SEC/SRO Update

Wall Street Lawyer (Vol. 17, 1)

Chairman Schapiro and Top Members of Her Team Are Leaving the SEC; SEC Is Watching Facebook and Other Media Sites for Executives’ Postings; FINRA Issues Helpful Materials to Aid Members with their Private Placement Notice Filings

Chairman Schapiro and Top Members of Her Team Are Leaving the SEC

On November 26, the Securities and Exchange Commission (SEC) announced that Mary Schapiro would step down as SEC Chairman, effective December 14. Ms. Schapiro became chairman in the wake of the financial crisis in January 2009. The SEC’s press release regarding her departure includes a long list of Chairman Schapiro’s accomplishments and praises her for strengthening and revitalizing the agency. Also on November 26, President Barack Obama issued a statement on the departure of Chairman Schapiro, in which he announced that he intended to designate Elisse Walter, a current Commissioner, as Chair upon Ms. Schapiro’s departure.

Ms. Walter was sworn in as SEC Commissioner in July 2008. Prior to her appointment as SEC Commissioner, Ms. Walter served as Senior Executive Vice President, Regulatory Policy & Programs for FINRA. She held the same position at the NASD before its 2007 consolidation with NYSE Member Regulation. Prior to joining NASD, Ms. Walter served as the General Counsel of the Commodity Futures Trading Commission (CFTC). Before joining the CFTC in 1994, Ms. Walter was the Deputy Director of the SEC Division of Corporation Finance. She graduated from Yale University with a B.A., cum laude, in mathematics and received her J.D. degree, cum laude, from Harvard Law School.

On December 4 and 5, the SEC announced additional departures of top SEC officials who were part of Chairman Schapiro’s team: Meredith B. Cross, Director of the Division of Corporation Finance, General Counsel Mark D. Cahn, and Robert W. Cook, Director of the SEC’s Division of Trading and Markets, all of whom plan to leave the SEC at the end of the year. Ms. Cross has served as the Division’s Director since June 2009. Mr. Cahn has served as the SEC’s General Counsel since February 2011, and Mr. Cook has led the Division’s regulatory policy program since joining the SEC in January 2010.

Are Your Executives Posting Company Information on Facebook or Other Social Media Web sites? The SEC Is Watching

On December 6, online movie rental company Netflix filed a Form 8-K announcing that, the day earlier on December 5, Netflix and its CEO, Reed Hastings, each received a “Wells Notice” from the SEC Staff indicating its intent to recommend that the SEC institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and its CEO for violations of Regulation FD, § 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 (Current Reports on Form 8-K) and 13a-15 (Controls and Procedures) under the Exchange Act. The 8-K itself represents an interesting piece of disclosure, but the CEO’s follow-up Facebook post attached to it is even more interesting to read.

Please see below a few quotes from Mr. Hastings’ Facebook post attached to the 8-K, which describes Mr. Hastings’ prior posts and his reaction to the SEC’s Wells Notice:

We use blogging and social media, including Facebook, to communicate effectively with the public and our members. In June we posted on our blog that our members were enjoying “nearly a billion hours per month” of Netflix, and people wrote about this. We did not also issue a press release or 8-K filing about this. In early July, I publicly posted on Facebook to the over 200,000 of you who subscribe to me that our members had enjoyed over 1 billion hours in June, highlighting how strong our content was. There was press coverage as there are many reporters and bloggers among you, my public followers. Some of you reposted my post. Again, we did not also issue a press release or file an 8-K about this.

First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers. Second, while we think my public Facebook post is public, we don’t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. 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. Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.

Netflix’ debacle highlights the disparity between current news dissemination channels and Regulation FD rules, which date back to 2000 and are designed to address the problem of selective disclosure of material information by companies. In 2000, the SEC took a narrow view as to what constituted a broad, nonexclusionary distribution of material nonpublic information. For example, at such time, the SEC took the position that a company’s Web site alone would not satisfy broad dissemination for Regulation FD purposes. In 2008, the SEC backed off of this position and provided guidance in an interpretative release on when information posted just on a company Web site would be considered public enough to serve as an alternative method for distribution of material information about the company under Regulation FD.

Assuming the information is viewed as material, it is unclear whether the SEC would extend its guidance set forth in its 2008 interpretative release to Facebook or other social media posts. If the SEC did apply such guidance to social media, a company would need to evaluate whether (i) the company’s or executive’s presence on these social media Web sites is viewed as a recognized channel of distribution of information about the company, its business, financial condition and operations; and (ii) disclosure of information through social media tools makes it available to the securities marketplace in general.

While it still remains to be seen whether the SEC will recognize social media Web sites as appropriate Regulation FD disclosure vehicles, companies should consider revisiting the adoption of social media policies to establish parameters for appropriate social media disclosures of company information.

FINRA Issues Helpful Materials to Aid Members with their Private Placement Notice Filings

The Financial Industry Regulatory Authority (FINRA) recently released FAQs and a user guide related to Rule 5123 filings. As discussed in more detail in the September issue of Wall Street Lawyer, Rule 5123 requires, subject to certain exceptions, FINRA member firms that sell securities in certain private placements to submit a notice filing with FINRA. Such notice filing shall include a copy of any private placement memorandum, term sheet or other offering document, including any materially amended versions thereof, used in connection with such sale. Members that do not employ offering documents must indicate to FINRA that no such documents were used in connection with the applicable offering. Submissions must be made within 15 calendar days of the first sale. The newly released FAQs answer practical questions regarding filing requirements, such as (i) how members file a notice with FINRA; (ii) whether third parties can file offering documents on behalf of a member; and (iii) when does the 15-day period commence for filing with FINRA. In addition, the FAQs address matters relating to exemptions from Rule 5123. The FAQs also provide contact information at FINRA for members who have general inquiries and questions regarding Rule 5123. The user guide gives members step-by-step instructions regarding how to access the private placement filing system and how to make a Rule 5123 filing.


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