Information Intersection > Troutman Sanders LLP

When World Views Collide: Social Media and the SEC

Posted: December 7, 2012

Yesterday the U.S. Securities & Exchange Commission did something routine. It issued a so-called “Wells-notice” against a company, charging the firm preliminarily with releasing confidential financial information to a select portion of the market, instead of publicly to all investors as required by Reg FD (“fair disclosure”).  What is remarkable, and potentially troubling, is that the basis for the charge was a short social media message by Netflix CEO Reed Hastings, reposted on the company’s public Facebook page.

As Law360 explained:

Netflix Inc. and its CEO Reed Hastings could face action by the SEC over Hastings’ July post revealing that Netflix members had watched more than one billion hours that month, the online video service said in a regulatory filing Thursday. Netflix and Hastings received a Wells notice on Wednesday that said the company could face either a cease-and-desist or civil injunctive suit for fair-disclosure violations allegedly prompted by the posting on the social networking site, according to an SEC filing by Netflix.

The juxaposition of a good-intentioned securities regulation and the disruptive impact of new technology could not be clearer. In his post, Hastings congratulated the Netflix team for a job well done in early July, noting the one billion hours of video delivered to subscribers the previous month. The message was just 43 words. In the usual social media fashion, the post was forwarded by his followers. Bloggers picked up on it. Media reports cited it.

Reed Hastings Facebook page

So what’s the deal? Technically, Netflix had not filed an “8K” update with that data at the SEC nor issued a traditional press release. But the company had revealed the 1B streaming hours in its public blog well before the CEO’s Facebook post.  And in 2008, the SEC became the first federal agency to recognize the growing communications functions of blogs by issuing landmark guidance saying that corporate use of blogs for release of material financial information would satisfy Reg FD.

In this context, the action against Hastings seems to make little sense. Even if the prior blog post had not disclosed the 1B figure adequately, Hastings’ post was open to more than 200,000 followers of his Facebook page, could be “subscribed” by anyone (“friends” or not) and was widely and immediately disseminated, both in social and traditional media. Had Hastings done this via a Twitter DM (direct message) or a private Facebook message to one or more individual friends, that would be completely different. But his post was public and thoroughly publicized.

That’s the precise purpose of Reg FD. But the SEC’s Wells notice illustrates that even government agencies that “get it” technically are often trapped in outmoded world views. It’s one thing for a public company CEO to post messages about financial performance on financial chat rooms and lists, under a pseudonym, to pump up trading volume artificially. It’s quite another for bureaucrats to decide that unless one uses the obsolescent technology of the past, public disclosures are inadequate. Would the SEC also suggest that a webinar, rather than telephonic conference call, is insufficient under Reg FD when announcing earnings guidance because not all investors have broadband Web access? That is hardly a sensible result.

We’ve written a lot in this blog about social media policies and how to reduce enterprise legal exposure. The irony of the Netflix case is that a company and executive who seem to have had a valid policy and followed the government’s own guidelines for use of social media has been targeted in a possible enforcement action nonetheless. That raises the spectre, which numerous commentators noted in connection with more a recent SEC alert on social media usage by investment advisors, that vague agency guidelines may lead to policy making by criminal complaint, rather than rules of general applicability. If that is the case wih regard to blogs and Facebook as mechanisms for Reg FD compliant disclosures, there’s an equally great risk that these new modes of communication and interaction will be rendered impotent for corporate purposes due to the unknown scope of potential SEC exposure. That’s a bad result which everyone should hope we do not reach.

For more information, please contact Glenn Manishin.

 

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