On August 20, 2019, the US Securities and Exchange Commission (SEC) charged TherapeuticsMD Inc., a Boca Raton, Florida, headquartered life sciences company, with violations of Regulation FD for sharing material, non-public information with sell-side analysts about the company’s interactions with the US Food and Drug Administration (FDA). While neither admitting nor denying the SEC charges, the company settled by paying a fine of $200,000. The settlement demonstrates the importance of companies having an established Regulation FD policy and ensuring that employees are adequately trained in complying with such a policy.
Regulation FD prohibits public companies, or persons acting on their behalf, from selectively disclosing material, non-public information to certain persons outside the company. In the TherapeuticsMD matter, the SEC charged the company with two separate violations of Regulation FD for selectively disclosing details about a meeting between the company and the FDA regarding a drug candidate for which the company had previously filed a New Drug Application (NDA).
On June 14, 2017, the company met with the FDA to discuss safety concerns related to the drug candidate subject to the NDA; the company had previously publicly disclosed the FDA meeting. On June 15, the company sent emails to sell-side analysts describing the meeting as “very positive and productive,” had follow up calls with certain analysts to discuss the meeting, and, in a follow-up email to one analyst, indicated that the company was “pleasantly surprised at how accommodating” the FDA officials were. On June 16, the company’s stock price increased 19.4% on heavy volume. Market watch officials from the New York Stock Exchange (NYSE) contacted the company, but the executives with whom they spoke did not know of the emails sent to analysts the prior day, believed that market events could have caused the volatility in the company’s stock price, and told the NYSE officials that they were not aware of any material information affecting the stock.
On July 17, 2017, the company issued a press release and filed a Form 8-K prior to market open following receipt from the FDA of the June 14 meeting minutes, indicating that the company had been able to present “new information” to the FDA at the meeting to address safety concerns raised by the FDA and to “positively affect” the status of the NDA, but that the company did not have a clear path forward regarding the NDA. The company’s stock price fell approximately 16% in pre-market and early trading, prompting questions from sell-side analysts as to what the press release meant. At a pre-scheduled 7:30 am conference call with sell-side analysts, the company discussed the new information provided to the FDA during the meeting, which consisted of three previously published medical studies and one long-term National Institutes of Health study, the results of which had not yet been published. The three published studies were emailed to analysts along with a statement by the company’s chief medical officer indicating that, based on the findings in the studies, the drug candidate “posed no safety risk.” After the call, the sell-side analysts published notes conveying information about the studies provided to the FDA and the finding of no safety risks related to the drug candidate, leading to a rise in the company’s stock price, which finished down only 6.6% by market close.
The SEC found that the disclosures to the sell-side analysts on June 14 and July 17 were each instances of providing material, non-public information, and, because the company failed to simultaneously or promptly publicly disclose that information, that such disclosures constituted violations of Regulation FD. Furthermore, the SEC noted that the company did not have a policy in place with respect to Regulation FD disclosure. The company subsequently implemented such a policy, however, and this remedial action was considered in connection with the settlement.
The settlement offers some important lessons for companies.
While a company might conclude that neither a statement as to “the positive and productive” nature of a meeting with a regulatory agency nor granular information on specific studies or information provided to a regulatory agency warrants public disclosure, providing different information to the public and to sell-side analysts can potentially constitute a Reg FD violation.
It is important for companies not to share any material, non-public information, or information that may be construed as such, with sell-side analysts and others who do not have a “need to know.” Shared information is evaluated with the benefit of hindsight, and a seemingly innocuous statement might lead to significant movements in stock price, triggering the scrutiny of the SEC, the stock exchanges or other regulators.
While a company should always be vigilant of its communications, at critical inflection points such as FDA meetings, trial commencement and the public release of results—each of which spark interest in analysts and investors alike—there is an increased likelihood of Regulation FD violations occurring due to the tendency of such events to affect stock prices.
To the extent that a company does not already have a Regulation FD or communications policy in place, it should consider developing such a policy, including relevant disclosure controls, and provide training on the policy to all relevant employees.
Companies should expect to be contacted by the stock exchanges, FINRA or the SEC if there is unusual trading activity in the company’s stock, and should be prepared to respond to the question of whether the company is aware of any material information affecting the stock. Because all team members will not necessarily have access to the same information, a coordinated response is important, and appropriate internal inquiries should be made before answering.
Although not subject to Regulation FD, foreign private issuers should nevertheless comply with Regulation FD as a corporate governance matter and to avoid liability for potential selective disclosures under the anti-fraud provisions of the securities laws.