In an April 2 release,1 the Securities and Exchange Commission moved its Regulation Fair Disclosure (“Reg. FD”) guidance into a new era. For public companies, many of the “old” messages and challenges remain.
The release centers on a July 3, 2012 posting by Netflix, Inc. CEO Reed Hastings on his personal Facebook page. The posting detailed that, over the previous month, online viewing of Netflix-distributed content “exceeded 1 billion hours for the first time ever . . . .”2 The information gradually was disseminated further through various media, Internet and marketplace channels over the course of the day. Netflix’s stock price increased from $70.45 at the time of the Facebook post to $81.72 at the close of next trading day.3
The SEC investigated whether the Facebook post violated Reg. FD. At its core, Reg. FD forbids certain selective disclosures of material, nonpublic information; it requires an issuer communicating such information to securities market professionals and shareholders to disseminate this information simultaneously – and broadly – to the marketplace. At the time of the post, Hastings’ Facebook page had over 200,000 followers. The SEC staff assessed whether disseminating this specific information in this manner was consistent with Reg. FD.
The SEC concluded the investigation with the release of the “Netflix Report” – a public report issued under Section 21(a) of the Securities Exchange Act. Such reports are used infrequently by the Commission to address novel issues of broad interest. Individuals and entities are identified in Section 21(a) reports, but they are not defendants or respondents in an SEC-initiated proceeding. In 2002, for example, a Commission report relating to Motorola, Inc. addressed the materiality analysis that is central to Reg. FD judgments.4 In effect, a Section 21(a) report serves as a securities law compliance “teaching tool” for the marketplace.
The Netflix Report stresses that issuers may use social media networks such as Facebook or Twitter to disseminate material information if companies have previously alerted investors that these channels will be used for such purposes. In short, investors need to be told where to look for material disclosures. Without such notice, the SEC noted, investors would be left with the “virtually impossible task” of monitoring a constantly evolving universe of disclosure channels.
While the facts leading to the Netflix Report are a product of new age technology, the report prompts five practical lessons applicable to all public companies and their counsel.
First, each public company should reassess which disclosure channels best suit their needs and their audience. It is unlikely that many companies will signal that Facebook accounts of senior officers will be a channel for disclosure of corporate information. That said, the Netflix Report can prompt a reassessment of what channels should be used for investor communications. Public company investor relations departments may wish to make greater use of company Facebook, Twitter, website and e-mail updates as supplements to their mandated SEC disclosures.
Such adaptations have always been a constant of life under the primary securities laws. The core statutes were adopted in the early 1930s when one technological imperative was running electricity to all U.S. households. More recently, to the extent that the widely-reported Netflix investigation chilled the consideration of alternate channels, the Netflix Report provides a “road map” for their future use.
Second, “old school” broad dissemination should remain a staple for disclosing a company’s core material information. The fact that material information could be disclosed through a Twitter account does not make that the right vehicle for that disclosure. Information most central to the marketplace – e.g., quarterly operating results, adjustments in earnings guidance, significant corporate transactions – should still be sourced first through formal corporate releases and, as appropriate, Form 8- K filings on the SEC’s EDGAR system. This directs the information to the sources where investors would look for this information.
Clearly, there is more room now to supplement these formal announcements through, for example, postings and tweets that draw attention to their content. Key disclosures generally should gravitate first to the conventions that the market expects and fit most directly in the existing SEC mold.
Third, securities law risks can extend to a company’s statements broadly disseminated through social media. Messages limited to as little as 140 characters are necessarily cryptic. Whatever their channel, if these statements are materially false, they can expose the company and the officers involved to the various legal risks under the federal securities laws.
When a public company avails itself of social media channels, it must adapt to this forum the safeguards that it applies to its SEC filings and earnings calls. When public companies first introduced Internet websites, they had to develop conventions to vet content before it was made accessible to the public. The current challenge with social media centers on capitalizing on the reach and speed of this medium while maintaining controls over the content. While these controls are company-specific, they often will include narrowly limiting the officers who can “speak” for the company, limiting topics that will be addressed in these channels and providing for advance review of these disclosures.
Fourth, the Netflix Report points to the broader challenges of “disclosure controls” in today’s world. Disclosure controls are the processes a company maintains to “roll up” its consolidated operating results into the disclosures mandated SEC reports. Disclosure controls set the regimen for what information gets distributed and who is responsible for that work. The Netflix Report is a reminder that in a frenetic information age, a few quick sentences can land a key executive and the company in an extensive SEC investigation. Like the Internet forums that preceded the widespread use of Facebook, social media presents new opportunities to magnify even the smallest leaks (and the speed at which some market participants can trade on this information). Management must be reminded constantly to control the sensitive corporate information at their fingertips and central to Reg. FD regulation.
Finally, the Netflix Report should cause internal counsel to mentally revisit the systems in place to support the senior managers who “face” investors on a regular basis. In some respects, SEC-mandated disclosures – Forms 10-K and 10-Q – might be considered the “easier” half of a company’s disclosure regimen. There are fixed rules, ample guidance and information is released in a controlled setting when it is “ready.” By contrast, a public company’s investor relations contacts – typically the CEO, CFO and Investor Relations managers – must address the company’s hardest questions “on their feet” in earnings calls, investor conferences and daily telephone calls. As a tacit acknowledgement of these challenges, Reg. FD is one of the rare Commission rules that anticipates errors (inadvertent disclosures) and creates a “prompt” disclosure antidote.
Corporate counsel should take the Netflix Report as a reminder to consider what systems are in place for the officers who operate in this forum. Since pointed questions inevitably come in these informal settings, the planned responses need to be vetted in advance. With guidance from counsel, management must enter these encounters with a clear sense of what information is material for that specific company.
There is no escaping that the way in which the world communicates key information is constantly evolving. On the day after the release of the Netflix Report, CNN reported the termination of a Rutgers University coach for abusive behavior; the news flash noted that this development had first been disclosed through “a tweet from the university’s athletics department.” In such a world, counsel must work closely with management to help them continue to be able to respond to the marketplace in real time.