Chuck Jaffe
Commentary: Rules will lead to more confusion and fraud
To see why the Securities and Exchange Commission had no choice but to allow
companies to release news via social media, one need only look at what happened
when the agency itself announced what it was doing.
First, on Tuesday afternoon, came the release of the information via the traditional channels. Then, some 19 minutes and 30 seconds later, the agency’s official Twitter feed carried the news.
In between, however, countless other people tweeted about the situation, with links to everything the SEC had announced via traditional channels. “Had the SEC been a company,” said Michael Kitces of Pinnacle Advisory Services, a leading financial adviser who happens to be active on Twitter, “it just created a 19-minute window for people to game the stock.”
So while it was easy to criticize the SEC for allowing news to be disseminated via social media, it’s not like the agency had another option. Social media was already a de facto means for disseminating information; it was just the back channel for stock jockeys and news junkies. Under rules governing fair disclosure — where the SEC requires companies to make public information as broadly as possible — excluding social media was simply ignoring the situation.
First, on Tuesday afternoon, came the release of the information via the traditional channels. Then, some 19 minutes and 30 seconds later, the agency’s official Twitter feed carried the news.
In between, however, countless other people tweeted about the situation, with links to everything the SEC had announced via traditional channels. “Had the SEC been a company,” said Michael Kitces of Pinnacle Advisory Services, a leading financial adviser who happens to be active on Twitter, “it just created a 19-minute window for people to game the stock.”
So while it was easy to criticize the SEC for allowing news to be disseminated via social media, it’s not like the agency had another option. Social media was already a de facto means for disseminating information; it was just the back channel for stock jockeys and news junkies. Under rules governing fair disclosure — where the SEC requires companies to make public information as broadly as possible — excluding social media was simply ignoring the situation.
Regulating the situation, eventually, will improve it, although there will be
an adjustment period.
What it won’t do, however, is “level the playing field” or “democratize the process,” precisely the thing that some industry watchers were praising the move for.
In the short run, the SEC ruling will lead to an increase in potential frauds. In the short time since the announcement, there already have been companies — AutoNation (US:AN) , for instance — saying they will use Twitter, Facebook or other social media for releases (the regulators require companies to notify shareholders if they intend to make announcements via social media); behind the scenes, attorneys who specialize in compliance issues said they know of firms that are discussing what they want to put into social forums, while already scooping up appropriate Twitter handles to try to protect the company name.
The worry is that it’s not hard for a scammer to create a ghost Twitter account or a fake Facebook page — something that looks official, but isn’t — and then wait for the right moment to move the stock.
Truthfully, however, something similar was happening even before the SEC gave explicit permission to use social media for disclosures. (See When to take investing advice from Twitter.) While there likely will be temporary confusion — where the fraudsters try to take advantage of an investing public that doesn’t yet really know what public companies’ official statements on social media will look like, that will go away as investors adjust.
Truthfully, the public’s expectation — based on reaction to the announcement — is above the level of reality.
What it won’t do, however, is “level the playing field” or “democratize the process,” precisely the thing that some industry watchers were praising the move for.
In the short run, the SEC ruling will lead to an increase in potential frauds. In the short time since the announcement, there already have been companies — AutoNation (US:AN) , for instance — saying they will use Twitter, Facebook or other social media for releases (the regulators require companies to notify shareholders if they intend to make announcements via social media); behind the scenes, attorneys who specialize in compliance issues said they know of firms that are discussing what they want to put into social forums, while already scooping up appropriate Twitter handles to try to protect the company name.
The worry is that it’s not hard for a scammer to create a ghost Twitter account or a fake Facebook page — something that looks official, but isn’t — and then wait for the right moment to move the stock.
Truthfully, however, something similar was happening even before the SEC gave explicit permission to use social media for disclosures. (See When to take investing advice from Twitter.) While there likely will be temporary confusion — where the fraudsters try to take advantage of an investing public that doesn’t yet really know what public companies’ official statements on social media will look like, that will go away as investors adjust.
Truthfully, the public’s expectation — based on reaction to the announcement — is above the level of reality.
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