October 11, 2018 / 10:27 PM / in 5 months

Lessons from SEC Tesla action: Time to refresh social-media compliance

NewYork(Thomson Reuters Regulatory Intelligence) - Corporate executives who feel left behind or simply lack time to build a Twitter following must have experienced a bit of schadenfreude when Tesla Chief Executive Elan Musk fell victim to his own tweets, which landed him a $20 million fine and a job demotion at the insistence of the U.S. Securities and Exchange Commission. But lessons about the role of compliance in managing the controls over executive-suite social media can be drawn from the curious case of Musk and his Twitter account.

The Tesla logo is seen at the entrance to Tesla Motors' new showroom in Manhattan's Meatpacking District in New York City, U.S., December 14, 2017.

Few chief executives are as prolific and outspoken in social media as Musk, and less than one third are active on Twitter, recent studies have shown. Technology firms are a large part of the active total. The Musk SEC case, however, shows that companies should start looking at how to implement controls as social media use grows. The case shows specific areas of concern for compliance, what is allowable and now the agency is linking social media to broader governance concerns.

For starters, it is worth noting that Musk’s settlement on Saturday allowed him to keep both the role of Tesla chief executive officer role and his Twitter account, even if he had to step down as chairman. The SEC backed away from a stiffer charge of securities fraud that would barred him from holding office at a public company. SEC Chairman Jay Clayton, who has frequently argued against punishing shareholders for managers’ misdeeds, explained that “the skills and support of certain individuals may be important to the future success of a company.”


Clayton's comments on the case{here} reflected the SEC chief's support for enforcement to act in ways that are not punitive for shareholders or disruptive to the markets. Clayton also noted the need for speed in bringing cases swiftly. The settlement charged Musk individually, another priority for Clayton's enforcement actions.

The SEC negotiated a settlement that many saw as favorable to Musk, amid signs the agency might have had difficulty winning a case charging that he had falsely claimed to have “funding secured” for a transaction to take his company private. The SEC in its own case document said that a Middle East sovereign fund was interested in funding a transaction, and Musk has raised billions for ventures — even those with little prospect of becoming profitable anytime soon.

For most chief executives and compliance officers the most relevant takeaway from the case will likely be the substantive actions taken to control the use of social media. Most executives know to be careful about disclosing material information to the public regardless of the medium used. But what about tweeting to the public things you would like to do?


Securities regulators have, for years, pushed chief executives to “share their vision of the future with shareholders,” said Thomas Gorman, a partner in the litigation practice of Dorsey & Whitney LLP and a former SEC enforcement counsel. This includes looking over the horizon, for example, at a potential going-private deal, as Musk said he was considering.

The SEC has for years given safe harbors for Forward Looking Statements for which documentation is not required so long as it is treated as a “cautionary statement.” The prospect that a chief executive might begin issuing forward looking statements over social media is one that compliance departments might begin to prepare for. The value of direct to public communication in brand building has been cited in numerous industry studies and CEOs will look for ways to seize the opportunity.

“The SEC in this case did a good job of sorting through the business problem and how to get it fixed,” said Gorman. “The real lesson from this case is really that when companies designate channels, as Tesla did, you really have to go to lengths to have adequate controls in place. If Mr Musk’s tweets had been properly vetted he could have said what he said and not gotten into trouble.”


The SEC settlement instead added some clarity in suggesting how controls are handled for social media, with a few general principles underlined, including:

- Social media is a legitimate platform for disclosing material information but controls must be put in place on its use.

- Firms that intend to use social media should disclose in an 8-K filing that they intend to use a specific Twitter feed for material disclosure. (As Tesla did in a November 2013 filing{here}.)

- Controls must be in place for tweets to be systematically reviewed ahead of time, and statements made on behalf of the company should be made with the knowledge of the financial officer or other top managers.

- Social media has no explicit safe harbor protecting firms from securities litigation like that recognized in the context of offering statements or analyst meetings.

- Compliance should make certain there are internal conversations not only in advance but also in followup to make certain regulatory filings are made about the substance of the disclosures.

- Corporate governance extends to social media, especially for social media venues that the company has notified the SEC will be used for material disclosure.

Existing forward-looking statements protections apply only to the set formats of analyst meetings, share issues and other engagements with investors and the public that are collaborative by nature. The SEC ruling in the Tesla case suggests that for the CEO and his or her phone to qualify for a similar safe harbor similar controls and cautionary statements would be required.

The SEC in the Musk case cited as its authority coming in part from the broadly worded Manipulative and Deceptive Devices{here} clause of the U.S. Legal Code, a statute that bans all forms of intentional actions that mislead investors or disrupt the markets.

The SEC also cited "Controls and Procedures"{here} rules requiring controls and procedures over making material disclosures. The SEC said Tesla had no such process in place.

The legacy Controls and Procedures rule, however, provides little guidance relevant managing the speed and ubiquity of social media in which a manager like Musk, alone with a smartphone, can reach millions of followers. The rules instead provide for quarterly reviews of “the effectiveness of the issuer’s disclosure controls and procedures.”


The compliance structure firms must build around public communication must be suited to the firm, addressing issues such as recording, storing the data and checking the accuracy of the information issued by the firm, the Controls and Procedures rule says.

“The framework on which management’s evaluation of the issuer’s internal control over financial reporting is based must be a suitable, recognized control framework that is established by a body or group that has followed due-process procedures, including the broad distribution of the framework for public comment,” the rule says.

In the Twitter era the concern over making certain that financial information has “broad distribution” appears to be the least onerous. The bigger worry will be how compliance tracks thousands of messages over multiple media by executives increasingly interested in going direct via Twitter. Compliance must make certain it is not going too directly to the public without the oversight and backstopping it needs.

(Richard Satran is a financial journalist covering daily and emerging issues for Thomson Reuters Regulatory Intelligence.)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Oct 5. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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