Under Chairman Mary Schapiro, the U.S. Securities and Exchange Commission (SEC) has done a Herculean job of moving from what was becoming an increasingly irrelevant and antiquated government agency to one that is again an essential element of our body capital. All indications are that Elisse Walter will continue the commission’s transition into the 21st Century unabated.
But when it comes to social media, Regulation FD, and what constitutes a "public" disclosure, it’s hard to see the SEC as anything but a typewriter-driven bureaucracy. There’s a very good chance that the courts will scold the Commission’s Luddite views if their case against Netflix ever goes to trial.
Earlier this month, Netflix received a dreaded Wells Notice over the alleged posting of material information to CEO Reed Hastings’ public Facebook page in July 2012. The SEC enforcement staff believes that Mr. Hastings broke with Reg FD when he posted a 43-word message about the one billion hours of video subscribers accessed in June of 2012. Already, a number of pundits—The Wall Street Journal’s Holman Jenkins, in particular—have questioned the wisdom of the enforcement staff’s decision to classify Hastings’ social media activity as anything but public. Those pundits aren’t alone.
"If I were advising Netflix, I would tell the company to tell the SEC to bring it on," says Neil Eggleston, a partner at Kirkland & Ellis LLP who has defended a number of high-profile companies and individuals entangled in regulatory enforcement matters. "It seems to me that this is a misguided attempt at regulation through enforcement that is entirely divorced from the origins of Reg FD. The rule was put in place to prevent selective disclosure of material information to certain analysts, thereby providing them an unfair market advantage. Moreover, Reg FD only requires that material information be publically disseminated; it does not mandate how that information should be publically disseminated.
"Thus, to say that a Facebook post to 245,000 followers breaks with Reg FD is a stretch. This is not a case of targeted dissemination and if Netflix makes that case in court, I think it will win."
Mr. Eggleston’s insights hit the nail on the head in an age when social media have fundamentally changed how public companies communicate with the marketplace. Does anyone believe that Netflix’s 10-Q or 8-K filings are as widely read as Mr. Hastings’ Facebook page? Does a traditional news release (the SEC’s preferred communications channel) have the viral allure of a tweet of a popular CEO?
The answer to both questions is a resounding no. And, as such, the SEC’s case against Mr. Hastings and Netflix represents a tremendous opportunity to finally open the flood gates for the entire sphere of public companies seeking new ways to hasten the speed and expand the reach of their key financial messages. After all, one could easily argue that Mr. Hastings stands for full and fair disclosure while the SEC demands allegiance to the telegraph in the age of the Internet.
Whether intentional or not, Mr. Hastings’ Facebook post made a compelling statement about social media’s utility in the IR realm for the simple reason that it had a dramatic impact. His page has more than 246,000 subscribers who facilitated a viral effect when he shared the record-breaking video view stats. They were rapidly disseminated amongst subscribers’ social networks, bloggers, analysts, and even traditional journalists. The result was a jump in stock price from under $70 a share to more than $80 – with the post being the only data point available for explaining the increase.
As of this writing, the stock is trading around $89 a share, even with the SEC investigation somewhat dimming investors’ excitement. With Carl Ichan circling overhead (he now holds a 10 percent stake in the company), the lasting spike created by Mr. Hastings’ very public post ought to be widely credited should the company be able to keep the corporate raider at bay.
Another important point to note—and one that lends this drama a certain sense of irony—is that IR engagement via social media falls directly in line with what the SEC is trying to accomplish in the Dodd-Frank era. As Mr. Hastings’ amply demonstrated, it has the reach to inform the widest possible swaths of the investing public. It has the speed to ensure that information reaches the marketplace in a timely fashion. Perhaps most important, it provides for two-way communications between shareholders and the companies they own. If there are other media that can inform and empower investors with such effect, they aren’t yet on my radar screen.
For all of these reasons, it’s hard to conclude that Mr. Hastings’ Facebook post is anything other than what the framers of Reg FD envisioned. At the same time, however, it is perfectly understandable that most public companies will want to see how this case plays out before jumping headfirst into the social media waters. The good news here is that they don’t have to.
Even if the unlikely outcome comes to pass and Netflix is ultimately found to have stepped outside regulatory boundaries, Mr. Hastings has provided us all with a salient reminder that it really is fine for a public company to discuss material information on social media sites as long as the company avails itself of traditional disclosure options simultaneously. As such, the answer moving forward is for public companies to feel perfectly confident sharing material information on blogs, Facebook, Twitter, or even YouTube—as long as the information has gone out via a news release, 8-K, or 10-Q first or at the same time.
Despite the SEC’s misguided attempt to reign in Netflix, speech, and the Internet in one fell swoop, public companies ought not to be turned off to the myriad benefits of social media engagement in the IR context. Not even the SEC can put the toothpaste back into the tube, turn back the clock, and deny that social media are here to stay.
If the Commission ends up making its case in court, it will likely learn that lesson the hard way. Either way, it’s probably a good time for the SEC to sell its typewriters.
—Richard Levick, Esq., President and CEO of LEVICK, represents countries and companies in the highest-stakes global communications matters — from the Wall Street crisis and the Gulf oil spill to Guantanamo Bay and the Catholic Church. Mr. Levick was honored for the past four years on NACD Directorship’s list of "The 100 Most Influential People in the Boardroom," and has been named to multiple professional Halls of Fame for lifetime achievement. He is the co-author of three books, including The Communicators: Leadership in the Age of Crisis, and is a regular commentator on television, in print, and on the most widely read business blogs.
[Image: Flickr user Daniel Kulinski]