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When Having 200,000 Friends Is Not Enough

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The Securities and Exchange Commission issued long-awaited guidance yesterday about companies' use of social media in a manner that comports with Reg FD, the SEC's regulation governing companies' disclosures of material nonpublic information. The guidance came in the form of a Section 21(a) Report announcing the SEC's decision not to bring an enforcement action against Netflix CEO Reed Hastings. The SEC had contemplated taking action against Mr. Hastings for a posting he made on Facebook announcing to his more than 200,000 friends that Netflix users had watched a record one billion hours of content in a month. To the SEC's dismay, he did so without "input from Netflix's chief financial officer, the legal department, or investor relations department."

The SEC gave Mr. Hastings a pass, but warned other CEOs--even those with "a large number of friends or other social media contacts"--not to count on getting similar mercy unless investors are told in advance that they need to friend the CEO to keep apprised of corporate developments.

The SEC's guidance provides some helpful clarity, but the unfortunate reality is that, even with such guidance, the SEC's rules make it difficult and legally treacherous for companies and their executives to communicate with investors and the public. As the SEC cautioned in the 21(a) Report, there are no bright lines; each case will be reviewed according to its facts. Fear of a possible SEC enforcement action will continue to dampen companies' ability to use new--and more traditional--media effectively. It might be time for legislators and regulators to take another look at whether the rules governing corporate communications are actually good for investors.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.