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SEC Signals New Phase of Regulation FD Enforcement

The United States Securities and Exchange Commission (SEC) announced today, August 20, 2019, that it charged TherapeuticsMD, Inc., a pharmaceutical company headquartered in Boca Raton, Florida, with violations of Regulation FD based on its disclosure of material, nonpublic information to sell-side research analysts.

Regulation FD was adopted by the SEC in 2000 to prevent the selective disclosure of material, nonpublic information to securities analysts and other securities market participants. Regulation FD provides that when a public company, or person acting on its behalf, discloses material, nonpublic information to certain enumerated persons (in general, securities market professionals and holders of the company's securities who may trade on the basis of the information), it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional. For an intentional, selective disclosure, the company must make public disclosure simultaneously. For a non-intentional disclosure, the company must make public disclosure promptly. Under the regulation, the required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.

Since enactment of Regulation FD, the SEC has periodically brought standalone enforcement actions against public companies and individuals who have violated the rule (in contrast to enforcement actions where the SEC charges numerous violations in conjunction with violating Regulation FD). Right after implementation of the rule, and then again in 2009 and 2010, the SEC brought a spate of Regulation FD enforcement actions based on companies’ attempts to temper analysts’ expectations through selective disclosures during the financial downturn. In 2013, the SEC brought a case against a company’s vice president of investor relations based on the allegation that, during one-on-one phone conversations with 20 sell-side analysts and institutional investors, he selectively disclosed that the company would not be receiving important federal loan guarantees. Notably, in that case, the SEC did not charge the company due to its “extraordinary cooperation” with the investigation. 

The case against TherapeuticsMD is the SEC’s first standalone Regulation FD case in many years. In the settlement order, the SEC alleged that on two separate occasions in 2017, TherapeuticsMD selectively shared material information with analysts about the company’s interactions with the FDA. On June 15, 2017, one day after a publicly-announced meeting with the FDA about a new drug approval, TherapeuticsMD sent private messages to sell-side analysts describing the meeting as “very positive and productive.” TherapeuticsMD’s stock price closed up 19.4 percent on heavy trading volume the next day.  Early in the morning on July 17, 2017, TherapeuticsMD issued a press release announcing it had submitted additional information to the FDA but did not yet have a clear path forward regarding its New Drug Application. TherapeuticsMD’s stock price declined about 16 percent in pre-market trading following the issuance of the press release. The SEC’s order finds that in a call and email to sell-side analysts after the press release was issued but before the market opened, the company selectively shared previously undisclosed details about the June FDA meeting and the information it had subsequently submitted to the FDA. According to the SEC’s order, all of the analysts published research notes containing these details, and the stock rebounded to close down only 6.6 percent for the day. TherapeuticsMD did not have policies or procedures regarding compliance with Regulation FD. TherapeuticsMD settled without admitting or denying the allegations and was ordered to cease and desist from future violations of Regulation FD and Section 13(a) of the Securities Exchange Act of 1934. The company agreed to pay a $200,000 penalty.

Preventative Measures

There are a number of preventative steps companies can adopt to reduce the risks associated with Regulation FD violations, including: (1) implementing a comprehensive policy with respect to the disclosure of material, nonpublic information; (2) engaging in periodic insider trading and Regulation FD training; and (3) establishing appropriate disclosure controls and procedures to ensure simultaneous or prompt disclosures can be made in accordance with the requirements of Regulation FD.

Copyright © by Ballard Spahr LLPNational Law Review, Volume IX, Number 232


About this Author

David Axelrod Investigation Lawyer Philadelphia Ballard Spahr

David L. Axelrod is a former Supervisory Trial Counsel at the U.S. Securities and Exchange Commission's (SEC) Philadelphia Regional Office and a former federal prosecutor. At the SEC, he directed all aspects of litigation—leading complex, multi-agency investigations into a range of alleged securities law violations and serving as lead trial counsel in high-profile federal cases. He also led nationwide insider trading training for SEC enforcement staff.

Mr. Axelrod's practice focuses on representing companies and individuals under investigation by government agencies, including the U...

Peter Hennesey, Ballard Spahr Law Firm, Philadelphia, Finance Law Attorney

Peter W. Hennessey is an experienced corporate and securities attorney who represents public and private companies, investment banks, and venture capital firms in a broad range of capital markets transactions. Peter handles initial public, follow-on, and secondary equity offerings, and investment-grade, high-yield, and convertible debt offerings.

Peter represents public and private companies in general corporate and securities law matters, Sarbanes-Oxley compliance, and exchange-listing standards. He advises public companies on stock exchange listing and compliance requirements under the Securities Exchange Act of 1934. He also represents private companies and venture capital firms in preferred stock financings, including negotiating purchase agreements, investor rights agreements, and voting agreements, and represents both buyers and sellers in strategic M&A transactions.

Peter has significant experience executing initial public offerings, including working closely with management and investment banks to draft registration statements, prepare responses to SEC comments, and negotiate underwriting agreements.

Matthew Kussmaul Criminal Code Lawyer Ballard

A former Ballard Spahr Summer Associate, Matthew Kussmaul most recently worked to revise a newly developed criminal code for the nation of Somalia. As a criminal law consultant for the International Development Law Organization, he contributed to commentaries explaining how the proposed code relates to current Somali law, international law, and Sharia law. Matt is the former staff director of Delaware Criminal Law Recodification Project, where he drafted a new criminal code for the State of Delaware.