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Social media cloud rules of disclosure as SEC may sue Netflix over CEO's Facebook comments

| Saturday, Dec. 8, 2012, 12:01 a.m.

Regulators, probing comments posted by Netflix Inc. Chief Executive Officer Reed Hastings on Facebook, are being urged to reconsider disclosure rules set up years before the advent of social media.

Netflix said it may be hit with a Securities and Exchange Commission civil lawsuit after Hastings told Facebook followers in July that Netflix customers watched more than 1 billion hours of videos the prior month, according to a filing Thursday.

The company said it did not issue an accompanying press release or make a filing with regulators.

Companies and executives are increasingly relying on sites such as Facebook and Twitter Inc. — alongside news wires and other more traditional outlets — to communicate with the public.

It's time for the SEC to update its policies to account for the widening role played by social media in helping companies be more transparent, said Stephen Diamond, associate professor of law at Santa Clara University.

“The SEC rules are 12 years old, and in the technology world, that might as well have been in the last century,” said Diamond. “The SEC has always encouraged issuers to be more forthcoming. Here's a medium which allows investors, quite easily and cheaply, to listen to what the CEO or other insiders are saying.”

The SEC adopted its fair disclosure regulations, known as Reg FD, in 2000 to inhibit companies from sharing sensitive information in a selective manner.

The case against Netflix may hinge on whether Facebook or other social sites can be considered as public an arena as a company blog or a broadly disseminated press release. The outcome will have implications for other executives who share information through tweets and other consumer-Web networks.

Tesla Motors Inc. CEO Elon Musk said on Twitter this week that his electric vehicle company is cash-flow positive, and Google Inc. executive Andy Rubin took to the microblogging site in June to say that 900,000 Android phones had been activated.

By using Reg FD to restrict disclosure via social media sites, the SEC could stifle the adoption of these tools in business, said Howard Lindzon, CEO of online-investing community StockTwits Inc.

“This is a warning shot for CEOs to be more careful,” Lindzon said. “They are locking down silos on how these CEOs communicate.”

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