The Green Light to Social Media Use for Regulation FD Purposes Looks More Like Yellow

I was excited to see the SEC’s press release about its report of investigation related to Netflix and social media issues yesterday.  The report (i) brings closure to the Division of Enforcement investigation of whether Netflix, Inc. and its CEO, Reed Hastings, violated Regulation FD and Section 13(a) of the Securities Exchange Act of 1934 (see previous blog posts and coverage in Up to Date newsletter about Netflix and Mr. Hastings each receiving a “Wells Notice” from the SEC Staff in connection with Mr. Hastings’ July 2012 announcement on his Facebook page that Netflix’s monthly viewing exceeded 1 billion hours) and (ii) provides guidance on the use of social media for Regulation FD purposes. 

The report brings good news that the SEC determined not to pursue an enforcement action against Netflix and Mr. Hastings (a different determination was likely to have a chilling effect on corporate communications via social media channels).  And even more significantly, the SEC uses this report as a forum to extend the principles set forth in its 2008 Guidance on the Use of Company Web Sites (2008 Guidance) to announcements made through social media channels (e.g., Facebook and Twitter) for Regulation FD compliance purposes. 

The cornerstone of Regulation FD is the concept that material non-public information should be disseminated in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” When the SEC issued its 2008 Guidance, it officially acknowledged that a company’s website could serve as a broad, non-exclusionary method of distribution of the information to the public under Regulation FD, provided such website was a recognized channel of distribution.  The SEC now expects issuers “to examine rigorously the factors indicating whether a particular [social media] channel is a ‘recognized channel of distribution’ for communicating with their investors.”  

The SEC’s report emphasizes the importance of providing notice to “the market about which forms of communication a company intends to use for the dissemination of material, non-public information, including the social media channels that may be used and the types of information that may be disclosed through these channels.”  The SEC suggests that “disclosures on corporate websites identifying the specific social media channels a company intends to use … would give investors and the markets the opportunity to take the steps necessary to be in a position to receive important disclosures — e.g., subscribing, joining, registering, or reviewing that particular channel.”  Netflix chose to file a Form 8-K on April 10, 2013 encouraging investors and the media to review the information posted on the social media channels listed in its Form 8-K, including Mr. Hastings’ Facebook page.

However, in addition to the notice to investors, applying the 2008 Guidance, there are other factors that are important in the determination of whether the company’s website, and now social media channels, can be viewed as “recognized” channels of distribution of information.  For example, companies should evaluate “the extent to which information posted … is regularly picked up by the market and readily available media, and reported in, such media … and the size and market following of the company involved.” 

Having read the report, my initial excitement has faded.  The SEC guidance leaves a company to perform a difficult facts-and-circumstances analysis of whether the company’s website or Facebook page is a recognized channel of distribution of information to the investing public even if the company provides the required notice to investors.  In the absence of a clear definition of what constitutes such “recognized channel,” companies may not be utilizing the full potential of the SEC’s 2008 Guidance and its 2013 extension to social media channels.

The SEC Is Taking a Hard Look at Fixed Income Markets

On March 28, 2013, the SEC announced the agenda and potential topics for discussion at its April 16 Fixed Income Markets Roundtable. The roundtable will focus on the transparency and efficiency of fixed income markets and will be divided into four panels. The first two panels will examine the current market structure for municipal securities and corporate bonds, and the last two panels will discuss potential improvements to the market structure for municipal securities, corporate bonds and asset-backed securities. The SEC’s list of possible agenda items for the panels makes it clear that the SEC is taking a hard look at the structure of the fixed income markets. Please see below a few discussion points related to corporate bonds that the SEC is interested in:

• How large is the corporate bond market? How diverse is the universe of corporate bond issuers and products? How large is the institutional investor presence? If a retail customer wishes to buy or sell a corporate bond, how would the transaction typically be handled by the customer’s broker? Does the process for buying and selling a corporate bond differ for an institutional investor?

• Does trading in corporate bonds differ depending on whether the bonds were sold in offerings registered under the Securities Act or in private offerings, including Rule 144A eligible offerings? Do different types of corporate bonds (e.g., plain vanilla, convertible bonds, structured debt) trade differently? Do investment grade bonds trade differently from non-investment grade bonds?

• What are the liquidity characteristics of the corporate bond market? Do some types of corporate bonds tend to be more liquid than others? If so, which ones and why?

• Are transaction costs for certain types of convertible bonds (e.g., convertible bonds, high-yield bonds) materially different from other corporate bonds?

• Does the primary offering process differ depending on whether it is registered under the Securities Act or made in reliance on an exemption from registration, including Rule 144A eligible offerings? Does it differ based on the type of debt being offered? What are the significant trends in the primary market for corporate bonds? What are the trends in private debt and how do they affect the public debt markets? Are there concerns about the availability of corporate bonds in primary offerings?

