On August 20, 2019, the U.S. Securities and Exchange Commission (“SEC”)
announced that it had settled charges against TherapeuticsMD, Inc., a Florida-based
pharmaceutical company, for violations of Regulation Fair Disclosure (“Regulation
FD”) following the company’s sharing of material, non-public information with
sell-side research analysts without also disclosing the same information to the public.
This action offers important takeaways for public portfolio companies and their
officers and directors subject to Regulation FD. Private equity firms that control or
invest in public companies will also benefit from these observations.
TherapeuticsMD’s Violations of Regulation FD
Adopted by the SEC in 2000, Regulation FD prohibits the selective disclosure
by a public company and persons acting on its behalf (e.g., directors, executive
officers and investor relations professionals) of material, non-public information
about the company or its securities to certain persons (in general, securities
market professionals and holders of the company’s securities who are likely to
trade on the basis of the information), without concurrently making widespread
public disclosure. An intentional selective disclosure must be accompanied by a
simultaneous public disclosure, while an unintentional selective disclosure must be
followed “promptly” by a public disclosure.
The SEC found that TherapeuticsMD made selective disclosures concerning TX004HR,
a hormone drug therapy, on two separate occasions while the therapy’s new
drug application was under review by the Food and Drug Administration (“FDA”).
The first selective disclosure occurred in June 2017. Following initial indications
of deficiencies with the drug application, TherapeuticsMD publicly announced
that it would meet with the FDA on June 14, 2017, to discuss advancing the review
process. The next day, a TherapeuticsMD executive sent a series of emails to sellside
research analysts that described the meeting as “very positive and productive,”
without a simultaneous disclosure by the company of this information to the
public. After the publication of research reports reflecting this information, the company’s stock price closed up 19.4% on June 16.
The second selective disclosure occurred a month later. Early in the morning of July 17, 2017, TherapeuticsMD issued a press release and filed a Form 8-K which disclosed that the FDA meeting had enabled the company to present “new information” to address the FDA’s concerns, but which did not provide any details of the new information. In response to this disclosure, the company’s stock price fell 16% in pre-market and early trading. That same morning, during a pre-scheduled call with sell-side analysts, TherapeuticsMD executives discussed the new information submitted to the FDA in support of the application and its relevance to the overall safety of TX-004HR. Each of the analysts then published research notes that included the detailed information submitted to the FDA that had been discussed on the call, in several cases repeating the company’s positive conclusions about the studies’ safety implications for TX-004HR. The company’s stock rebounded, finishing down only 6.6% by market close. TherapeuticsMD did not publicly disclose the information it revealed to analysts for another two weeks, during its August 2017 earnings call.
The SEC found that on both occasions TherapeuticsMD failed to simultaneously publicly disseminate the material information in accordance with Regulation FD, thus placing the investing public at a disadvantage relative to the analysts and their subscribers who were privy to the selective disclosures. The SEC charged the company with violations of Section 13(a) of the Exchange Act and of Regulation FD, and imposed a monetary penalty of $200,000.
The TherapeuticsMD action represents the SEC’s first case focused solely on Regulation FD in nearly six years and could well signal a renewed interest by the agency in combating selective disclosure.
Takeaways for Public Portfolio Companies and Their Officers and Directors
The SEC’s action against TherapeuticsMD holds three key lessons for the leaders of, and investors in, public portfolio companies.
Prepare for continued interest by the SEC in Regulation FD enforcement.
While the TherapeuticsMD action represents the SEC’s first case focused solely on Regulation FD in nearly six years, it could well signal a renewed interest in combating selective disclosure, particularly given the ongoing priority the agency has placed on protecting retail investors.
Implement and maintain effective policies, procedures and training.
TherapeuticsMD’s violation of Regulation FD was compounded by the SEC’s finding that the company did not have compliance policies or procedures for Regulation FD in place prior to the violation. In contrast, note that in 2013, the SEC chose not to bring a Regulation FD enforcement action against First Solar Inc. (but instead only against the company officer who had violated Regulation FD) in part due to the company’s “environment of compliance” prior to the violation.
Public portfolio companies should implement, periodically review and, if necessary, update their Regulation FD policies, procedures and training for officers, directors and employees authorized to communicate with the financial community and investors. Senior management, directors (including private equity professionals sitting on the boards of public portfolio companies), in-house counsel and other key personnel should be informed of company policies, procedures and limits on communicating material, non-public information. While intentional or negligent violations of a company’s policies and procedures may still occur, substantive compliance policies and procedures can protect a company from civil and administrative SEC proceedings as well as the attendant reputational harm.
Develop a response plan and consider cooperation.
Regulation FD covers both intentional and unintentional disclosures of material, non-public information. In the event of an unintentional selective disclosure, Regulation FD requires the company to make a public disclosure as soon as reasonably practicable, but in no event after the later of 24 hours or the commencement of the next day’s trading on the New York Stock Exchange (regardless of where or whether the company’s stock is traded), in each case after a senior company official learns of the disclosure.
If an unintentional selective disclosure occurs, time is thus of the essence. Public portfolio companies should have a plan ready to implement that provides for prompt corrective measures. A company may wish to designate the general counsel or another key employee as the point person for receiving notifications of inadvertent disclosures. Directors, officers and other company spokespersons should be encouraged to contact that person immediately in the event of an unintentional selective disclosure.
If faced with an SEC investigation, public portfolio companies should consider cooperating with the SEC to reduce or avoid penalties. First Solar, for example, avoided being charged due to its self-reporting and ‘extraordinary cooperation’ with the subsequent investigation.
If faced with an SEC investigation, public portfolio companies also should consider cooperating with the SEC to reduce or avoid penalties. In issuing a penalty against TherapeuticsMD, the SEC credited the company for its subsequent remedial action, including its implementation of policies and procedures for compliance with Regulation FD and its establishment of review protocols for external communications. Similarly, First Solar avoided charges by the SEC due to its decision to self-report the company officer’s misconduct to the SEC and its “extraordinary cooperation” with the investigation.
The Private Equity Report Fall, 2019, Vol 19, No 2