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ANALYSIS: Yes, the SEC is Still Paying Attention to Reg FD

Aug. 21, 2019, 6:13 PM

A small drug company dishes details about FDA talks on one of its medications to a group of sell-side analysts. The company does not publicly reveal the discussions or the details of the conversations. Trading volume soars and the stock price increases significantly after each disclosure. What could possibly go wrong?

The obvious answer is—everything. The conversations led to an SEC investigation and a settlement including a cease and desist order and a $200,000 civil penalty.

TherapeuticsMD’s Selective Disclosures

The SEC charged TherapeuticsMD, Inc., a pharmaceutical company headquartered in Boca Raton, Florida, for violations of Regulation FD in connection with its sharing of material, nonpublic information with sell-side research analysts. Regulation FD generally prohibits the selective disclosure of information by publicly traded companies and other issuers to certain individuals or entities, such as securities market professionals and large shareholders. In the event of such a disclosure, issuers must make public disclosure of that information.

As alleged, the company publicly announced on May 31, 2017 that it would meet with the FDA to discuss a deficiency in the approval application for IMVEXXY, its only drug in the FDA review pipeline at the time. On June 15, 2017, the day after the FDA meeting, TherapeuticsMD sent private messages to sell-side analysts describing the meeting as “very positive and productive.” The company’s stock price closed up 19.4% on heavy trading volume the next day. TherapeuticsMD did not issue a press release or make any other market-wide disclosure about the meeting.

In response to a request by the New York Stock Exchange about the unusual trading pattern, company executives replied that they were not aware of any material information that could have caused the market reaction. The executives did not conduct any inquiry to determine the cause of the significant stock price movement, or to assess whether the magnitude of the price movement could be explained by the anticipated volume or possible market volatility that day.

The next month, TherapeuticsMD issued a press release stating that it had submitted additional information to the FDA, but did not yet have a clear path forward regarding the approval of its new drug. TherapeuticsMD’s stock price dropped by 16% in early morning trading after the press release. The SEC found that the company contacted a group of sell-side analysts and shared previously undisclosed details about the June meeting and the information it had submitted to the FDA. The analysts published research notes containing these details, and the stock rebounded to recover most of the morning’s losses.

Takeaways from the TherapeuticsMD Case

Regulation FD generated a flurry of SEC enforcement actions after its adoption in 2000, but the SEC has been very quiet in this area in recent years. The lack of actions may stem from the fact that issuers and corporate executives have become comfortable with the disclosure requirements, and don’t make selective disclosures with any frequency. The action against TherapeuticsMD indicates, however, that the Commission and the Enforcement Division may be receptive to prosecuting these cases going forward.

The market watch group of the New York Stock Exchange contacted TherapeuticsMD at 1:16 P.M. after the irregular trading pattern emerged that morning. The word to the wise here is that the major exchanges are actively engaged in market surveillance and will detect irregular activity.

Finally, it is worth noting that TherapeuticsMD did not have policies or procedures in place relating to compliance with Regulation FD. The company subsequently acted to 1) require public disclosure of material, nonpublic information in connection with Regulation FD; 2) provide examples of types of material, nonpublic information that may arise in light of TherapeuticsMD’s business model; and 3) establish specific review protocols for all external communications, including earnings calls, analyst meetings, and press releases.

The company also now requires Regulation FD training for employees. The SEC cited the company’s cooperation and remedial actions in accepting the settlement offer.

The takeaways here are clear. Companies should adopt and enforce a robust compliance policy and comprehensive disclosure controls designed to promote Regulation FD compliance and to detect violations. Regular training on disclosure matters also should be a part of any compliance program.