Regulatory reform typically occurs after a crisis or some unfortunate situation affects the average citizen. Only then do lawmakers and regulators question how the situation could have been prevented.
History is once again repeating itself with the disclosure of material information and the use of social media by public companies. The Securities and Exchange Commission (SEC) must update its Regulation Fair Disclosure guidelines, otherwise known as Reg FD. The agencies recent spat with Netflix offers the perfect examples as to why the change is needed.
What is Reg FD?
At the turn of the millennium, there was no such thing as Reg FD. For all intents and purposes, Reg FD says that publicly traded companies must disclose material information to all investors at the same time. Material information is defined as that which the average investor would consider important in determining whether to buy or sell stock in a public company.
It was only a little more than a decade ago that many companies took advantage of the Internet bubble by raising billions of dollars at the expense of the individual investor who wasn’t privy to material news that the institutional investor had access to. As a result, the SEC was forced to take a look at and eventually regulate this principle of material disclosure. But this was only after the bubble had burst and a recession was underway.
Why Is Reg FD in need of an update?
We now find ourselves in a similar situation with a company like Netflix. In December, the SEC threatened to sue Netflix under Reg FD. The agency claimed Netflix made a material disclosure via a social media channel—in this case, Facebook—when CEO Reed Hastings posted in July that the company’s subscribers had viewed more than 1 billion hours of video in the previous month. The company’s stock price jumped on the news.
I have studied Reg FD for many years, practiced securities law, and written a book that includes a chapter on public company communications with respect to social media.
In my opinion, the SEC should lay off Netflix. And it should do so until it takes into consideration what has transpired over the past several years and provides constructive and easy to understand guidance on how 21st century technology—particularly social media and mobile devices—should factor into public companies’ communications.
The last time the SEC said a word about Reg FD was in August 2008 when it published 17 CFR Parts 241 and 271 entitled, “Commission Guidance on the Use of Company Web Sites.” How can they sue Netflix when they haven’t done their job of keeping up with the times with respect to technological advances in communications? Are they waiting for more situations like Netflix before they realize that new commentary and guidance is in order? The world has significantly changed since 2008. Mobile devices and technology then paled in comparison to what exists now in 2013. Furthermore, companies such as Facebook and Twitter were barely known in 2008, let alone used on a daily basis by the average person.
It is time for the SEC to do its job, reconsider its thinking on Reg FD, and incorporate guidance on the use of social media and mobile as a means for public companies to accomplish disclosure.
Where should the SEC start?
As a starting point, the SEC should keep the process simple and straightforward. Companies already know that the EDGAR database exists. This databases collects all public companies’ disclosures to the SEC. The SEC should now require that all material disclosures be accomplished through the filing of a Form 8-K.
Additionally, the SEC has already indicated that the corporate website is an acceptable means to further disclose material information. Given what has occurred during the past several years, it should now broaden this to include social media channels such as Facebook and Twitter provided that a company designates its intention to disclose material information through such means in their Form 10-K filings.
In its August 2008 commentary on Reg FD, the SEC goes on for pages discussing numerous scenarios through which companies do and should conduct disclosure of material information. However, it is not specific and leaves much room for interpretation.
Given what are now well-accepted practices in the use of technology for public companies’ communications, the SEC has an opportunity to provide concrete and unambiguous steps for public companies to comply with Reg FD via mobile technologies and social media. By acting sooner rather than later, the SEC can do what the public expects of it—remove the uncertainty that presently exists to prevent other companies from finding themselves in a situation similar to Netflix.
Jeff Corbin is the CEO of KCSA Strategic Communications and author of Investor Relations: The Art of Communicating Value (Aspatore 2012).