wells notice

Netflix CEO Hastings deserves SEC scrutiny

December 7, 2012: 2:55 PM ET
Reed Hastings

Reed Hastings

Netflix investors shouldn't be expected to search everywhere for information.

FORTUNE -- Back in July, Netflix (NFLX) CEO Reed Hastings disclosed what may have been material company information via his personal Facebook page. The SEC has since responded with a Wells Notice, which is the regulatory equivalent of being told to go to the principal's office. You don't yet know the specific punishment, but are pretty sure one is coming.

The SEC basically thinks Hastings violated Reg FD, which was adopted in 2000 to prevent companies from selectively disclosing information. In other words, all investors should have access to the same information.

Not surprisingly, a lot of tech bloggers are outraged. Not only because we bloggers are contractually obligated to be outraged at least once per week, but because the SEC seems to be trivializing social media (i.e., our preferred method of communication). After all, way more people use Facebook (FB) than Edgar.

The only problem, however, is that the SEC happens to be right. Not only in terms of enforcing the letter of Reg FD, but also in defending its spirit of equal access (assuming, of course, that the information Hastings disclosed actually was material).

Investors in publicly-traded companies should not need to crawl all corners of the Internet to discover material information. Such data should be publicly-available in a central location, such as the investor relations page of a company's website. Netflix has one, which includes all press releases, SEC filings, annual reports, quarterly analyst call transcripts, etc. And if Netflix wants to create a new section for "social media" disclosures, fine. But it should not allow Hastings to make a material disclosure via Facebook and then just assume that investors will know to look.

Remember, this isn't just limited to Facebook. What's to stop Hastings from disclosing material information via his Twitter account. Or via Netflix's Twitter account? Or via the company's Pinterest account? Or its blog? Or maybe Hastings has a Tumblr. Could he record material info in an MP3 that only gets shared (freely) via iTunes? Would Wikipedia entries suffice?

My point is that the Internet is disparate, and centrality is essential for insuring that investors have equal access to the same information. I believe in information evolution, but am not so Darwinian as to think that investors should be expected to divine which outlet a company CEO will choose to utilize on a given day.

The SEC certainly should update Reg FD, in order to better accommodate the use of social media. But it should not simply shrug its shoulders at selective disclosure, just because the offender is using something hipper than a traditional press release.

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