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Legal Guidelines for CEOs on Social Media – Avoid the Netflix Issue

In July, Netflix CEO Reed Hastings posted on Facebook that viewing on his company’s site “exceeded 1 billion hours” of videos in June.   The stock rose 6.2% on the day of the post.  Last week, the SEC sent Netflix notice it may investigate.  You can read the Washington Post story here

Reg FD, or Fair Disclosure, is the issue.  In a nutshell, companies must make public disclosures of material information to the general public and cannot selectively provide information to favored shareholders or investors.  That’s loaded for two reasons – “public disclosure” and “material.”

Public Disclosure

Usually companies provide press releases to recognized wires or news services and then make public filings with the SEC to make public disclosures.  The reg also allows for “any other non-exclusionary method.”  

This time, the CEO sent the information to 200,000 of his fans on Facebook–many of whom were part of the business media who would have received the press release.  The CEO also posted on his blog earlier in June that Netflix was almost at 1 billion hours per month.  Neither were followed with press releases or SEC filings.

Reg FD was passed in 2000 — before Facebook and Twitter.  It wasn’t until 2008 that the SEC formally approved making public disclosures via company websites under certain circumstances.  Will this force the SEC to accept other more popular ways and current ways of disseminating information?  Perhaps every CEO of publicly traded company should be required to follow an official SEC account so all of their posts or tweets are re-issued and available in one spot. 

Material

Even if the post was not considered a public disclosure, there is still a question as to whether it was material.   As you can probably guess, “material” is not expressly defined, but the SEC has provided some guidelines.  It may be material if there is a “substantial likelihood that a reasonable shareholder would consider it important” such as earnings, M&A issues, new products, changes in management or serious defaults. 

Although Netflix says the information was not material, the stock did have its biggest one day rise in six weeks. 

So do we ban posts and tweets from the corner office?

The Wall Street Journal ran a story in September about the risk of CEOs being on Twitter. If you can’t stop the CEO, here are some tips to minimize risks for upper level management involved in social media.

 1.   Have a plan.  Review your current process you use to disseminate information to investors analysts and other in light of Reg FD.  After you spot the risks, prepare a policy outlining the consequences and share it with executives, investor relations and anyone else who is responsible for talking to investors.  Use the policy to do periodic Reg FD planning and designate a primary compliance person to review statements before they go out if there is a question.

2.   Have a specific plan regarding earnings or other major announcements and collect all public statements not including social media such as SEC filings, press conferences and and conference call transcripts. 

3.   Track the social media accounts of your major executives.  Unless you want to pre-approve the CEO’s message about the company softball game in advance, at least allow your primary compliance person to track all of the various social media accounts to take swift action.

4.  Plan for the unintentional selective disclosure.  That is a term of art under the Regs and requires corrective action beyond the scope of this post.  Assume it is going to happen and be prepared for it with IR, management and your legal team.

5.  When in doubt, bring a witness.  If you are hosting a conference or call and you are concerned, bring someone along whose sole job is to recognize and note any unintentional disclosures.

6.   Get insurance for your executives and the company.

Will the SEC come around and allow for Twitter and Facebook to be used for public disclosures?  If the speed of their implementation of crowd funding is any indication, it may be some time before there is some brightline guidance.  Until then, we have to watch what happens to others.  Tesla could be next — on December 4, the CEO tweeted “Am happy to report that Tesla was narrowly cash flow positive last week” to his almost 113,000 followers.