The growing pains accompanying advances in technology often can clash with regulatory policy that is slow to adapt to these rapid-fire changes. Nowhere is this more evident than a recent Securities and Exchange Commission (SEC) investigation into something as seemingly innocuous as a Facebook posting.
At issue is a Facebook status update made by Reed Hastings, the CEO of Netflix, last July. The posting, with “public” privacy settings, congratulated a specific Netflix employee and the content licensing team for exceeding 1 billion hours in monthly viewing.
On Dec. 6, Netflix filed a Form 8-K public disclosure with the SEC, stating that Netflix had received a “Wells Notice” (a formal recommendation for a civil enforcement action against the company by the SEC) against Netflix and Hastings himself for a violation of Regulation Fair Disclosure (FD).
Regulation FD is a fairly modern rule adopted in 2000 by the Securities and Exchange Commission that prohibits the selective disclosure — disclosure to a limited group that includes brokers, investment advisers, etc. — of “material nonpublic information” (17 CFR 243.100). It was promulgated by the SEC due to concerns that selective disclosure by securities issuers would, according to the Final Rule notice on Regulation FD, lead to a “a loss of investor confidence in the integrity of our capital markets.”
“The commission believed that companies were feeding brokers and traders information that others didn’t have,” said Rutheford Campbell, William L. Matthews Jr. Professor of Law at the University of Kentucky College of Law. “Regulation FD requires that you simultaneously make a public disclosure when you make a selective one.”
The key elements are “material,” “nonpublic” and whether the disclosure itself was selective or fully public. In the filing with the SEC and a concurrent Facebook post, Hastings disputed that the information disclosed was material and nonpublic, because an earlier blog had posted that Netflix was approaching the billion-hour mark. Whether the information is considered material under the regulation may be influenced by the fact that Netflix share prices increased after the announcement.
“The big issue,” according to Campbell, “is whether the Facebook posting amounts to public disclosure [under the regulation].”
If the posting is found to be selective, the specific violation will be that Hastings didn’t concurrently file a Form 8-K with the SEC (as he did when making his explanatory follow-up Facebook post), which becomes instantly available as a public disclosure in fulfillment of Regulation FD.
Hastings suggested in his posting that the disclosure was not selective, stating, “[W]e think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.”
What is particularly striking about the usage here is that the SEC has no clear rules or precedent generally regarding communications via social media in this context. In 2008, the SEC issued a formal interpretation letter that defined how company websites and disclosures contained therein would be handled. In this interpretation letter, the SEC expressed that factors involved in the determination of whether information has been publicly or selectively disclosed might include whether the specific website involved was a “recognized channel of distribution” for investor information, which seems to suggest that public disclosure also requires some further guidance for investors over where to be looking. At the same time, despite being issued in 2008, when Facebook alone had more than 100 million users, there was no mention of
social media, which arguably doesn’t fall under the category of “company website.”
“Not every trader is on Facebook or has friended this guy,” said Campbell, and therefore Facebook might not be an obvious location to be looking for material information.
“This is really a novel case,” said Craig Bradley, a securities attorney with Stites & Harbison, PLLC in Louisville. “It does seem a bit unfair that what has become a very public enforcement proceeding came about without any guidance over whether social media is an acceptable form of communication under Regulation FD. A lot of companies are now looking very carefully at their corporate compliance when it comes to social media.”
As an example, Bradley pointed to 8-K filings by Zipcar Inc., which have been issued when Zipcar posts to its Twitter feed from both the corporate Twitter account and CEO Scott Griffith’s account concerning a merger with Avis. Even something as inconsequential as a CEO pointing out positive press — “@bostonglobe weighs in on the revolution we started at @Zipcar” (from Scott Griffith’s Twitter feed, @SWGriffith, Jan. 4, 2013) — receives a full, formal Form 8-K public disclosure filing with the SEC in the wake of Netflix’s troubles.
“In some ways,” said Bradley, “this represents the next step [by the SEC] in addressing evolving means of communication.”
Publicly traded corporations, he suggested, should keep a close eye on their social media accounts until the SEC issues clearer guidance on how social media can be used for communication of material information.
In applying the regulation against a Facebook posting, Campbell joked, the SEC is “striking a blow for the luddites.”