify the selectively disclosed information as material and to comply with the requirement to promptly disclose the information in a Reg FD compliant manner. These situations can best be avoided by limiting who is authorized to communicate on behalf of the company, closely monitoring and evaluating those communications as part of the company’s disclosure controls and procedures, and taking prompt action to address any inadvertent disclosures of material, nonpublic information in accordance with Reg FD.
Using Social Media to Comply with Reg FD
SEC guidance regarding the use of social media to comply with Reg FD dates back to 2013, as an extension of its earlier guidance on website communications. Generally, the SEC has recognized that social media communications can be a viable vehicle for complying with Reg FD, provided that the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information. Even with the benefit of this guidance, the use of social media for Reg FD compliance remains a gray area for many companies and may present a compliance risk. For that reason, most companies are well advised to use customary methods of complying with the regulation (Forms 8-K or press releases, for example) alongside or in lieu of social media to relay material, nonpublic information. Companies that wish to rely solely on social media to relay this information should consult with counsel to minimize the risk of Reg FD violations.
Conclusion
Public companies besieged with countless new regulations and disclosure requirements might feel compelled to shift attention and limited resources away from existing regulations, relying on well-established policies and practices to maintain compliance. The DraftKings enforcement action serves as a valuable reminder that Reg FD is still very much on the SEC’s enforcement radar, and continued compliance requires regular refreshment of and diligent attention to those policies and practices.
For more information on this topic, or to learn how Godfrey & Kahn can help, contact a member of our Securities practice.