The Securities and Exchange Commission once again addressed social media use by publicly owned corporations in the wake of a Facebook posting by Netflix CEO Reed Hastings that impacted stock prices.
On July 3, 2012, Hastings, who has tens of thousands of Facebook followers, posted on his personal Facebook page that Netflix's monthly online viewing had exceeded 1 billion hours for the first time. At the time of the posting, though, the company had not reported that information to investors through a press release or an SEC filing.
The SEC, which noted that the company's stock price "had begun rising before the posting, and increased from $70.45 at the time of the Facebook post to $81.72 at the close of the following trading day," began an investigation of the incident on Dec. 5, 2012.
In April, 2013, the SEC announced that it would not pursue an enforcement action against Netflix or Hastings and instead issued new guidance saying that companies can use social media outlets like Facebook and Twitter to announce key information as long as investors have been previously notified that the social media will be used in that way.
Companies must ensure all distribution channels of company information are disclosed to the marketplace in advance of those channels being used, said John Failla, a New York-based partner in Proskauer's Insurance Recovery and Counseling Group.
"You simply don't want to have the Wild West with directors and officers using undisclosed channels to disseminate information," he said.
The compliance challenge for corporations is to take advantage of fast-moving social media resources while having protocols in place to vet information for accuracy.
The SEC's application of regulations concerning the disclosure of potentially material nonpublic information through the use of new forms of communication and technology has been evolving, Failla said.
In 2008, he said, the SEC issued guidance on the use of websites and blogs. "That was really the state of the art at the time. This current report of investigation takes that one step further and deals with the Facebook, Twitter world."
Failla said the SEC report will probably prompt corporations to more closely monitor policies and actions related to social media use.
While the decision won't have a direct impact on D&O insurance, risk managers should review their policies for coverage for regulatory investigations, he said, noting that the SEC may initiate an investigation through a "matter under inquiry" instead of a formal order of investigation.
Depending on the language of the insurance policy, D&O coverage may be triggered by the more formal order of investigation, but not under the MUI, he said. "It's important to make sure that the language in the policy keeps up with the change in regulatory procedures so that the insurance policy gets triggered at the earliest point where there really is activity by the enforcement staff of the regulator," he said.
"These subtle language changes make a huge difference in practice," Failla said.
By Anne Freedman
June 1, 2013
Copyright 2013© LRP Publications