• Does the pricing of primary offerings or do prices in the secondary market differ depending on whether the bonds were sold in registered offerings or in exempt offerings, including Rule 144A eligible offerings? Does pricing differ depending on the type of purchaser for the corporate bonds?

• Are there ways to improve the availability or timing of information on the corporate bond issuer that is made available to investors? Are there ways to improve the pricing of corporate bonds in primary offerings?

The SEC expects that the information provided in connection with this roundtable may influence the SEC’s decision to engage, or not engage, in rulemaking in this area.

Netflix’s CEO Facebook Post Triggers a Debate

We have previously blogged about and covered in our Up to Date newsletter the fact that Netflix and its CEO, Reed Hastings, each received a “Wells Notice” from the SEC Staff over Hastings’ Facebook post in July 2012, in which Mr. Hastings wrote that Netflix’s members had enjoyed over one billion hours in June 2012.  The SEC Staff indicated in the Wells Notice its intent to recommend to the SEC that it institute a cease and desist proceeding and/or bring a civil injunctive action against the company and Mr. Hastings for violations of Regulation FD, Section 13(a) of the Securities Exchange Act and Rules 13a-11 and 13a-15.

Mr. Hastings continues to post on Facebook and said in an interview last week referring to his July post, “I’m not going to back down and say it’s inappropriate. I think it’s perfectly fine. Sometimes you’re just the example that triggers the debate.”  Mr. Hastings post has indeed triggered the debate of what constitutes “public disclosure” of material information under Regulation FD. 

Regulation FD requires a public company to publicly disclose material, non-public information (oral or written) that is selectively disclosed to market professionals and securityholders.  Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.  

Despite this broad approach, from the time of the adoption of Regulation FD in 2000 until August 2008, a press release or a Form 8-K was practically the only form of distribution of information under Regulation FD.  In August 2008, when the SEC issued its Guidance on the Use of Company Web Sites (2008 Guidance) it officially acknowledged that a company website could serve as a broad, non-exclusionary method of distribution of the information to the public under Regulation FD, provided (i) such website is a recognized channel of distribution, (ii) posting of information on a company website disseminates the information in a manner making it available to the securities marketplace in general, and (iii) there has been a reasonable waiting period for investors and the market to react to the posted information.

The debate started by Mr. Hastings has revealed that there are two unofficial “camps” on this issue: one camp believes that CEOs and other public company executive officers should refrain from posting company information on social media to ensure that Regulation FD and other securities rules and regulations are not violated, and the other camp encourages the SEC to take a clear position on which social media postings would be considered Regulation FD compliant given the role that social media is playing in our society today.

It seems that Joseph A. Grundfest, Stanford Law School professor and former SEC commissioner, is in the second camp.  On January 30, 2013, Stanford Law School and The Rock Center for Corporate Governance published his article, Regulation FD in the Age of Facebook and Twitter:  Should the SEC Sue Netflix? This article is in the form of an amicus Wells Submission and suggests that the SEC should proceed by rulemaking to address issues raised by the evolution of social media instead of initiating enforcement proceedings against Netflix and Mr. Hastings.  Professor Grundfest’s article stated that any prosecution on these facts would constitute a “dramatic divergence from precedent” and would violate the SEC’s commitments not to “second guess” good faith attempts to comply with Regulation FD. Professor Grundfest also believes that while the posting was not “inconsistent with the Commission’s 2008 Guidance regarding the implementation of Regulation FD and the use of company websites, that guidance is, in any event, outdated because it fails to account for the evolution of social media.”  

Other interesting arguments outlined in Professor Grundfest’s article include the following:

  • Regulation FD is vulnerable as an unconstitutional restraint on truthful speech, particularly as applied on the facts of this case.
  • The Staff’s Wells Notice has already had a chilling effect on the use of social media without a contemporaneous Form 8-K filing. The Staff has thus obtained much of the remedy it seeks without subjecting its action to SEC review.
  • The proposed enforcement action is a questionable allocation of limited agency resources.
  • The SEC’s regulatory solution should emulate many practices that are now common in the social media rather than challenge information dissemination through the social media.

Generally, I give conservative advice to executives to stay away from the social media posts until the SEC comes out with additional rulemaking on this issue.  But I have to confess that now I am one of Reed Hastings’ 200,000 + followers on Facebook to be able to follow firsthand posts that may lead the SEC to extend permissible broad non-exclusionary forms of distribution of information under Regulation FD to social media.

When Do You Need to Start Complying With New NASDAQ and NYSE Compensation Committee Rules?

