This past Tuesday, August 1st, Gilmartin Managing Directors, Laurence Watts and Stephen Jasper hosted a webinar with Latham & Watkins Partners Colleen Smith and John Sikora. The panel explored all things FINRA and SEC-related, and best practices when confronted with inquiries. Below are key takeaways from this conversation.
Moderators:
- Laurence Watts, Managing Director, Gilmartin Group
- Stephen Jasper, Managing Director, Gilmartin Group
Guest Speakers:
- Colleen Smith, Partner, Latham & Watkins
- John Sikora, Partner, Latham & Watkins
Key Takeaways:
FINRA Inquiries Towards Biotech Companies are Routine
As a self-regulating organization (SRO) with authority over broker dealers and public markets, FINRA is tasked with assuring market integrity and being the main surveillance body under the SEC. They watch for member firms involved in suspicious trading, collect information from cooperative parties, and then defer to the SEC for further investigation if necessary. Newly public biotech companies are likely unaccustomed to being under regulation, but management should not panic if they receive a FINRA inquiry. Since biotech companies are largely event driven with stock prices that are heavily affected by company news announcements, FINRA inquiries are common.
FINRA Inquiries are Triggered by Large Stock Movements and Have a Standard Process
Large stock movement is not defined by specific percentages or a metric, but rather is associated with company specific news that causes the stock price to move. When FINRA begins their inquiry process, an initial request for more information regarding the specific news announcement will typically go to one person in the company (general counsel if available). This is an attempt to better understand the triggering event, who knew this information before it was announced, and retrieve relevant documents. The next steps in the process will be a name recognition request containing individuals or institutions that made coincident trades. FINRA will then decide whether to turn the inquiry to the SEC, who is the ultimate decision maker on pursuing a deeper investigation.
Establishing Efficient Company Policies are Critical for Preparation and Protection
When a company has an upcoming news announcement that will likely trigger a FINRA inquiry, it is within the company’s best interest to ensure the blackout period is in place. While this will not prevent the employees from purchasing shares outside of company knowledge, it will provide protection for the company in the case of inquiry. Chronology and tracking the necessary facts are also part of best practices. This includes taking detailed chronological notes of the relevant people involved, information exchanged, and conversations. Finally, to ensure insider trading rules are well known by employees, efficient and engaging training is critical to implement before employees begin work, and continually reestablish during their tenure.
Be Aware of Regulation FD when Making Disclosures
Regulation FD stands for Regulation Fair Disclosure, which is an SEC rule regarding how companies can disclose material information. While the definition of material information is largely within the context of each individual company, it is important to remember that information can be material even if it has not yet been disclosed. Material information for biotech companies is often data, conversations with regulators, or FDA related. Latham & Watkins cautions against using personal judgment to determine materiality and advises to take Regulation FD seriously, as penalties can lead to fines, injunctions, and reputational damage that can affect companies in their future years.
Gilmartin Group has extensive experience working with both private and public companies across the Medtech, Biotech, Life Science Tools & Diagnostics, HCIT & Digital Health. To find out more about how we strategically partner with our clients, please contact our team today.
Authored by: Devon Chang, Analyst, Gilmartin Group