SEC Urged to Update Fair Disclosure

U.S. regulators, probing comments posted by Netflix Inc. Chief Executive Officer Reed Hastings on Facebook Inc.'s site, are being urged to reconsider disclosure rules created years before the advent of social media.

Netflix said it may face a Securities and Exchange Commission civil suit after Hastings told Facebook followers in July that Netflix customers watched more than 1 billion hours of videos in June, according to a filing by Netflix yesterday. The company said that it didn't issue an accompanying press release or make a filing with regulators.

Companies and executives are increasingly relying on sites such as Facebook and Twitter Inc. — alongside news wires and other more traditional outlets — to communicate with the public. It's time for the SEC to update its policies to account for the widening role played by social media in helping companies be more transparent, said Stephen Diamond, associate professor of law at Santa Clara University.

“The SEC rules are 12 years old, and in the technology world, that might as well have been in the last century,” said Diamond, whose school is located in Santa Clara, California. “The SEC has always encouraged issuers to be more forthcoming. Here's a medium which allows investors, quite easily and cheaply, to listen to what the CEO or other insiders are saying.”

The SEC adopted its fair disclosure regulations, known as Reg FD, in 2000 to inhibit companies from sharing sensitive information in a selective manner.

To comply, companies need to file a so-called Form 8-K or distribute a press release through a “widely disseminated” news or wire service or another “non-exclusionary method of disclosure,” according to the SEC. The agency uses a so-called Wells Notice to signal that it may bring an action, which could result in a fine or settlement.

“The SEC staff believes that I gave you all 'material' investor information in my post and that we needed to instead release the June viewing fact 'publicly,'” through a press release or a regulatory filing, Hastings wrote, addressing his customers, in yesterday's SEC filing.

Jonathan Friedland, a spokesman for Los Gatos, California-based Netflix, said the company had no additional comment. Florence Harmon, a spokeswoman for the SEC, declined to comment.

Netflix, based in Los Gatos, California, rose 3.6 percent to $89.24 at 9:46 a.m. New York time. The shares had advanced 24 percent this year through yesterday.

Precedent Setting

The case against Netflix may hinge on whether Facebook or other social sites can be considered as public an arena as a company blog or a broadly disseminated press release. The outcome will have implications for other executives who share information through tweets and other consumer-Web networks.

Tesla Motors Inc. CEO Elon Musk said on Twitter this week that his electric vehicle company is cash-flow positive, and Google Inc. executive Andy Rubin took to the microblogging site in June to say that 900,000 Android phones had been activated.

By using Reg FD to restrict disclosure via social media sites, the SEC could stifle the adoption of these tools in business, said Howard Lindzon, CEO of online-investing community StockTwits Inc.

“This is a warning shot for CEOs to be more careful,” Lindzon said. “They are locking down silos on how these CEOs communicate.”

The SEC has loosened rules in the past. Commissioners voted in 2008 to encourage companies to disclose more market-moving information via websites and blogs to give investors faster updates on business developments.

“This is not a new phenomenon,” said William McGeveran, associate professor of law at the University of Minnesota. “It took a long time for the SEC to approve release of information corporate blogs as something that complied with Reg FD too. So, when you have new information technology, it takes a while for the SEC to let things settle and decide that's a disclosure that's widespread enough to be satisfactory.”

The SEC made the changes after Jonathan Schwartz, the former Sun Microsystems Inc. CEO, complained publicly in 2006 about restrictions on disclosure via blogs.

Speaking in an interview yesterday, Schwartz said fair disclosure regulations were “ridiculous” because they favored the “1950s technology” of phone calls, press releases and newspapers over the Internet.

Public Media

Still, he said Facebook shouldn't get the same treatment under disclosure rules as websites that are available for anyone to visit.

“Perhaps I'm old-fashioned, but I don't consider Facebook the Internet,” Schwartz said. “Facebook is Facebook and you need an account. I do agree that it is inappropriate to carve off a select audience and give them updates.”

The SEC must ensure that investors get information in a manner that's truly public, said Mark Fickes, a former senior trial counsel at the SEC and now a partner at BraunHagey & Borden LLP in San Francisco. SEC filings are not the same as a post on Facebook, which has more than 1 billion users, he said.

“The SEC is looking more at the ways in which social media can be used in the way the SEC deems improper,” he said. “The question is: How public is it to put something on Twitter or Facebook?”

For a different perspective of the Netflix's Facebook posting, see this Dealbreaker post.

Bloomberg News

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