On January 11, 2013, the SEC approved proposed changes to the listing standards of the New York Stock Exchange LLC and NASDAQ Stock Market LLC related to compensation committees. Both exchanges created transition periods to comply with the new rules.

As of July 1, 2013, NASDAQ and NYSE listed companies will be required to comply with the new rules relating to the authority of a compensation committee to retain compensation consultants, legal counsel, and other compensation advisers; the authority to fund such advisers; and the responsibility of the committee to consider independence factors before selecting such advisers. The requirement that such authority and responsibilities of the compensation committee be included in the compensation committee’s written charter does not apply until a later date (see below) for NASDAQ listed companies and such companies should consider under state corporate law whether to grant such specific responsibilities and authority through a charter, resolution or other board action. In contrast, NYSE listed companies will have to amend their existing charters as of July 1, 2013 to address these additional rights and responsibilities of the compensation committee related to compensation consultants, legal counsel, and other compensation advisers. To the extent a NASDAQ listed company does not have a compensation committee by July 1, 2013, these requirements will apply to the independent directors who determine, or recommend for the board’s determination, the compensation of the CEO and other executive officers of the company.

The remaining new rules, for example, compensation committee charter and independence standards for compensation committee members, will not have to be complied with by NASDAQ listed companies until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014.

NYSE listed companies will have until the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the new standards for compensation committee director independence.

Welcome a New Type of SEC Filing – IRANNOTICE

Yesterday, the SEC announced that the Notice required by the Iran Threat Reduction and Syria Human Rights Act of 2012 (Act), which was signed into law on August 10, 2012, should be filed on EDGAR.  This new EDGAR form is called IRANNOTICE, and it will be publicly available on EDGAR upon filing with the SEC.  The SEC expects this EDGAR form to be released on January 14, 2013.

Section 219 of the Act added a new subsection (r) to Section 13 of the Securities Exchange Act of 1934 to require an issuer that files Exchange Act periodic reports under Section 13(a) of the Exchange Act to disclose in its annual or quarterly report whether during the period covered by the report the issuer or any of its affiliates knowingly engaged in certain specified activities, including contacts with or support for Iran.  Section 13(r) also requires an issuer that describes such activity in a periodic report to concurrently file with the SEC a notice, designated as IRANNOTICE by the SEC, that identifies the issuer and indicates that disclosure of the activity was included in its periodic report.


The SEC Approved PCAOB Rules on Communications with Audit Committees

On December 17, 2012, the SEC approved PCAOB proposed rules on Auditing Standard No. 16, Communications with Audit Committees.  Auditing Standard No. 16 supersedes PCAOB’s interim standards AU section 380, Communication with Audit Committees, and AU section 310, Appointment of the Independent Auditor.  Auditing Standard No. 16 is effective for audits of financial statements for fiscal years beginning on or after December 15, 2012 and applies to the audits of all issuers, including emerging growth companies established under the JOBS Act and foreign private issuers.

It is interesting to note that, among other matters, Auditing Standard No. 16 expands the inquiries of the audit committee required by Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement, which requires the auditor to inquire of the audit committee regarding its knowledge of the risks of material misstatements, including fraud risks.  The inquiry required by Auditing Standard No. 16 goes beyond material misstatements and fraud risks and provides that the auditor “should inquire of the audit committee about whether it is aware of matters relevant to the audit, including, but not limited to, violations or possible violations of laws or regulations.” 

 In light of this inquiry, audit committees will need to discuss procedures for evaluating violations, including possible violations, of laws and regulations, especially considering the fact that this requirement does not include any materiality threshold.

Are Your Executives Posting Company Information on Facebook or Other Social Media Websites? The SEC Is Watching.

Yesterday, Netflix filed a Form 8-K announcing that, on December 5, 2012, Netflix and its CEO, each received a “Wells Notice” from the SEC Staff indicating its intent to recommend that the SEC institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and its CEO for violations of Regulation FD, Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 (Current Reports on Form 8-K) and 13a-15 (Controls and Procedures) under the Exchange Act.  The 8-K itself represents an interesting piece of disclosure, but the CEO’s follow-up Facebook post attached to it is even more interesting to read.    

 Please see below a few quotes from Reed Hastings’ (Netflix’ CEO) Facebook post attached to the 8-K, which describes Mr. Hastings’ prior posts and his reaction to the SEC’s Wells Notice.

 “We use blogging and social media, including Facebook, to communicate effectively with the public and our members.  In June we posted on our blog that our members were enjoying “nearly a billion hours per month” of Netflix, and people wrote about this. We did not also issue a press release or 8-K filing about this.  In early July, I publicly posted on Facebook to the over 200,000 of you who subscribe to me that our members had enjoyed over 1 billion hours in June, highlighting how strong our content was.  There was press coverage as there are many reporters and bloggers among you, my public followers.  Some of you re-posted my post.  Again, we did not also issue a press release or file an 8-K about this.”

