SEC Guidance on Social Media and Regulation FD

SEC Guidance on Social Media and Regulation FD

The U.S. Securities and Exchange Commission (SEC) issued a Report of Investigation on April 2, 2013 providing guidance on the use of social media as a method of disclosure under Regulation Fair Disclosure (Regulation FD).  The report was precipitated by an SEC investigation into a Facebook posting by the Netflix Chief Executive Officer regarding usage by Netflix members.  This investigation raised two questions. The first was “the application of Regulation FD to” the Facebook post. The second question was the applicability of the SEC’s August 2008 Guidance on the Use of Company Web Sites in relation to emerging technologies such as social media.

Netflix filed an 8-K on December 6, 2012 reporting the receipt of a Wells Notice from the SEC for the company and Chief Executive Officer Reed Hastings alleging violation of Regulation FD. The potential violation regarded a July 3, 2012 Facebook posting by Mr. Hastings reporting “that our members had enjoyed over 1 billion hours in June” of Netflix according to his statement attached to the December 8-K. The July 2012 Facebook posting was not followed by a current report on 8-K or a press release distributed through normal channels.  Regulation FD was issued in August 2000 requiring the intentional disclosure of material, nonpublic information be done through a “broad and non-exclusionary distribution to the public” in an effort to avoid “selective disclosure” to specific audiences such as analysts or selected investors. The regulation also requires any inadvertent disclosure of information to be promptly followed by a public dissemination. The SEC has also stated that the regulation “does not require use of a particular method, or establish a ‘one size fits all’ standard for disclosure”. In August 2008 the SEC issued guidance on disclosure under Regulation FD in response to the increasing use of web-sites to distribute information.

Based on the 2008 guidance and Regulation FD the SEC focused the investigation onto the question of whether Netflix had made “investors, the market and the media aware of the channels of distribution it expects to use” for the disclosure of material information. The SEC did not bring an enforcement case against Netflix or Mr. Hastings or allege any wrongdoing but did conclude that the “personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information”.

The SEC recognized the increasing use of social media channels by public companies since the release of the August 2008 guidance and recommended that issuers analyze any disclosures made through social media for compliance with Regulation FD and that they notify investors and the market about the channels they intend to utilize to distribute material, nonpublic information.