Executives run into trouble when using social media for two reasons: either they forget that social media is speaking to the public or the rules haven’t adapted to understand that social media is speaking to the public. In 2012, the CFO for fashion retailer Fancesca was fired for tweeting “Board meeting. Good numbers=Happy Board.” Apparently he forgot that Board meetings are confidential and that financial information for a publicly traded company are supposed to be disclosed in a certain fashion, no pun intended (well, maybe a bit). Just last month, the CEO of Zipcar tweeted a link to a story on the company and its potential acquisition by Avis which prompted Zipcar to make an SEC filing. That’s because the acquisition is still pending and any communication by the CEO that could be an attempt to persuade shareholders to vote on the acquisition has to be filed with the regulator.
But those are examples of executives innocently or otherwise forgetting that their speech was public. I find the case involving Reed Hastings, CEO of Netflix, far more interesting since it involves a regulator’s view of social media. As reported last month, the SEC is investigating this post made by Hastings on Facebook:
The investigation concerns whether Hastings’ post violates the SEC’s Final Rule on Selective Disclosure and Insider Trading, more commonly referred to as Regulation FD. If you don’t have time to read the approximate 29,000 words of Regulation FD (granted, that’s with the footnotes, but who skips the footnotes?) then let me provide a brief summary.
In the 1990s it became a lot easier for people to trade stocks by themselves. The rise of networked personal computers gave access to individuals that was previously only available to licensed stockbrokers. With the increase in individual traders, a problem came to light: public companies were accustomed to holding regular meetings or phone calls with certain analysts and brokers and those meetings gave valuable information about the stock and the rest of the trading public was being left out. To prevent this unfair distribution of information, Regulation FD was passed which requires public companies to disclose material information uniformly, rather than selectively.
When Regulation FD was ratified in 2000 this meant that companies needed to have broader phone calls (and distribute information about how to dial-in ahead of time) or make the information available to the public through press releases or SEC filings or other electronic means. The regulation’s executive summary states:
Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
Back in 2000, the SEC and everyone else on the planet couldn’t predict that a dozen years later over a billion people would have accounts on a single website. Or that the website would allow individuals to publish information to their friends. Or that the website would also allow people to open their information to the public via subscription. But that’s the world we live in today.
Hastings’ Facebook account was open for subscriptions and at the time of his posting had over 200,000 people subscribed. And those are just the people that would initially see the message–thanks to Likes or Shares, many more could have seen it as well. Theoretically, all 1 billion+ Facebook users could have accessed the status update.
But that isn’t public, according to the SEC. Which leaves us with the head-scratching notion that if we accept the SEC’s argument, Hastings may have told up to a billion people something but not told the public.
Twitter has tried to make the same argument, that if you tell 140 million people something it can still be private, but while Twitter’s argument deals with criminal procedure issues the SEC’s investigation seems to forget the intention behind the rule they seek to enforce. The problem that Regulation FD addressed was the lack of public information. Investors didn’t know about these private meetings or phone calls or weren’t invited to attend. There was absolutely no way for them to get the information from those sessions–so if that information impacted the stock price then the individual trader was out of luck. In this case, Hastings posted the information publicly. Virtually anyone can get a Facebook account if they don’t have one already, and certainly anyone who trades stocks and is interested in any tidbit of information about Netflix could subscribe to Hastings’ feed.
This case certainly differs from all the other Regulation FD cases the SEC has pursued as of April, 2011 (here’s the full summary of those cases, if you’re interested). In the 11 years since passing the regulation there were 11 actions. Here’s the rundown:
- Raytheon told certain analysts their projections were too high or aggressive
- Secure Computing told two advisors about a material contract prior to telling the rest of the market
- Siebel Systems held an invitation-only investor conference where outlooks different from public outlooks were shared
- Motorola Solutions called certain analysts following a public call so that the term “significant” was clarified
- Schering-Plough’s CEO told some analysts and investors that estimates were too high days before issuing a press release
- Senetek told two analyst firms non-public information in their preparation of public research reports
- Siebel Systems’ CEO held another private event where non-public information was disclosed
- Flowserve’s CEO affirmed prior guidance to certain analysts at a private meeting
- American Commercial’s CFO told certain analysts in an email non-public earnings guidance
- Presstek’s CEO told one investment advisor material earnings guidance
- Office Depot told certain analysts, through inference, material non-public information
These 11 cases have a very different feel than the Hastings case. In all 11 of the above cases you could see why the people receiving the information would have an advantage and why they would probably not tell anyone else in the short term. In all cases it would be impossible for anyone outside of the recipients to even know the information existed, let alone request that information.
The Facebook post is something different. 200,000 people could have initially seen it but the press coverage was immediate. VentureBeat and other blogs/industry press sites had the story posted within hours. Press coverage by itself isn’t required by the regulation, but in the SEC’s supplemental interpretations of Reg FD (#16 if you want to read along) the SEC was asked if a disclosure was public if the press was invited to an event that disclosed material information. The SEC’s answer concludes with
Whether or not the meeting would be deemed public would depend, among other things, on when, what and how widely the press reports on the meeting.
If sufficient press coverage at an otherwise private event is enough to re-classify the event as public with regard to Reg FD, I don’t see how a public Facebook post fails to meet this standard. The SEC has also issued guidance on when a company can use its own website to publicly disclose material information (starting on page 17) but the analysis does not address using a third party website like Facebook. In the age where more people use Facebook or Twitter or several other services than would regularly check press releases or an Investor Relations section of a corporate website, it is only a matter of time before the SEC issues guidance on the proper use of social media.
To be fair, the Netflix case has some additional angles. Market Daily News has a great article about why Hastings’ disclosure of just the streaming time and not some negative news (such as declining profit) is the bigger issue. The stock also rose for two days following Hastings’ post, which may help make the case for the information being material–there has been some debate over whether the billion hours statistic was material given everyone’s anticipation of the milestone–but Netflix also points out that the stock started rising before the announcement. But in the end there is so far a failure for the SEC to acknowledge the fundamental changes to how news is distributed these days. That will change and Hastings will be the main figure to blame/thank.