What Trump’s Order Reviewing Social Media Legal Protection Means for Markets

Editors’ Note: Our political commentary is intentionally nonpartisan, favoring no party or politician as political bias blinds, which invites investing mistakes. We assess political developments only for their market impact—or lack thereof.

Are social media’s liability protections now gone with a stroke of a pen? Two days after Twitter added fact-check labels to a pair of his tweets on mail-in voting, President Trump signed an executive order last Thursday directing the Federal Communications Commission (FCC) to examine how it implements the 1996 Communications Decency Act’s Section 230 regulations, citing unfair bias in the outlet’s policing of content. Section 230 is the legal provision that grants Internet companies broad legal protection from content their users post. This has sparked fears regulatory change could disrupt many Tech and Tech-like companies’ business models. Like most executive orders though, it likely doesn’t amount to much for stocks and the economy.

Many believe Section 230 is critical for social media sites to function without being sued into oblivion. The law limits content platforms’ liability for user-generated content so long as they make a sufficient effort to remove objectionable material. Some think taking away this shield risks imposing onerous costs on companies because they would be liable for all activity taking place on their sites. Imagine reviewing every post put up by over a billion users for anything that might include accuracy issues, misstatements or other problems. Besides the cost, some also argue heavy-handed policing alienates users vital to attracting advertisers, which are social media platforms’ primary revenue source.

But we doubt these feared outcomes really materialize. The executive order has two main parts. It petitions the FCC to determine if online platforms act in “good faith” under Section 230. Currently, the law gives content platforms legal immunity regarding “any action voluntarily taken in good faith” to censor or remove posts from their sites. The White House argues Tech companies that police user posts against their terms of service or without providing recourse should lose their Section 230 privileges. The executive order also asks the Federal Trade Commission (FTC) to investigate companies’ alleged unfair or deceptive practices regarding selective online censorship and bias violating free speech, potentially taking action against those deemed in breach of existing law. Beyond that, it establishes a Department of Justice (DOJ) working group to study potential enforcement and recommend legislation. Meanwhile, federal agencies may review—potentially to revoke—advertising contracts with companies the DOJ finds engaged in “viewpoint discrimination, deception to consumers, or other bad practices.”

Whatever your view of the allegations, note that the executive order doesn’t—and can’t—strip social media companies of the liability protections Section 230 affords. Neither the president nor the FCC and FTC can unilaterally do so. That would require Congress passing—and the president then signing—legislation. The Executive Branch may find companies aren’t acting in good faith when choosing how to treat selected user content, but their views carry limited weight insofar as the law is concerned. Absent new legislation, the courts’ view carries the most weight. They have long upheld Section 230 and taken a broad interpretation of it. This also suggests the president’s executive order may face a barrage of court challenges, assuming social media firms or their advocates deem it worthwhile.

Moreover, for markets, the threat of greater Tech regulation isn’t exactly new or surprising. Although it has been a near constant background presence for years, it just hasn’t gone anywhere. Consequential action requires legislation. Today, we don’t see bipartisan consensus large enough to end or change Section 230’s scope to get a bill through Congress. We think markets recognize the impasse—gridlock and inaction on this front implies the status quo is likely to stay mostly intact for the foreseeable future.

The situation, as they say, is worth monitoring, but legislation and court decisions can take years. If they happen at all, they are usually watered down. Then, too, we doubt markets would be suddenly caught unaware. In the meantime, Tech and Tech-like companies will probably be driven more by other factors that don’t garner as much headline—or social media—attention.

Hat tip: Research Analyst Timothy Schluter.