SEC Still Way Behind The Times In Dealing With The Way People Communicate

from the broken-regulations dept

Way back in 2006, Jonathan Schwartz, then the CEO of Sun, caused a ruckus at the SEC for doing the amazing thing of trying to disclose material news about the company on his blog. The SEC was concerned about this, because it massively over-regulates communications from public companies, specifically under Regulation FD (for "fair disclosure"). The issue is that information needs to be available widely at the same time so that no one has a particular advantage (i.e., you can't just reveal info to some big bankers on Wall St. who trade on it, and then release your press release later). But, in our over-regulated world, the SEC had to go through a long process before deciding that, in this modern digital world, perhaps these crazy "blog" things are okay.

We're seeing something of a repeat of the episode a little more than six years later, Netflix CEO Reed Hastings wrote on his Facebook account the news that Netflix users were watching "nearly a billion hours per month." The SEC decided that this might be material information that Hastings had dangerously shared in a new-fangled manner and this might violate RegFD. Amusingly, Hastings told the world about this... via Facebook.
SEC staff informed us yesterday that they are recommending that the SEC bring a civil action against us for my July 1 billion hour public post, asserting we violated “Reg FD”. This rule is designed to ensure that individual investors have equal access to information as large institutional investors, by prohibiting selective disclosure of material information. The SEC staff believes that I gave you all “material” investor information in my post and that we needed to instead release the June viewing fact “publicly” with an 8-K filing or press release.
Hastings points out that the whole thing is stupid. The Facebook postings are public and viewable by anyone with a Facebook account, and he already has 200,000 subscribers to his updates. Furthermore, he pointed out that the announcement itself had nothing to do with "material" information for investors, it was just cool news -- which had been blogged about a few weeks earlier anyway.

Hastings finds the whole thing so ridiculous (and it is) that he's promised to keep posting news to Facebook even as the SEC continues its "investigation." As he points out, the whole thing is more about SEC red tape than any reasonable regulation:
“Reg FD was about protecting me from telling Carl Icahn something special, the big investor, that not everyone else got,” Hastings said. “This was me talking to 200,000 Facebook followers; it is letting the small guy in on the information.”
It would be nice if our various regulatory institutions didn't react to any new technology by automatically dumping it into the "must be evil / most be stifled" category.

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  1. identicon
    Anonymous Coward, 8 Feb 2013 @ 12:46pm


    Actually any new media is a threat to old school stock trading. In them olden days SEC had to be very careful about disclosure of information to avoid insider trading or situations getting near that. When new media is used everybody with a computer has the potential to find the information, but unless it goes through stock exchanges very fast thereafter short term trading will have an information imbalance and those with a strong knowledge of the technology will get an advantage.
    The problem has been dwarfed by automatic systems like HFT and LLT. Errors in those systems can completely crash the system and bankrupt the owner of the algorithm bigtime.

    Ironically LLT is making financial hedgers like Goldman Sachs into researchers and developers of better connections and information gathering... Only problem is the availability of this research since business models cannot be patented. The research is therefore trade secrets, making it a horrible platform to encourage r&d on, just like many other patentable areas.

    LLT can easily be removed from the system by stock exchanges and in Europe several countries have done so, but for some reason SEC is completely oblivious to the stupidity and possibility for untraceable fraud in LLT.

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