 “First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.  Second, while we think my public Facebook post is public, we don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings.  We think the fact of 1 billion hours of viewing in June was not “material” to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.  Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.”  

 Netflix’ debacle highlights the disparity between current news dissemination channels and Regulation FD rules, which date back to 2000 and are designed to address the problem of selective disclosure of material information by companies.  In 2000, the SEC took a narrow view as to what constituted a broad, non-exclusionary distribution of material nonpublic information.  For example, at such time, the SEC took the position that a company’s website alone would not satisfy broad dissemination for Regulation FD purposes.  In 2008, the SEC backed off of this position and provided guidance in an interpretative release on when information posted just on a company website would be considered public enough to serve as an alternative method for distribution of material information about the company under Regulation FD.  

 Assuming the information is viewed as material, it is unclear whether the SEC would extend its guidance set forth in its 2008 interpretative release to Facebook or other social media posts.  If the SEC did apply such guidance to social media, a company would need to evaluate whether (i) the company’s or executive’s presence on these social media websites is viewed as a recognized channel of distribution of information about the company, its business, financial condition and operations and (ii) disclosure of information through social media tools makes it available to the securities marketplace in general.   

 While it still remains to be seen whether the SEC will recognize social media websites as appropriate Regulation FD disclosure vehicles, companies should consider revisiting the adoption of social media policies to establish parameters for appropriate social media disclosures of company information.

Time Period for SEC Action on Exchanges’ Proposed Compensation Committee Rules Was Extended until January 13, 2013

On September 25, 2012, each of The NASDAQ Stock Market LLC and New York Stock Exchange filed with the SEC proposed rules amending their listing standards for compensation committees.  Generally, under the Securities Exchange Act of 1934, the SEC should decide whether to approve or disapprove proposed rule changes within 45 days of the publication of notice of the filing of a proposed rule change or within such longer period (up to 90 days) as the SEC may designate.  The 45th day from the publication of notice of filing of the compensation committee proposed rule changes by the exchanges was November 29, 2012. The SEC extended the 45-day time period for SEC action on these proposed rule changes and designated January 13, 2013, as the date by which the SEC should either approve or disapprove these changes.

Mary Schapiro Will Resign as SEC Chairman in December; Elisse Walter Was Designated to Lead the SEC

The SEC announced today that Mary Schapiro will step down as SEC Chairman on December 14, 2012.  Ms. Schapiro became chairman in the wake of the financial crisis in January 2009.  The SEC’s press release regarding her departure includes a long list of Chairman Schapiro’s accomplishments and praises her for strengthening and revitalizing the agency. 

President Obama issued a statement today on the departure of Chairman Schapiro, in which he announced that he intends to designate , a current Commissioner, as Chair upon Ms. Schapiro’s departure.

Ms. Walter, was sworn in as SEC Commissioner in July 2008. Prior to her appointment as SEC Commissioner, Ms. Walter served as Senior Executive Vice President, Regulatory Policy & Programs for FINRA. She held the same position at NASD before its 2007 consolidation with NYSE Member Regulation. Prior to joining NASD, Ms. Walter served as the General Counsel of the Commodity Futures Trading Commission (CFTC). Before joining the CFTC in 1994, Ms. Walter was the Deputy Director of the SEC Division of Corporation Finance. She graduated from Yale University with a B.A., cum laude, in mathematics and received her J.D. degree, cum laude, from Harvard Law School.

Hurricane Sandy and SEC Filings

The SEC has recognized that it may be logistically difficult for some companies to file various SEC reports and other documents within the prescribed deadlines due to the effects of Hurricane Sandy.  The SEC has posted Hurricane Sandy Information stating that some filers may be unable to submit their filings during the weather emergency and that they should do so when they are able.  The SEC will handle requests for filing date adjustments on a case by case basis.

A few SEC filings made this week reflect the effect of Hurricane Sandy ranging from postponing or cancelling quarterly earnings calls to extending the deadline of a tender offer.

In addition, in response to Hurricane Sandy, some companies qualify their guidance in earnings press releases by excluding losses due to the impact of the hurricane if a significant portion of the company’s revenues is derived from the areas affected by Hurricane Sandy.   Some forward-looking statements in earnings press releases reference the impact of Hurricane Sandy as one of the risks and uncertainties which could cause actual results to differ materially from those projected. 

While we are in the midst of the 10-Q season, companies affected by Hurricane Sandy should also evaluate whether they need to include in Form 10-Q a risk factor related to the potential impact of the hurricane on their results of operations and financial position.