A recent U.S. Securities and Exchange Commission ruling appears to give companies the nod to make important financial disclosures via social media. But don’t expect rapid change when it comes to free expression on Facebook and Twitter. By offering little in the way of instruction, the SEC has left corporations hesitant to post and tweet.
Netflix CEO Reed Hastings provoked the regulator last July when he used his personal Facebook page to announce that the online movie service’s monthly viewing had just topped 1 billion hours. The SEC probed the offending Facebook post, which was unaccompanied by any of the reporting that U.S. corporations are expected to make when disclosing such metrics, for violating the Securities Exchange Act. Hastings had revealed a big increase in streaming hours from Los Gatos, California–based Netflix’s previous disclosure, six months earlier, which used conventional channels. In its April 2 ruling on the matter, the SEC asserted that without a formal press release, an 8-K filing or messages on the company website or Facebook page to presage the personal posting, Hastings had screwed up.
“Questions were prompted by the case and by the media,” says Lona Nallengara, acting director of the SEC’s division of corporation finance, of the decision to investigate. His summary of the ruling: “You can use social media to disclose material information; you just need to tell people it will be there.”
The Netflix investigation looked at how corporations should apply the SEC’s Regulation Fair Disclosure (Reg FD) of 2000 and its 2008 “Guidance on the Use of Company Web Sites” to social media. Reg FD, along with Section 13(a) of the Securities Exchange Act, forbids public companies or their representatives from selectively disclosing material information to equity analysts, other professionals or shareholders who might trade on it before it becomes public knowledge. The commission’s 2008 guidance on websites, blogs and unknown future means of communication explained that a company must disclose such information “through a recognized channel of distribution.”
Whether the ruling elicits shock, dismay or indifference depends on one’s perspective. “The situation with Netflix and Hastings has been around a while,” says Thomas Murphy, head of the securities practice at law firm McDermott Will & Emery in Chicago. “The fact that [the SEC] took this opportunity to lay some ground rules was a surprise.” Murphy points to the regulator’s decision not to charge Hastings or his company. “But if someone did the exact thing tomorrow, they would,” he contends.
Nallengara doesn’t expect throngs of corporate executives to start putting material information on Facebook and Twitter any time soon. “If you ask lawyers in disclosure practices, their advice would be ‘Don’t do it,’ ” he says. Murphy agrees, noting that companies will need to add disclaimers to social media postings: “Are people going to want to have disclaimers on their Facebook page? I would say it’s not worth it.”
Those roadblocks don’t thrill Lou Kerner, the first-ever social media equity analyst and New York–based portfolio manager of the Social Internet Fund at National Asset Management, a division of National Securities. “Broker-dealers won’t let me tweet,” gripes Kerner, stressing the irony of his predicament as a social media specialist who can’t use the tools of the trade. “It’s great for regulators to say you can do it,” he says. “But until they say, ‘Here’s how you can do it,’ you won’t.”
Robert Lamm, chairman of the New York–based Society of Corporate Secretaries and Governance Professionals’ securities law committee, sounds just as frustrated. “I don’t want to slam the SEC too hard, but it’s disappointing to see them take the position they’re taking,” says Lamm, who spent four decades in corporate governance, including five years as assistant general counsel at U.S. drugmaker Pfizer. Instead of outlining how companies should proceed with social media, the regulator is scaring them away, he asserts.
Social media strategist and attorney Glen Gilmore is more optimistic. “Social media is the communication medium of choice,” says Hamilton, New Jersey–based Gilmore. “This will create a lot more communication in social media about the characteristics of companies,” he predicts of the Netflix ruling.
As for analyst Kerner, he’s in no rush to tangle with the SEC. “Most people who are smart will let someone else blaze the trail,” he says. “This is the future, but it’s a rocky road to get there.”
The recent hack of the Associated Press’s Twitter feed won’t hasten the acceptance of social media for company disclosure. A tweet last week claiming that President Barack Obama had been injured by a bomb knocked the Dow Jones Industrial Average down 145 points before it recovered.