For the first time in six years, the U.S. Securities and Exchange Commission issued an enforcement action against a company solely for Regulation FD violations. On Aug. 20, the SEC announced that it charged life sciences company TherapeuticsMD (TMD) with violations of Regulation FD for selectively communicating to sell-side analysts information about interactions between TMD and the U.S. Food and Drug Administration (FDA) regarding the potential approval of one of TMD’s drugs. To settle the matter, TMD agreed to pay a $200,000 fine.
Especially for younger public companies, it is a good reminder of the necessity of having robust disclosure controls over the public dissemination of material information. The fact pattern also serves as a warning for officers of public companies to resist the natural temptation to provide analysts additional details and commentary about unfavorable public news where that same commentary is not also disseminated publicly through an FD-compliant method.
Regulation FD prevents the selective disclosure of material non-public information to analysts, other securities market professionals or individual stockholders. Regulation FD requires issuers to make simultaneous disclosure of material information to market professionals and to the public generally. If an issuer unintentionally discloses material information selectively to market professionals, it must remedy that action by making prompt public disclosure of the information.
On July 7, 2016, TMD submitted an initial application to the FDA for approval of a new drug. On May 5, 2017, the company received a letter from the FDA that cited a single deficiency in the New Drug Application: the lack of long-term safety data for the drug. The company disclosed the FDA’s May 5 letter in a press release before the market opened three days later, and the company’s stock price declined 10.5 percent. TMD and the FDA agreed to meet on June 14, 2017, to discuss the FDA’s May 5 letter, and on May 31, 2017, TMD publicly announced the June 14 meeting date.
On June 15, 2017, the day after the meeting, a TMD executive sent emails to six sell-side analysts. The emails described the FDA meeting as “very positive and productive” and indicated that the company would be waiting for the meeting minutes to decide on a path forward. Some of the emails to analysts concluded with an offer to discuss further, and at least three of the analysts arranged follow-up phone calls. In a follow-up email to one analyst, a TMD executive wrote that the company was “pleasantly surprised at how accommodating [FDA officials] were.”
The next day, June 16, the company’s stock price rose 19.4 percent on heavy volume. The NYSE contacted the company and the executives with whom they spoke, who were not aware of the emails sent the previous day, said that they were not aware of any material information that would explain the stock’s movement. TMD did not make any public disclosures about the substance of the June 14 FDA meeting until July 17.
On July 17, the company issued a press release before the market opened. The press release stated that the July 14 FDA meeting had enabled the company to provide the FDA with new information to address the long-term safety concern about the new drug and positively affect its approval status. The disclosure went on to state that there was no formal timeline for approval and that the company continued to reserve its options, but the disclosure provided no additional color about the meeting and contained very little information on the status of approval. Following that disclosure, the company’s stock price declined sharply (approximately 16 percent) in pre-market and early trading.
That same day, at a pre-scheduled 7:30 a.m. conference call with sell-side analysts, TMD provided additional detail regarding the June 14 FDA meeting and discussed the information it provided to the FDA. During the call, the company emailed analysts supporting studies that had been provided to FDA. Analysts published notes in the hours following the call that included details from the call. The company’s stock price rebounded and finished down by only 6.6 percent at market close on July 17.
The SEC identified two selective disclosures. The first was the general disclosure on June 15 and 16 about the tone of the June 14 FDA meeting and the accommodating posture of FDA officials. The second was the disclosure on July 17 of additional details regarding the June 14 FDA meeting and specific information submitted to the FDA. The SEC charged TMD with violations of Regulation FD, noting that because it “failed to simultaneously publicly disseminate the material information in accordance with Regulation FD, the investing public was placed at a disadvantage relative to the analysts and their subscribers who were privy to the selective disclosures.” TMD agreed to pay a fine of $200,000.
In its order, the SEC noted that at the time of the charged conduct, TMD did not have policies or procedures relating to compliance with Regulation FD.
There are a number of steps companies should take to comply with Regulation FD, especially in light of the recent TMD enforcement action:
- Implement policies and procedures governing the drafting and approval of public disclosures, including identification of corporate spokespersons.
- Conduct periodic Regulation FD training for corporate spokespersons, IR and PR teams and the legal department.
- Establish procedures to ensure simultaneous or prompt disclosures can be made in accordance with the requirements of Regulation FD.
- Do not provide advance copies of press releases or other potentially material non-public information to analysts or other third parties.
- Prior to earnings calls or conferences,
- Review scripts and talking points with senior management to ensure they know what information is publicly available.
- Set ground rules for questions management will not answer and then stick to those ground rules. Make sure an additional person is present who can watch for unintentional disclosures.
- Identify someone at the company who will monitor stock price movements and notify the legal department of any unusual spikes that may signify an unintentional disclosure of material information; then remedy unintentional disclosures within 24 hours.
If you have questions about Regulation FD compliance or related issues, please reach out to Fenwick securities enforcement co-chairs Susan Muck and Michael Dicke or other members of the Fenwick team.