SEC Demands Admissions For Compliance Failures
When the Commission adopted its policy of requiring admissions to settle certain enforcement actions no bright line test was created. Rather, an array of facts were to be assessed on an individual, case-by-case basis. Generally, the factors focused on if the violations were egregious and of wide-spread interest. Now, however, the SEC has required that a political intelligence firm with inadequate compliance procedures, but where no other actual violation occurred, make admissions of fact as a condition of settlement. The case at least suggests the standard may be evolving. In the Matter of Marwood Group Research, LLC, Adm. Proc. File No. 3-16970 (November 24 2015).
Marwood is a political intelligence firm. It is registered with the Commission as a broker dealer and the State of New York as an investment adviser. Initially its work centered on the healthcare area and was tied to the Center for Medicare and Medicaid Services or CMS and the Food and Drug Administration or FDA.
Generally, the firm conducts and writes reports and updates regarding regulatory and legislative issues. The firm markets its analysis to clients in the financial sector focusing on events that had the potential to impact the share price of a public company’s stock.
Account representatives communicated the firm’s research to clients. They also participated in drafting the research reports. In some instances phone calls with government employees were arranged.
The firm had a policy which prohibited insider trading. Its written policies and procedures concerning the use and dissemination of inside information provided for a review process over the preparation and publication of its regulatory and legislative research notes. Those policies required approval by a licensed supervisory principal and submission of the review material through the compliance department. Employees were instructed that if they had doubts the compliance department should be consulted. Employees were also prohibited from using material non-public information if they obtained it.
The Order alleges two instances in which the firm is alleged to have failed to enforce its existing policies. The first concerned the drug Provenge, an immunotherapy approved by the FDA in 2010 for metastatic prostate cancer. For certain medical items and services CMS may make a National Coverage Determination or NCD to determine the criteria for coverage for all Medicare beneficiaries. That process leads to a National Coverage Analysis or NCA. A change can impact Medicare coverage.
When this process was initiated for Provenge some clients sought Marwood’s views on the reason the NCA had been initiated and the likely outcome. CMS staff were governed by a confidentiality policy although they were permitted to speak to the public on select topics. A Marwood employee who was a former employee of CMS and had worked in the group responsible for NCAs contacted a person at the agency he knew. From that contact he learned information which provided “color” to the events and which he cautioned should be kept confidential. Specifically, he understood that there was concern for off-label use and a further belief that CMS would cover on-label use. The information was sent to two managers. No steps were taken to present the information to the CCO. On July 8, 2010 Marwood published a research note predicting CMS’s continued coverage and reimbursement of Provenge’s on-label usages.
The second drug was Bydureon, an injectable diabetes drug. The sponsoring company submitted a new drug application which was later revised. In response to the refilling the FDA set a new statutory deadline for a decision.
Some clients sought Marwood’s view on the likely outcome of the decision. A firm consultant who was a former high ranking FDA official had a lengthy conversation with Marwood staff during which he discussed information obtained from contacts at the agency. In part that information revealed that the FDA had continued concerns and there was a debate between safety and reviewers. The consultant specified issued he believed were of concern to the agency. No steps were taken to quarantine the information. Marwood informed clients about the intense debate regarding the drug within the agency.
While Marwood’s analysts interacted with government employees who were likely to be in possession of material nonpublic information the firm did not have written policies or procedures that required the CCO be provided with sufficient information to assess the situation. To the contrary the firm relied largely on line employees. This resulted in violations of Exchange Act Section 15(g) and Advisers Act Section 204A, according to the Order.
To resolve the proceeding the firm agreed to implement a series of undertakings including the retention of a consultant. The firm also admitted to the facts detailed in the Order. Marwood consented to the entry of a cease and desist order. It will also pay a penalty of $375,000.