Many may remember the Netflix matter. That stemmed from an inquiry the SEC’s Division of Enforcement launched about a post that Netflix CEO Reed Hastings made on his personal Facebook page. The post stated that Netflix’s monthly online viewing had exceeded one billion hours for the first time.
The SEC has now backed down with some public fanfare, putting its own spin on the matter. The SEC issued a press release captioned “SEC Says Social Media OK for Company Announcements if Investors Are Alerted.” Obviously, the SEC recognizes it cannot stand in the way of progress, and maybe recognized it didn’t have a winnable case, perhaps because of the materiality issue, among other things (some believe in footnote 15 to the SEC’s report discussed below, the SEC concedes the materiality issue). The SEC noted “The SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix. Recognizing that there has been market uncertainty about the application of Regulation FD to social media, the SEC issued the report of investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934.”
While the guidance is not hard to understand, it will be difficult to apply. And the SEC will be looking for someone to cross the line.
According to the SEC, the report of investigation explains that although every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer — without advance notice to investors that the site may be used for this purpose — is unlikely to qualify as an acceptable method of disclosure under the securities laws. The SEC opines that personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.
So it’s OK for an officer to use social media for company announcements, as long as it has been authorized and disclosed in advance. How many companies are going to authorize that? And what is acceptable advance notice? The SEC directs issuers to 2008 guidance on corporate web sites for further analysis.
This is the second Section 21(a) report on Regulation FD. The first centered on Motorola, where the SEC noted “before engaging in the conduct in question, Motorola officials sought the advice of in-house legal counsel. Counsel approved the conduct in question based on a determination that the information in question was not material or nonpublic. Counsel’s determination was erroneous in both respects. Nevertheless, because it appears that counsel’s advice was sought and given in good faith, and in light of the surrounding facts and circumstances, we are issuing this Report rather than bringing an enforcement action against Motorola or its senior officials.”
For a fairly current analysis of prior Regulation FD enforcement actions, see Vanessa Schoenthaler’s write-up on IR Web Report.
An interesting question is “Just what is a Section 21(a) Report?” As Broc Romanek of TheCorporateCounsel.net has noted, the SEC uses the report to “as a vehicle to signal how it views a particular problematic area or set of practices – so they are essentially policy statements. Perhaps more important, they put people on notice that going forward the SEC and it’s Enforcement Division will consider similar conduct to be fair game for more conventional enforcement action.”