Reg F’D: How Will the SEC Respond to Carl Icahn’s 20 Billion Dollar Tweet?


One Tweet by Investor Carl Icahn Sent Apple’s Stock Soaring — Is This Only the Beginning of a Major Headache for the SEC?

When the SEC drew up Regulation Full Disclosure (Reg FD) more than a decade ago, they did so without knowing what Twitter was, why Carl Icahn would ever use it, or how a single 140-character Tweet could move the market for AAPL by more than $20 billion dollars in a single trading session.

No doubt the SEC’s newly minted commissioner Kara Stein looks back on those days with a twinge of nostalgia.

As controversial as Reg FD was at the time, her task at hand now is many times more complicated. Navigating the current lightning fast social media landscape is difficult enough, but building policies that are flexible enough to accommodate the inevitable rise and fall of individual platforms is akin to walking backwards through a shifting minefield.

If one thing is certain, it’s that whatever path Stein does eventually take will be met with plenty of dissent from the financial and technology communities.

Damned if You Regulate Tweets, Damned if You Don’t?

There will almost certainly be the chorus of technophobes, as there always are, who think social media has no place in financial disclosure. You know, the same people who still aren’t sure if pagers should be allowed on a trading floor. To their credit, retaining the Y2K incarnation of Reg FD — which mandates all material news be disseminated through an SEC filing, by press release, or on the company’s website — wouldn’t leave for much gray area in the laws.

But that strategy would also, ironically, necessitate stricter policing of the very mediums it is trying to suppress. In contrast to a system where Icahn’s tweet is embraced as legitimate way to break material financial news, the low-tech strategy requires much more oversight.

Alternatively, the SEC could let anything go on social media.

Proponents of this strategy will also surely point out that if putting all investors on a level playing field is the goal of Reg FD, there’s no more equitable way to break news than Facebook and Twitter. Despite Reg FD’s best efforts, information from a company doesn’t really get to all investors simultaneously — they either have to be constantly hitting refresh on the company’s website, or wait for a news service like Bloomberg to alert them to a breaking release. The same retail investor could follow thousands of Twitter handles to achieve the same level of immediacy for free. Isn’t that far closer to Reg FD’s ideal of simultaneous disclosure?

Still, letting social media off its leash entirely isn’t a perfect solution either.

Platforms aren’t all created equal, and releasing information to an obscure one with a small audience of “in the know” participants isn’t really any different than releasing it to a conference call full of analysts. Companies could use social media circles to privilege certain groups of investors despite giving the appearance of inclusivity.

Another option available to Stein is to explicitly green-light certain platforms as Reg FD-compliant, but this too is complicated. By approving a company’s Investor Relations page as an acceptable medium of communication, Reg FD gave investors pretty clear directions about where to look for new information. No such clear directions have been given for social media, and if they were, they’d have to be frequently updated and would no doubt be the subject of much debate.

Are Netflix’s Hastings and WEBM’s Meckler the Examples to Follow?

The balance the SEC has struck thus far, first with their short-lived investigation of Netflix CEO Reed Hastings, and again with their decision not to pursue WEBM CEO Alan Meckler seems to strike a reasonable balance between the spirit of Reg FD and its literal interpretation. In both cases, their verdict was that a company should clearly point investors to the social media platforms where they’ll break news, but gave Netflix a mulligan for Hasting’s comments. This seems like a common sense approach to a problem that I imagine will reoccur often.

But those decisions were made under Stein’s predecessor, and the new commissioner will have to blaze her own trail. The Hastings and Meckler cases certainly won’t be the last or most difficult questions she’ll face around social media.

Murky Waters Ahead for the SEC

What, for instance, is the proper course of action for when a hypothetical major stakeholder moves the market with a Tweet about their private conversation with the CEO of a hypothetical fruit-named company?

It’s not that this never happened in the days before Twitter — Icahn could’ve said the exact same thing on one of his many CNBC appearances. However, in the same way that email makes it easier to send a sharply worded email in the heat of the moment that you regret moments later, Twitter lowers the bar for a thought to become public knowledge. I wouldn’t generally say that Carl Icahn has too much in common with Johnny Manziel, but they both might end up learning the hard way how much destruction can be packed into a single tweet if the SEC were to decide one of his Tweets had crossed the line.

In this case, they could take issue with his comments for a couple of reasons. Firstly, the sharpness of the share price movement makes it pretty obvious that the content of that conversation Icahn had with Cook was material. Alternatively, Icahn could be taking advantage of the medium to increase the value of his own stake, which is generally tolerated. Regardless, the incident plunges the SEC into some pretty murky waters, and like most regulators, the SEC doesn’t like to swim.

And that’s just if it’s intentional.

Even murkier will be the inevitable hacking of a company’s IR handle to manipulate its share price, perhaps by announcing an acquisition or revising their earnings outlook.

If that happened today, onlookers might be skeptical enough to look for a second source. However, if Twitter becomes a standard channel for guidance revisions, investors may trust the source enough to pull the trigger without question. Will the SEC tolerate this as just another instance of market manipulation, or will it be a black mark against social media as a disclosure mechanism?

It’s far too early to tell how Stein will respond to these and other difficult questions concerning the SEC’s treatment of social media.

What’s immediately clear is that these decisions, whatever they end up being, will shape the future of financial news and define her time as SEC commissioner.

Your move, Kara Stein.

How do you think the SEC should respond?

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