Regulatory Overreach, SEC Edition

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“Regulatory overreach” describes an effort by a government regulatory agency to expand their power by extending existing regulations to cover situations for which the regs were never intended.  This article discusses regulatory overreach, SEC edition. Netflix is being investigated for a possible violation of regulation FD.  The company’s crime?  CEO Reed Hastings posted a message that Netflix had streamed over a billion hours of video the previous month.  The message was on the Netflix Facebook page.  If this seems pretty harmless to you, you are not alone.  Columnists for both the Wall Street Journal and the New York Times have denounced this enforcement action. (The Times gets the AOL “me, too” award, as their column appeared today.  The Journal had this story on Saturday, December 8.)

The SEC is, of course, the U.S. Securities and Exchange Commission.  They are charged with regulating financial markets.  One of their more contentious regulations is rule FD.  That rule requires companies to fully disclose new information to all shareholders.  Previously, companies would often brief financial analysts before a public release.  When rule FD was under discussion, critics pointed out that companies would probably respond by releasing less information and the rule would reduce the value of financial analysts. In fact, that is what has happened.  One outcome not forecast by many observers was less coverage of smaller companies by financial analysts.  Under the leadership of chairman Arthur Levitt, rule FD marked a big change in regulations.

So now the SEC is trying to apply rule FD to the Netflix case.  Talk about overreach, this is a moon shot.  Sadly, with the current administration in Washington, D.C., I don’t see relief from this kind of stupidity any time soon.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.