The life sciences sector remains a critical area of focus for the US Securities and Exchange Commission (SEC) under the current administration. Companies operating in the healthcare, pharmaceutical, biotechnology, and medical device industries can expect heightened regulatory scrutiny, particularly concerning financial disclosures, insider trading, cybersecurity, and selective disclosures. These companies should be proactive in managing risks and preparing for potential investigations.
Under the current US administration, the SEC is expected to shift its enforcement approach. Certain areas, such as crypto cases, standalone off-channel communications violations, and internal controls-only charges, are no longer a focus. Instead, we expect the SEC to return to "back-to-basics" enforcement focused on insider trading, fraud and fraud-like conduct, misleading claims regarding artificial intelligence (AI), and cybersecurity-related misconduct.
In terms of remedies, we expect the SEC to emphasize disgorgement (i.e., returning money to harmed investors) over the imposition of hefty penalties. Penalties themselves are expected to align more closely with established precedent rather than escalating from prior cases. We also expect the SEC to take a less aggressive stance on officer and director bars, unless an individual held a senior leadership role at the time of the misconduct.
Disclosures and Financial Fraud
Life sciences companies face substantial pressure to accurately disclose information related to US Food and Drug Administration (FDA) interactions, clinical trials, product approvals, and marketing uses. Misrepresentations, whether intentional or inadvertent, can trigger SEC investigations, especially when stock price movements, large trading volumes, whistleblower tips, or referrals from other agencies such as the FDA or the US Department of Justice raise red flags.
The SEC typically views drug and other product developments as material to investors. Companies that misstate clinical trial outcomes, the approval status of products, or permissible uses of drugs could face charges involving penalties and disgorgement, and individuals could face these remedies along with officer and director bars.
Financial reporting also remains a key focus. Historically, SEC scrutiny has included allegations such as inflating sales figures, prematurely recognizing revenue, channel stuffing, or misclassifying financial data. Even metrics outside standard GAAP accounting, such as sales trends or disclosures regarding the mix of customers, can become problematic if presented in a materially misleading manner.
Investigations into financial disclosures often involve forensic reviews of internal accounting records and can result in serious consequences, such as large monetary penalties, clawbacks of incentive compensation, and professional practice bans for directors, officers, and accountants.
Insider Trading
Life sciences companies tend to possess an abundance of material, nonpublic information (MNPI), making them prime targets for insider trading investigations. SEC and Financial Industry Regulatory Authority surveillance tools are highly sophisticated and monitor trading activity around key events such as mergers, licensing agreements, earnings announcements, clinical trial results, and FDA decisions.
Even seemingly minor profits (or avoided losses) based on MNPI can prompt investigations depending on timing. Importantly, SEC investigators consider not only executives but all potential sources of leaks, including information technology staff, consultants, and contractors, and even family members and friends. Recently, for example, the SEC pursued cases involving pharmaceutical company employees trading ahead of FDA announcements, often resulting in substantial financial consequences.
Regulation Fair Disclosure (Reg FD)
Reg FD prohibits public companies from selectively disclosing MNPI to favored analysts or investors without broadly disseminating the information to the public. Due to the complexity and materiality of FDA-related developments, life sciences companies face particular risks in this area.
The SEC has charged companies where executives provided additional details to sell-side analysts about regulatory events, even when public filings used cautious, neutral language. Companies can face penalties even absent allegations of insider trading.
To mitigate Reg FD risk, companies should ensure that any material updates shared with select audiences are made public immediately and that investor communications are properly coordinated and documented.
Cybersecurity
Cybersecurity continues to be a growing focus of SEC scrutiny, especially in life sciences where companies often store sensitive customer, patient, and proprietary information.
Following a cybersecurity incident, the SEC is likely to investigate the following:
The recent announcement of the SEC’s Cyber and Emerging Technologies Unit underscores the agency’s commitment to investigating cyber-related misconduct. Even if a company is a victim of a hack, failures in disclosure or insider trading safeguards can lead to enforcement investigations and may ultimately result in enforcement actions.
Key Takeaways for Life Sciences Companies
To mitigate enforcement risks and prepare for potential regulatory scrutiny, life sciences companies should consider taking the following steps:
By proactively addressing these risk areas, companies in the life sciences sector can position themselves to better withstand SEC scrutiny and minimize potential exposure under the current regulatory environment.