Netflix, the SEC, and a Problem Called FD
by
Jacob Frenkel
When Netflix CEO Reed Hastings recently congratulated his company’s content licensing team about blowing away monthly viewership numbers, to most of the social media world, this was simply another message to his 200,000 “friends,” to whom “FD” could mean “Facebook Delivery.” To the Securities and Exchange Commission (SEC), “FD” has regulatory meaning – Regulation FD for “fair disclosure.” When a senior official in a publicly-traded company communicates information using social media – including tweeting, “facebooking” and even posting on the company’s website, the company must make certain that the first disclosure is to as broad an audience as possible, not just to “friends.” So, the next question for Netflix and Mr. Hastings is whether “FD” will mean “Failed Delivery.”
Why care? The SEC takes considerable interest when communication by a corporate official has the result of increasing a stock’s market price by 13%, which is how much Netflix’s stock price rose. On May 14, 2012, a different public company fired its Chief Financial Officer because he made a comment on Twitter that read “Board meeting. Good numbers = Happy Board” during a period when corporate officials were supposed to be silent about corporate performance. If markets may view a statement as an interim disclosure about a company’s financial position and future growth potential, then SEC regulations about reporting of corporate information kick into effect. The objective of Regulation of FD is to ensure that everyone receives information at the same time, not selectively.
The SEC last issued carefully worded guidance about Regulation FD in 2008 on the topic of using corporate websites to share information. Previously, the SEC had said that sharing information on a corporate website could be a “component” of disclosure but posting information only to the website was inadequate. Sun Microsystems’ CEO criticized the SEC, understandably challenging Regulation FD’s failure to fully embrace the web as “anachronistic.” The SEC relented and now permits information shared on a company website to meet Regulation FD’s standards, as long as the website is a “recognized channel of distribution” and posting the information on the website actually makes it publicly available, and meets several other factors. The SEC did not address directly public company use of social media, and still provides no meaningful guidance to senior officials of public companies wishing to use state-of-the-art and timely communications media.
In January 2012, the SEC issued a risk alert to registered investment advisers in connection with their use of social media to communicate with existing and potential clients and to promote their services. There, the SEC’s message was make to certain to comply with the antifraud, compliance and recordkeeping provision of the federal securities laws. That advice applies as well in the corporate context. Absent more specific guidance for corporations, it is up to the lawyers to structure communications protocols and compliance measures to address instances of both intentional and the more common inadvertent disclosure, for which there is a “fix” available.
The SEC’s view is that there should be no “you heard it here first” moments, thereby giving an edge to certain investors. Media savvy CEOs must treat all investors equally. The use of social media to share information that a company has not yet disclosed through Regulation FD-approved channels is inherently risky. Certainly, once a company makes public information through public distribution channels following Regulation FD, then executives may further disseminate the information through social media. Also certain is that companies should use discretion and judgment to ensure that announcements are made through correct channels and notify in advance their corporate counsel about anticipated statements to large groups, whether in person or by social media, that some may interpret as new “news” about the company.
Without guidance and given the nature of some social media, it is questionable whether in the SEC’s eyes social media will ever qualify as a “recognized channel of distribution” such that posting information may become considered publicly available. Some sites require membership of the site to view content. Other sites may give investors who subscribe more instantaneous “push” content than other investors. And other sites may own and restrict the distributed content. Even issues as basic as unannounced changing of a social medium’s features, policies and security settings can impact evenness of content distribution. Also, third-party content and timing control, instead of the communicating issuer, undoubtedly causes heartburn for the SEC. As a result, the SEC likely will stay with widely accepted news channels, mindful that not only do all investors not use Facebook or Twitter but also some probably think a “Tumblr blog” is a resource for beverage or gymnastics information. With the dizzying array of social platforms in the marketplace, it is less probable that choosing one specific platform will meet the high bar of Regulation FD.
On one hand, SEC enforcers pride themselves now in monitoring closely all communications media as potential sources of violations. And the agency has brought enforcement actions against only 11 companies and 12 individuals charging violations in the 10-year history of the regulation. So, common sense dictates that a civil regulator should provide guidance rather than play “gotcha,” but no. Under Regulation FD, the SEC does not need to prove that a violation was intentional. At times and unfortunately, the SEC appears more interested in regulation or guidance by enforcement rather than through clear communication and advice, which would benefit the market.
For the time being, “FD” continues to mean “Follow Dutifully.”
Jacob Frenkel is a former SEC Enforcement lawyer and former federal criminal prosecutor who chairs the Securities Enforcement, White-Collar Crime and Government Investigations practices at Maryland law firm Shulman, Rogers, Gandal, Pordy & Ecker, P.A. (shulmanrogers.com/attorneys-95.html). Mr. Frenkel counsels companies and their executives and directors in compliance with SEC regulations and defends investigations by the agency. The author acknowledges the assistance of John Crimmins in the preparation of this article.
