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.
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.
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.”