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Fair Disclosure In Facebook Age At Issue In SEC's Netflix Action

A bit of idle corporate backslapping could test the mettle of a 12-year-old rule designed to make sure investors play on a level information field.

The Securities and Exchange Commission's late Thursday notice to Netflix (NFLX) of a Facebook (FB) post by CEO Reed Hastings in July highlights gray areas in the commission's Regulation Fair Disclosure, or Reg FD.

With millions of people now getting updates on social media sites including Facebook and Twitter, just what constitutes "public disclosure?" And what is "material information?

"Netflix growing and growing is not necessarily a state secret," said Matt Kelly, editor of Compliance Week, a trade publication.

In the 44-word July 3 post that drew regulators' scrutiny, Hastings congratulated his licensing team and noted that the streaming video site had crossed 1 billion monthly viewing hours for the first time in June. As even more new content went online, he promised "we'll blow these records away.

Netflix shares shot up 6.2% that day and 13.4% the next session.

Late Thursday, Netflix disclosed that it and Hastings had received a formal Wells notice that the SEC was considering civil claims or other action on both for possible selective disclosure of key information.

Hastings shot back on Facebook (and filed with the SEC for good measure) that no selective dissemination occurred.

The post was viewable to about 200,000 followers, some members of the media, who reported the milestone widely. He also said the data were not material. Netflix had noted in a previous blog post that it was close to that 1 billion hours mark, with no press release or SEC wrist-slap.

He said the stock started rising before his midmorning post and was likely driven by a positive analyst report the night before.

Test Case?

Michael Corty, a Morningstar analyst who covers Netflix, also thinks the company is being hit for what amounts to a PR announcement. He said the metric Hastings cited isn't important.

"Clearly, the SEC is trying to make a point, and maybe this will help establish rules on what insiders can post on a social media platform. Maybe this will be a vehicle for these rules to be worked out," he said.

Reg FD, enacted in late 2000, was designed to protect individual investors who were increasingly empowered by Internet press releases and online brokerages to trade.

Before FD, companies frequently meted out tidbits to analysts at closed conferences and gave guidance on earnings calls that weren't broadcast publicly.

Now, when companies release market-moving data, they must do so via a press release, SEC filing or open access to analyst conference calls or conferences. But the agency left the "public disclosure" definition purposely vague to provide "greater flexibility.

Reg FD In 2012

The SEC may judge Facebook and other social media as "exclusionary" because people must sign up and follow specific accounts.

Reg FD guidelines didn't envision a world in which news items are tweeted and retweeted around the globe almost instantaneously.

"There are now questions out there that it fundamentally does not answer, that it was never designed to answer," Kelly said.

Hastings' midmorning timing may have drawn SEC ire, Corty speculates. Press releases typically are released before or after market hours. However, many investor conferences and earnings calls happen during the day.

Google (GOOG), Facebook and other firms have announced milestones or other bits of news on blogs. But Kelly said his readers — corporate compliance officers and other executives — lose sleep over what's kosher online.

They should be cautious, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Even when one has millions of followers, they may not be the right followers, said Elson, a Reg FD supporter.

"Market makers don't watch Twitter," he said. "Maybe some do. But not many.

Ultimately, Kelly doesn't think this incident will force the SEC to re-examine reporting requirements. There's a case to be made that Hastings didn't disclose material information. And regulators have more pressing issues.

"They know this is a concern, but the republic is not going to fall if we take no action on this point anytime soon," he said.