Early last month, Netflix disclosed the fact that it and its Chief Executive Officer, Reed Hastings, had received “Wells Notices” from the Staff of the Securities and Exchange Commission. Those Wells Notices threatened civil claims and cease and desist proceedings against the company and Mr. Hastings predicated on Mr. Hastings’ June 2012 Twitter post touting the fact that Netflix users had streamed more than 1 billion hours of video that month. The SEC believes that Mr. Hastings’ post potentially violated SEC Regulation Fair Disclosure (Regulation FD), which requires companies and their representatives to disclose material nonpublic information through the filing of a Form 8-K with the Securities and Exchange Commission (it is worth noting that the SEC has not alleged that Mr. Hastings’ tweet constituted a misstatement). In what appears to be a direct reaction to the SEC’s threatened action, earlier this month Zipcar filed a Form 8-K disclosing a tweet by Scott Griffith, Zipcar’s Chief Executive Officer, posting a link to a Boston Globe article covering the Zipcar/Avis merger. The merger had been announced publicly two days prior to Mr. Griffith’s tweet. For the reasons set forth below, the SEC’s approach not only is contrary to the purpose of Regulation FD, but may very well curb corporate officers’ use of social media altogether, thereby restricting the amount of information ultimately available to the investing public.
The Threatened Action is Inconsistent with Regulation FD’s Purpose
The SEC’s position that Netflix and Mr. Hastings violated Regulation FD ignores the clear purpose of the regulation. Enacted in 2000 (years before social media existed in its current form), the regulation expressly sought to curtail selective disclosure of material nonpublic information to “securities market professionals and holders of the issuers’ securities who may well trade on the basis of the information.” Put differently, the SEC believed that Regulation FD would curb insider trading by preventing securities analysts and selected institutional investors from obtaining a perceived edge in accessing information over the general investing public. Regulation FD specifically did not concern itself with widespread communication and the easy access to information social media offers; rather, it focused on curtailing the dissemination of non-public information to those securities professional arguably better positioned to receive non-public information than the general investing public.
Putting aside whether Mr. Hastings’ tweet contained material information—an assertion he and the company dispute—it was neither directed at the securities analysts nor institutional investors contemplated by Regulation FD. It was sent to his more than 200,000 individual Twitter followers and also was accessible by anyone with access to a computer, thereby affording virtually any investor with even a passing interest in Netflix’s stock performance the ability to monitor the communications of its CEO. While Regulation FD certainly proposes a uniform method of distributing corporate information, there can be no doubt that Mr. Hastings’ post was not the kind of secret backroom communication intending to favor “market insiders” over the investing public that Regulation FD sought to curtail.
The Threatened Action Ignores the Realities of Social Media and Digital Communication
The SEC’s position also overlooks the reality of the way people communicate in the digital age. Digital tools like Facebook, Twitter and LinkedIn allow individuals to communicate virtually on a real time basis about personal and professional matters. The SEC’s hard-line position could prompt corporate officers from using these digital communication tools altogether—indeed, using the Zipcar disclosure as an example, if a corporate CEO cannot tweet a link to a public newspaper article referencing an already public merger without the requirement of a Form 8K filing, is there anything that really can be shared by an officer via Twitter that would not prompt a regulatory filing? The effect of the SEC’s threatened position—and a cautious corporation’s appropriate reaction to that position—likely will restrict the flow of information to the general investing public because it could very well chill corporate officers’ use of social media and direct digital communication altogether. Because sites like Twitter arguably are more popular and widely used by the investing public than sites providing access to SEC filings, the SEC’s approach ultimately could end up providing more limited access to corporate information.
What Should The SEC Do?
Rather than attempting to regulate these new forms of digital communication by trying to shove them into the four corners of Regulation FD, the SEC should consider embracing this technology as a means to ensure that more information is communicated to the investing public. Indeed, in a 2008 Guidance Opinion, the SEC wrote: “We believe that company disclosure should be more readily available to investors in a variety of locations and formats to facilitate investor access to that information.” While investors now may have to hunt down a company’s 8-K filings and press releases, social media websites make access to this information much easier for investors—essentially, tools like Twitter and Facebook hand deliver information to the investing public. Thus, the SEC should consider methods whereby shareholders and analysts can elect to automatically follow a corporate officer’s Twitter feed or Facebook page. This approach will allow more people to follow a corporation’s news and disclosures, recognizes the realities of new digital methods of communication, and will foster more corporate communication with the public.
To read more from Benjamin Fischer, please visit www.maglaw.com