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Assessing the Net of Disclosure: Should the SEC “Like” Facebook?

Netflix CEO Reed Hastings is in the news again, not for enraging subscribers over a price increase or for presiding over a steep decline in share price, but for using social media to tout a company milestone.

Hastings took to his Facebook page in June and praised his staff for achieving a monthly viewing rate in excess of 1 billion hours for the first time in the company’s history.

The Securities and Exchange Commission (SEC), which has regulations governing the way in which publicly held companies such as Netflix disclose this type of information, apparently did not “like” seeing this information on Facebook. It sent Hastings and Netflix a Wells Notice, which advises them of a pending investigation into their social media activities. The commission claims that Hastings’ Facebook post violated Regulation FD, the rule requiring a company to disclose anything of material importance to the public as a whole.

From the SEC’s point of view, whose Facebook site has 1,173 Likes, the milestone achieved by Netflix was materially important and, as such, should have been disclosed via the Electronic Data Gathering, Analysis and Retrieval System (EDGAR) or through another “recognized channel of distribution”; that is, a location that investors know to be a place where the company regularly releases information for investors.

Since Facebook is not currently a recognized channel of distribution, Hastings violated the existing SEC regulations and could face penalties.

The SEC has long been concerned about timely disclosure of company information to the public. It created Regulation FD in 2000 to prevent the dribbling of earnings estimates and other important information to select analysts in order to avoid market volatility. In the eyes of the SEC, companies can easily disseminate information through EDGAR whose “primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time sensitive [emphasis mine] corporate information filed with the agency.”

The problem, though, is that Regulation FD was promulgated in 2000, four years before Facebook and six years before Twitter even existed. In what appears to have been an attempt by the SEC to update Regulation FD for the digital age, the commission issued guidance in 2008 recognizing a company’s website and blog as “recognized” channels of distribution. The agency has issued no guidance since.

From my perspective, the real issue here isn’t a willful violation of securities law, but rather, the continued existence outmoded government regulations.

Earlier this year, I commented on the proposed Federal Drug Administration (FDA) guidelines regarding acceptable uses of social media by pharmaceutical companies. Despite 15 years in the making, these guidelines fell short of providing any meaningful guidance while ignoring the public’s desire to access health information in an expedient and efficient manner online and via social media.

If the SEC is concerned with information being “time sensitive,” why do they not yet allow “material information” to be disseminated via social media? In any given month, the SEC website has around 400 thousand unique visitors, Twitter 91 million and Facebook 140 million. The numbers would indicate that more people hit social media in a day than the SEC website in an entire month. People are more likely to receive timely information via social media than through an EDGAR search that would turn up multiple results for a user to sift through. Hastings himself has more than 245,000 subscribers to his Facebook page — more than half the number of people who visit the SEC site each month.

This year Facebook saw its 1 billionth user and Twitter hit the 500 million user mark. People regularly turn to social media for up-to-the-minute news information. To ignore this fact is irresponsible at worst and risky at best on the part of any organization especially a federal agency. Thanks to the likes of YouTube, Instagram, Facebook and others, engaging key audiences is legions easier than it once was. Within minutes news can spread across the internet to a far reaching audience – much faster than that of a traditional press release.

The SEC would better serve its purpose by crafting guidelines that are in tune with the communications methods of today than go after a CEO who was praising his staff. Twelve-year-old regulations can have a chilling effect on modern corporate communications.

If the goal is honesty and transparency then the world of social media must be integral.

Gerard F. Corbett, APR, Fellow PRSA, is 2012 Chair and CEO of PRSA.

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