Netflix Inc. CEO Reed Hastings’s use of social media has landed him in hot water with regulators, but some experts are coming to his defense.
Hastings disclosed on Thursday that the Securities and Exchange Commission is looking into whether a message he posted on his public Facebook page in July violated Regulation Fair Disclosure (“Reg FD”), a rule promulgated by the SEC in 2000 that requires all publicly traded companies to disclose material information to all investors at the same time. According to a statement that Hastings posted on his Facebook page on Thursday, his company just received a “Wells notice” from the SEC staff, recommending that the agency bring an enforcement action against the company over the July post.
In his July Facebook post (which BusinessWeek included in its story), Hastings touted the fact that Netflix subscribers had watched a combined 1 billion hours of video the previous month. The company’s stock shot up 6 percent the day of the announcement, although it’s tough to say whether the Facebook post triggered the uptick—the day before, a Citigroup analyst issued an upbeat report on Netflix’s future.
More than 200,000 Facebook users subscribe to Hasting’s Facebook page. Subscribing to Hastings’ page will put you on notice when he posts content, but any of Facebook’s 1 billion users can read his musings.
On Thursday, Hastings defended himself on Facebook, of all places. “[W]e think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers,” he wrote in the post. “We think the fact of 1 billion hours of viewing in June was not ‘material’ to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.”
“I think this is an overaggressive use of Reg FD,” Dorsey & Whitney partner Thomas Gorman, who blogs at SECActions, told us. “I really question the enforcement discretion here.”
In Gorman’s view, an SEC enforcement action against Netflix would run contrary to the very reason that the agency created Reg FD: to prevent investment brokers and analysts from getting info before the general public. With Facebook posts, the general public is the very recipient of the information, Gorman argues. “This isn’t why the regulation was enacted,” he said.
“To argue that a public posting on [Facebook] isn’t public dissemination will be a challenge for the SEC,” agreed Craig Carpenito, a partner at Alston & Bird and a former senior counsel at the SEC’s regional office in New York.
Almost a decade ago, some forward-thinking CEOs, like Jonathan Schwartz of Sun Microsystems, began using corporate blogs to disseminate information. At Schwartz’s urging, the SEC clarified in 2008 that corporate blog posts are public disclosures. The SEC added, however, that if companies are going to disseminate material information on their web sites, they need to make that clear to investors.
Drawing parallels to that debate, Foley & Lardner partner Patrick Quick told us that the SEC’s beef might not be with Hastings’ use of social media, so much as the company’s alleged failure to make clear that Hastings’ Facebook page is a potential source of info. Forbes blogger Halah Touryalai made the same argument in a post on Friday, pointing out that “in browsing the Netflix investor relations page, you’d be hard pressed to find a link to Hastings’ Facebook page.”
Both Gorman and Carpenito said the SEC should have clarified its stance on social media through its rule-making procedure, which allows for public notice and comment, before sending a Wells notice. “The proper venue for refining their rules and laying out clear guidelines isn’t an enforcement action,” said Carpenito.
Quick, of Foley & Lardner, is sympathetic to that argument, but he also understands why the SEC took bolder action. “It’s a bit like using a hammer. But it does get people’s attention,” he said.