danbailieyEarlier this week I published a post on this site about the employment practices liability exposures that the social media may present for employers. After seeing my post, D&O maven Dan Bailey of the Bailey Cavalieri law firm send me a note pointing out that the social media also present D&O liability exposures for companies and their directors and officers as well. Dan sent me a brief article he had written on the topic as well. Dan agreed to publish his article as a guest post on this site, and I have reproduced it below. I would like to thank Dan for his willingness to publish his article on this site. Responsible commentators who would like to submit a guest post on a topic of interest to readers on this site should contact me directly. Here is Dan’s guest post:  


One cannot overstate the important impact that social media is having on all aspects of our social and professional lives.  Evidence is growing that this phenomenon may also impact D&O liability exposures if it is not properly addressed within corporations.  The primary issue from a D&O perspective is whether social media posts by a company or its directors and officers of information that may be considered material to investors can serve as a basis for a securities claim either because the information was selectively disclosed to a few rather than to the entire market, or because the information was false or misleading.


On April 2, 2013, the SEC issued a report that provides guidance on the application of Regulation FD to the use of social media by public companies and their directors and officers.  The SEC stated in the report that social media channels may be used by companies to communicate material non-public information, as long as the company previously took appropriate steps to alert investors and the market to both the types of social media channels that the company may use to distribute such information, and the type of information that the company intends to disclose through those channels.  This guidance applies with respect to disclosures through company websites, blogs and social media sites such as Facebook, Twitter and YouTube.  If a company has not properly informed its investors and the market regarding the company’s intended use of social media sites to communicate company news or if the information disseminated by a company or its directors and officers through those sites is not truthful and complete, significant securities law violations may occur.


Social media risks can arise under other laws, as well.  For example, on January 17, 2013, the Federal Financial Institutions Examination Council issued proposed guidance on risk management for financial institutions impacted by social media.  The guidance addresses the application of various laws, regulations and policies to the social media activities of banks, savings associations, credit unions and other nonbank entities supervised by the Consumer Financial Protection Bureau.  The guidance seeks to promote institutional awareness of responsibilities to identify, measure, monitor and control social media-related risks.  Those risks include not only legal risks, but also reputational and operational risks.  Among other things, the guidance states that all financial institutions should have risk management programs for social media, including internal controls; policies for the use, monitoring and retention of social media communications, with specific regard to compliance with consumer protection laws; employee training; oversight and monitoring of all information posted on the financial institution’s own social media accounts; and compliance procedures and director/management reporting parameters.


Most companies today utilize social media platforms to support their business strategies, but many are not adequately managing the liability exposures which may arise from such activities.  Some suggested loss prevention concepts in this area to protect both the company and its directors and officers include the following:


a.            Company Policies.  Companies should adopt internal policies regarding the appropriate use of social media by its directors, officers and other employees, should train all personnel with respect to those policies, and should monitor social media sites for compliance with those policies.  The informal nature of social media communications may tempt people to abandon their normal discipline regarding appropriate communications when participating in social media sites, thereby creating potential exposures not only for themselves, but also the company and its management.


b.            Authorized Corporate Representatives.  Social media communications which purport to be by or on behalf of the company should be made only by a few select authorized persons who are trained in the various issues which can arise through social media communications.  Any unauthorized communication purporting to be by or on behalf of the company should be disclaimed by the company.


c.             Securities Law Compliance.  All social media communications by or on behalf of the company or its directors and officers should be carefully vetted to assure compliance with securities laws.  For example, one should assess whether the information is material and non-public and, if so, whether the communication is being made through a channel of distribution previously disclosed to investors.  Also, like any corporate disclosure, the communication should be truthful, not misleading, and free of hyperbole or spin.


d.            Inform Investors.  If the company intends to disclose material information through social media channels, the company should clearly inform investors to that intended practice and the specific channels of communication that are likely to be used, as well as the types of information that may be disclosed.  Investors should be notified of this information through alternative sources—such as SEC filings, press releases, and the company’s website—in order to increase the likelihood that all investors will have access to the information, thus giving all investors the opportunity to monitor the social media communications.


e.            Regularity.  If possible, companies should create a pattern or some regularity to its use of specific social media channels so that investors have a better opportunity to monitor all of the information disclosed by the company through social media.


If directors and officers directly participate in social media communications which violate either the securities laws or other legal standards, claims by regulators, shareholders or other third parties may be asserted against the directors and officers.  Likewise, directors and officers who fail to properly identify and manage a company’s social media risks may also be the target of claims by shareholders or regulators.  As the burgeoning world of social media continues to expand rapidly, these risks to directors and officers are likewise expanding.