U.S. regulators, probing comments posted by Netflix Inc. ChiefExecutive Officer Reed Hastings on Facebook Inc.'s site, are beingurged to reconsider disclosure rules created years before theadvent of social media.

Netflix said it may face a Securities and Exchange Commissioncivil suit after Hastings told Facebook followers in July thatNetflix customers watched more than 1 billion hours of videos inJune, according to a filing by Netflix yesterday. The company saidthat it didn't issue an accompanying press release or make a filingwith regulators.

Companies and executives are increasingly relying on sites suchas Facebook and Twitter Inc. — alongside news wires and other moretraditional outlets — to communicate with the public. It's time forthe SEC to update its policies to account for the widening roleplayed by social media in helping companies be more transparent,said Stephen Diamond, associate professor of law at Santa ClaraUniversity.

“The SEC rules are 12 years old, and in the technology world,that might as well have been in the last century,” said Diamond,whose school is located in Santa Clara, California. “The SEC hasalways encouraged issuers to be more forthcoming. Here's a mediumwhich allows investors, quite easily and cheaply, to listen to whatthe CEO or other insiders are saying.”

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

To comply, companies need to file a so-called Form 8-K ordistribute a press release through a “widely disseminated” news orwire service or another “non-exclusionary method of disclosure,”according to the SEC. The agency uses a so-called Wells Notice tosignal that it may bring an action, which could result in a fine orsettlement.

“The SEC staff believes that I gave you all 'material' investorinformation in my post and that we needed to instead release theJune viewing fact 'publicly,'” through a press release or aregulatory filing, Hastings wrote, addressing his customers, inyesterday's SEC filing.

Jonathan Friedland, a spokesman for Los Gatos, California-basedNetflix, said the company had no additional comment. FlorenceHarmon, a spokeswoman for the SEC, declined to comment.

Netflix, based in Los Gatos, California, rose 3.6 percent to$89.24 at 9:46 a.m. New York time. The shares had advanced 24percent this year through yesterday.

Precedent Setting

The case against Netflix may hinge on whether Facebook or othersocial sites can be considered as public an arena as a company blogor a broadly disseminated press release. The outcome will haveimplications for other executives who share information throughtweets and other consumer-Web networks.

Tesla Motors Inc. CEO Elon Musk said on Twitter this week thathis electric vehicle company is cash-flow positive, and Google Inc.executive Andy Rubin took to the microblogging site in June to saythat 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, saidHoward Lindzon, CEO of online-investing community StockTwitsInc.

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

The SEC has loosened rules in the past. Commissioners voted in2008 to encourage companies to disclose more market-movinginformation via websites and blogs to give investors faster updateson business developments.

“This is not a new phenomenon,” said William McGeveran,associate professor of law at the University of Minnesota. “It tooka long time for the SEC to approve release of information corporateblogs as something that complied with Reg FD too. So, when you havenew information technology, it takes a while for the SEC to letthings settle and decide that's a disclosure that's widespreadenough to be satisfactory.”

The SEC made the changes after Jonathan Schwartz, the former SunMicrosystems Inc. CEO, complained publicly in 2006 aboutrestrictions on disclosure via blogs.

Speaking in an interview yesterday, Schwartz said fairdisclosure regulations were “ridiculous” because they favored the“1950s technology” of phone calls, press releases and newspapersover the Internet.

Public Media

Still, he said Facebook shouldn't get the same treatment underdisclosure rules as websites that are available for anyone tovisit.

“Perhaps I'm old-fashioned, but I don't consider Facebook theInternet,” Schwartz said. “Facebook is Facebook and you need anaccount. I do agree that it is inappropriate to carve off a selectaudience and give them updates.”

The SEC must ensure that investors get information in a mannerthat's truly public, said Mark Fickes, a former senior trialcounsel at the SEC and now a partner at BraunHagey & Borden LLPin San Francisco. SEC filings are not the same as a post onFacebook, which has more than 1 billion users, he said.

“The SEC is looking more at the ways in which social media canbe used in the way the SEC deems improper,” he said. “The questionis: How public is it to put something on Twitter or Facebook?”

For a different perspective of the Netflix's Facebookposting, see this Dealbreaker post.

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