Jay Parkhill November 6th, 2008

The SEC spends a lot of time thinking about public statements- and misstatements.  It looks at a company’s communications and holds the company liable for *everything* it says publicly, whether statements were made as part of a formal “announcement” or just in some marketing collateral.  This is reasonable- to do otherwise would let companies cite one set of facts “on the record” for shareholders and paint a different picture elsewhere.

In August, the SEC published some proposed rules governing websites.  It seems to be worried that companies could use third-party websites to get around the integrated-communications policy.  E.g. a company could describe some negative results in a press release while simultaneously linking to a an analyst’s blog that offers mitigating opinions.

Most people can probably agree this would be a manipulative business practice.  The SEC would like to hold companies liable for statements made on sites hyperlinked from a company website.  On its face that seems like a reasonable proposition.  Unfortunately, it flies straight into one of the bedrock rules for conduct and liability on the Internet: site owners are not liable for statements made by third parties.

The law that creates this rule is known as 47 USC Sec. 230, was enacted by Congress in 1996 and has been interpreted and upheld numerous times over the past twelve years.  It is as fundamental as any rule gets in the still-young arena of Internet law.

Santa Clara University Professor Eric Goldman wrote a comment letter to the SEC about the conflict between Sec. 230 and the SEC’s proposed rules.  In addition to explaining why the SEC’s rules are problematic, the letter does a fantastic job summarizing Sec. 230, major cases under it and its position today.  Definitely a worthwhile read for operators of sites that solicit third-party content and the people who advise them.

I find this area fascinating.  The SEC has a very long history of regulating corporate communications and its new rules flow directly from that tradition.  At the same time, the civil liability it seeks to impose is clearly preempted by Sec. 230, creating a head-on collision between the SEC and existing law.

Criminal liabilities are a different matter- 230 does not address them at all.  In the end this may be the way through, but it would be a tight, unhappy squeeze if third-party statements could lead to criminal liability, but not civil ones.  Stay tuned to see how the SEC’s proposed rules evolve based on comments it receives.

Tags: internet law, Securities

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