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Analysis: An FTC probe of Facebook could make waves in broader tech sector

A decision by the U.S. Federal Trade Commission to investigate Facebook Inc.'s privacy protections may not have a large immediate impact on the company's financials. Yet any regulatory action could have broader implications for the tech sector.

The FTC has reportedly opened an investigation into Facebook following news that the social networking giant allowed political data analytics firm Cambridge Analytica LLC to access roughly 50 million Facebook users' data. The data was harvested from a personality quiz shared on Facebook, which required users to download an app that analyzed their personalities by reviewing information on their Facebook profiles. The developer of the app, which also collected some information about their Facebook contacts, then passed that data along to Cambridge Analytica.

An FTC inquiry would reportedly focus on whether sharing the information with Cambridge Analytica was a violation of a previously agreed to consent decree between the FTC and Facebook. In order to end an investigation into Facebook's privacy protections on the site back in 2011, Facebook agreed to obtain consent from users before collecting their personal information and sharing it with others.

Enforcing a legal action against Facebook could be difficult, due to the FTC's divided commission at present. The commission currently just includes Maureen Ohlhausen, a Republican that President Donald Trump designated as acting FTC chairman in 2017, and Terrell McSweeny, a Democrat, who was appointed in 2014. Ohlhausen has historically been critical of more government regulation, while McSweeny has been more supportive.

In a statement emailed to S&P Global Market Intelligence, an FTC spokesman said the agency was aware of concerns about Facebook, but he could not comment on whether the FTC was investigating the company.

"We take any allegations of violations of our consent decrees very seriously," the spokesman acknowledged in the email.

Facebook's shares gained 2.2% to $171.91 by 1:20 p.m. ET, recovering from a 9.2% fall following the Cambridge Analytica revelations over the first two days of the week.

Should the FTC move forward with proceedings, Eric Goldman, a law professor at Santa Clara University, said Facebook will need to answer if it clearly outlined to users the parameters of the personality test app, including the possibility that their data could be passed on to other users and whether they could opt out of that.

However, Goldman also questioned whether the government ultimately has the adequate knowledge and experience to regulate the activities of tech companies and third-party applications.

"How do we dial up or down the regulation to cover the situation where we want to encourage a really robust app developer community, but we don't want them going in and misusing data?" he asked.

Nevertheless, there is a growing chorus of consumer advocacy groups that seem to be calling on the government to take a bigger role in policing data privacy, calling such incidents a threat to democracy.

"Communications technologies have become an essential part of our daily lives, but if we are unable to have control of our data, these technologies control us," Nuala O’Connor, president and CEO of the Center for Democracy & Technology said in a March 17 statement. "For our democracy to thrive, this cannot continue."

Gene Munster, a managing partner at venture capital firm Loup Ventures, downplayed the risk of hefty fines for Facebook, saying any FTC ruling likely would amount to less than 5% of Facebook's cash holdings. Yet he warned that any regulatory action could have broader implications for other major tech players, including Alphabet Inc.'s Google, Apple Inc. and Microsoft Corp.

Notably, Commerce Committee Chairman Sen. John Thune, R-S.D., said last month at an FTC nomination hearing that he expects the regulator to have an "increased focus on the American tech sector and the growing influence of Silicon Valley." At the same hearing, discussion centered on whether tech firms that grow too large can wield too much power over consumers and competition.

"The risk here is more than just a bad news cycle and [the chance] that Facebook gets a tarnished reputation," said Munster. "The risk is the bigger theme around breaking up big tech [and] this is a slippery slope for regulators."