Netflix CEO Reed Hastings, no stranger to controversy, is in hot water with the Securities and Exchange Commission (SEC). The brouhaha dates back to this summer, when Hastings announced on the company’s blog and Facebook that Netflix’s customers had used the company’s DVD and streaming video services for one billion hours in June.
In the past, such news would have been announced in a press release; and as a public company, Netflix’s lawyers would have advised the company to tuck that information into an SEC Form 8-K. Material events that can have an impact on a company’s stock price must be disclosed in an 8-K within four business days of that event--examples such as a CEO’s disclosure, bankruptcies or business decisions that can have a impact on the stock price, but cannot wait until the company’s regularly scheduled annual or quarterly reports (10-K or 10-Q for U.S.-based companies), are among the reasons why companies must submit these disclosures via the SEC’s online EDGAR system.
Well, last week, Hastings announced to his 240,000 subscribers that the SEC sent a nasty-gram, or “Wells Notice,” indicating that the SEC has recommended that the regulatory agency begin civil action against the company for violating Regulation FD. Concurrently, Netflix responded to the notice with an immediate 8-K.
So did Netflix and Hastings violate U.S. securities law, or is this a case of a government regulatory agency applying arcane rules to how we communicate corporate governance issues and financial disclosures in the 21st century?
The SEC imposed Regulation FD (“Regulation Fair Disclosure,” or “Reg FD”) in 2000 to end what some complained was selective disclosure, i.e., the practice of large institutional investors receiving material information about a company’s performance before smaller organizations and, of course, individual investors. Thanks to Reg D, all publicly held companies must release such disclosures to everyone at the same time. In part because of Reg D, all public companies have an investor relations page that anyone can access, and quarterly and annual earnings conference calls that are, for the most part, publicly available to anyone that is interested.
According to the SEC, Hastings violated Regulation FD by announcing a very material event: that billion hour milestone. Despite Hastings’ huge following on Facebook, which includes bloggers and journalists, the fact remains that investors expect such information articulated in an 8-K--and the SEC promulgates such regulations to ensure that such disclosures are consistent.
Hastings’ sniffed at the Wells Notice, and insisted that the billion hour comment was not material investor information. But considering that the company’s stock rose 20 percent between his initial announcement on July 2 and July 5, that claim is dubious. And while social media channels are effective ways to communicate with customers and stakeholders, most companies are very careful about what they communicate on Facebook and Twitter--and most of that information is only news that plunks the company in a positive light. Investor relations (IR) pages that list a company’s SEC filings provide all information, in real time, that is material to a company’s performance. As Douglas Park, a corporate attorney based in Palo Alto, explains:
"Investors expect material information to be disclosed on an 8-K. Once they have to go fishing though social media, the nature of the search changes drastically. That reporters and bloggers follow the Netflix page does not seem sufficient to meet the standard of being ‘public.’”
Corporate governance expert Marcy Murninghan had this to say about the SEC's dilemma:
“As usual, laws and regulations FOLLOW social innovations and cultural change; by design, they're reactive and often out of date when there's a lot of change happening in a short time, which is what we've got now. It's like chasing a greased pig: you end up in the mud once you catch him.”
Leon Kaye, based in Fresno, California, is a sustainability consultant and the editor of GreenGoPost.com. He also contributes to Guardian Sustainable Business, Inhabitat and Earth911. You can follow Leon and ask him questions on Twitter or Instagram (greengopost).
Image credit: Wikipedia (coolcaesar)
Leon Kaye has written for TriplePundit since 2010, and became its Executive Editor in 2018. He's based in Fresno, CA, from where he happily explores California’s stellar Central Coast and the national parks in the Sierra Nevadas. He's lived in South Korea, the United Arab Emirates and Uruguay, and has traveled to over 70 countries. He's an alum of the University of Maryland, Baltimore County and the University of Southern California.