The Securities Litigation Expert Blog

Netflix gets Wells Notice from Facebook Post

Posted by Jack Duval

Dec 10, 2012 3:18:48 AM

The AmLaw Litigation Daily is reporting that Netflix received a Wells Notice for a Regulation FD violation caused by CEO Reed Hastings posting on Facebook.  (AmLaw)

CEO Reed Hastings announced the receipt of the Wells Notice and defended his actions on, you guessed it, Facebook.  Here it is:

Hastings disclosed on Thursday that the Securities and Exchange Commission is looking into whether a message he posted on his public Facebook page in July violated Regulation Fair Disclosure ("Reg FD"), a rule promulgated by the SEC in 2000 that requires all publicly traded companies to disclose material information to all investors at the same time. According to a statement that Hastings posted on his Facebook page on Thursday, his company just received a "Wells notice" from the SEC staff, recommending that the agency bring an enforcement action against the company over the July post.
In his July Facebook post (which BusinessWeek included in its story), Hastings touted the fact that Netflix subscribers had watched a combined 1 billion hours of video the previous month. The company's stock shot up 6 percent the day of the announcement, although it's tough to say whether the Facebook post triggered the uptick—the day before, a Citigroup analyst issued an upbeat report on Netflix's future.

More than 200,000 Facebook users subscribe to Hasting's Facebook page. Subscribing to Hastings' page will put you on notice when he posts content, but any of Facebook's 1 billion users can read his musings.

On Thursday, Hastings defended himself on Facebook, of all places. "[W]e think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers," he wrote in the post. "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."


I'm pretty sure this violates the letter of Regulation FD, but probably not the spirit.  The big argument will be over whether the information was material.



As we have noted before, social media is emerging as a big compliance and supervisory issue for broker-dealers, and now all public companies.  See our previous coverage here and here.
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Topics: FINRA, social media, Netflix, litigation, SEC, Wells Notice, Facebook, Compliance, Reed Hastings, Regulation FD, regulation.

Finra Incorporates Social Media in New Communications Rules

Posted by Jack Duval

Nov 22, 2012 2:24:17 AM

Finra Notice to Members 12-29, announced the SEC approval of far reaching updates to previous NASD and NYSE communications rules.  (NTM 12-29)  The new rules will be numbered 2210 and 2212-16 and will be collectively referred to as the "Communication Rules".  These new rules will incorporate and replace the following rules:


  • Finra rules: 2210, 2211, and Interpretive Memos 2210-1, 2210-3 through 2210-8

  • NYSE Rule 472


The new rules go into effect February 4, 2013.

Of interest are the following:


  • A reduction in the number of defined types of communication from six to three;

  • The formal incorporation of social media as a type of retail communication under 2210(c)(7)(m).  (The previous guidance was under NTM 10-06, Social Media Web Sites.)


Here's an extract on the three categories:
Communication Categories

The rule change reduces the number of current communication categories from six to three, as follows:


  • Institutional communication includes written (including electronic) communications that are distributed or made available only to institutional investors, but does not include a firm’s internal communications. “Institutional investor” generally has the same definition as under NASD Rule 2211(a)(3).4

  • Retail communication includes any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. “Retail investor” includes any person other than an institutional investor, regardless of whether the person has an account with the firm.

  • Correspondence includes any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.


Communications that currently qualify as advertisements and sales literature generally fall under the definition of “retail communication.” In addition, to the extent that a
firm distributes or makes available a communication that currently qualifies as an independently prepared reprint to more than 25 retail investors within a 30 calendar-day period, the communication also falls under the definition of “retail communication.”

Compliance officers and supervisors will (at a minimum) need to do the following:

  • Update their policies and procedures for review of social media communications;

  • Integrate social media review into their supervisory systems;

  • Create ESI search and retrieval capabilities for social media discovery purposes.

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Topics: 2212-16, FINRA, social media, 2210, Communications Rules, SEC, Compliance

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