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Cady Bar the Door Insight & Commentary on SEC Enforcement Actions and Related Issues

SEC Publishes Report on Reg. FD and Social Media – Joy, Vexation Follow

Posted in Insider Trading

You probably remember a dustup from a few months ago when the SEC threatened to sue Netflix for violations of Regulation FD.  Basically, the rule says that when a public company gives material nonpublic information to anyone, the company must also publicly disclose the same information to all investors.  Netflix’s CEO, Reed Hastings, had arguably broken the rule last July when he posted on his personal Facebook account that for the first time Netflix viewers had consumed one billion hours of video in a month.  In December, staff in the SEC’s San Francisco office sent Netflix a Wells notice to say it was considering recommending enforcement action for releasing this information to only a limited set of Netflix investors.

The problem for the SEC was, Hastings’s Facebook account had over 200,000 followers at the time of his post.  He wasn’t exactly leaking this billion-hour number to a tiny club.  But the post also was not accompanied by a parallel Form 8-K and press release, the safest way for a public company to release information and ensure, from the SEC’s perspective, that the company is putting all recipients on an equal footing.  Reaction to the Wells notice was not positive.  Broc Romanek, a former CorpFin staff member and an eminently sensible voice in this space, said flatly at the time, “This is a hard one for me to swallow.”  The consensus from many was that the SEC needed to get with the times and consider that in the right circumstances, dissemination of material, nonpublic information by social media outlets could be sufficiently general disclosure for Reg. FD.

To the SEC’s credit, it recognized the legal uncertainty and decided not to sue Netflix.  Instead, on Tuesday it released a somewhat rare Report of Investigation with an accompanying press release titled, SEC Says Social Media OK for Company Announcements if Investors Are Alerted.  The report laid out the facts surrounding the Netflix matter and reminded “issuers that disclosures to persons enumerated in Regulation FD, even if made through evolving social media channels, must still be analyzed for compliance with Regulation FD.”  The reaction from many was, “Yay!”  After all, the press release title said what it said.  Social Media OK!

Others were less sanguine.  Sure, Netflix is off the hook for now, but the report was notably free of clear guidance on exactly how public companies could delve into social media and stay on the right side of Reg. FD.  The SEC’s press release is telling.  In the first paragraph the SEC says “companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Reg. FD so long as investors have been alerted about which social media will be used to disseminate such information.”  The second paragraph reminds us of 2008 guidance “clarifying that websites can serve as an effective means for disseminating information to investors if they’ve been made aware that’s where to look for it.”  As Broc noted yesterday, this “guidance” doesn’t seem terribly new.

What I Think

While the SEC’s report is not the green light for corporate social media use that many have been hoping for, I think it is a fairly reasonable reaction as companies get deeper into these waters.  It would be terribly difficult to write a rule outlining exactly what is okay and what is not.  Reed Hastings’s post to 200,000+ followers seems reasonable to me, especially given that those followers would quickly re-post the same information to others.  If he opened a brand new Twitter account and tweeted material, nonpublic Netflix information to three followers who then traded and profited on that information, it’s safe to say enforcement action would follow.  Any rule or definitive guidance would have to take into account, at least, numbers of followers, the network at issue, whether investors recognized it as a place to learn corporate information, and frequency of updates on the network.  But the ship has sailed on SEC enforcement actions against companies who thoughtfully (1) let investors know to expect to see corporate information on particular social media sites; (2) post information with some regularity; and (3) do not try to game the system with posts on obscure accounts.  I cannot imagine the Enforcement Division wanting to take a case with those facts to a jury.

  • http://www.compliancebuilding.com Doug Cornelius

    I disagree with you on Mr. Hasting’s post. It was a poor decision. Six months earlier the company stated that it would not be an official communications channel.

    But, It was just public enough that many people would see it and not just a select group of investing insiders. While it may have been a foot fault, it was likely a losing case for enforcement.

    In the big picture, social media is just media. Companies can pick their distribution platform. I think they will find most social media sites are poor platforms for the communications needs. Even Facebook does not use Facebook for corporate communications.

  • http://twitter.com/DavidSmyth33 David Smyth

    I see what you’re saying, especially about the company’s prior statement. I do think it’s a close call. And, having gone through the investigation and Wells process, it probably doesn’t seem like much of a victory to Netflix. But to me, Hastings’s post seems to be a long way from the selective leaks underlying the passage of Reg. FD. I just don’t see how the SEC prevails in such a case.