What Can Managers Privately Disclose to Investors?

* Harvard Business School. I would like to thank Jeff Guo (editor), Brian Bushee, Jihwon Park, and workshop participants at Temple University for their thoughtful feedback. This research is funded by the Harvard Business School.

Regulators have long been aware that differential access to information can undermine the efficiency and fairness of financial markets. In an effort to place investors on equal footing, the Securities and Exchange Commission in 2000 created Regulation Fair Disclosure (Reg FD), which prohibits public firms from disclosing material information to certain parties but not others. Nevertheless, managers have continued to meet privately with select investors, possibly sharing information in violation of Reg FD. A key weakness of Reg FD is that its definition of materiality remains unclear. Using a series of vignettes based on actual private investor meetings, I investigate how managers and regulators understand Reg FD. I find considerable uncertainty and disagreement among both managers and regulators as to what kind of information may be lawfully communicated. Many managers interpret Reg FD subjectively, often relying on individual industry norms to decide where to draw the line. Ultimately, the ambiguity of Reg FD leads to considerable variation in the information managers privately provide to investors, undermining the notion of a level playing field in financial markets.


I. Leveling the Playing Field

Well-functioning equity markets are predicated on investors’ ability to acquire accurate and timely information about firms. This information is gathered from a variety of sources, including press releases, regulatory filings, conference calls, and private meetings with management. Historically, executives provided information selectively, sharing it with certain investors during private meetings. To the extent that only some investors had access to certain material information (e.g., advance knowledge of earnings-related information), it placed these investors in a more favorable trading position.1 Notably, the prohibition against insider trading did not restrict managers from providing information during private meetings with investors, since the information was neither being misappropriated nor traded upon for personal gain by insiders.2 Out of concern that the selective disclosure of news by managers could undermine investor confidence and the integrity of financial markets, the Securities and Exchange Commission (SEC) implemented Regulation Fair Disclosure (Reg FD) in October 2000. Reg FD requires any material information disclosed by managers to be released publicly so that all investors may consume it.3 The regulation effectively closed the gap that existed around insider trading restrictions that permitted managers to convey some non-public, material information legitimately to outsider parties.

When Reg FD was promulgated, some commenters raised concerns that the regulation could sharply curtail or even eliminate private dialogue between managers and investors.4 However, in the years since, private meetings have flourished despite the apparent restrictions on what may be conveyed during these offline interactions. For example, Brown, Call, Clement, and Sharp (2018) recently surveyed hundreds of investor relations officers and found that seventy percent of firms granted investors offline access to senior executives.5 Researchers have tried to understand how private meetings persisted in the wake of Reg FD. One explanation is that managers merely provide immaterial information to investors during meetings, which is permitted under the regulation. An alternative hypothesis is that managers commonly disclose material information, but that these violations are difficult to enforce because the meetings are private. Indeed, these private meetings appear to be quite valuable: Academic papers have found that those in attendance make more informed trading decisions—buying before the stock rises and selling before it falls.6 To better understand how both managers and regulators view the appropriateness of information disclosed during private meetings, I present a series of vignettes of private meeting interactions to managers and regulators to ascertain what types of dialogues they view as appropriate. As will be shown, the answers by both managers and regulators suggest that there is considerable uncertainty about what is acceptable. Managers operate in the penumbra of regulatory ambiguity when they privately meet with investors.

II. Assessing Managerial and Regulatory Views of Acceptable Private Dialogue

Reg FD requires that whenever a firm seeks to disclose material information, the information must be disclosed publicly (e.g., via press release, conference call, etc.). The regulation does not explicitly prohibit managers from speaking privately with investors and analysts, but restricts them to communicating information that is immaterial. However, Reg FD does not define what is meant by material information.7 In its preamble to the final rule, the SEC explicitly noted that Reg FD relies on existing definitions of materiality in the case law—i.e., “[i]nformation is material if ‘there is a substantial likelihood that a reasonable shareholder would consider it important’ in making an investment decision.”8 Numerous law firms have noted the uncertainty in the interpretation of the regulation and the difficult position it places managers in,9 Morrison & Foerster, Frequently Asked Questions About Regulation FD(2017), https://media2.mofo.com/documents/faqs-regulation-fd.pdf [https://perma.cc/DF52-D6X3].] and ultimately no clear guidance about what information could be conveyed privately under the regulation was provided.10.] Adding to the ambiguity, the SEC considers some information immaterial even if it can be used by investors and analysts in conjunction with their other information to make material insights.11 The continued ubiquity of private investor meetings suggests that some norms have developed about what information managers may convey. However, it is uncertain whether these practices comport with the expectations of regulators. To better ascertain the boundaries of permissible private dialogue under Reg FD, I asked both managers and regulators to evaluate a series of vignettes depicting private meetings between investors and managers.

To design the vignettes, I relied on a dataset collected by observing and recording the private interactions between investors and managers at nearly seventy private meetings at two publicly traded companies.12.] During these meetings, investors posed more than 1,200 questions to executives.I focused on questions that asked information about management impressions of the firm and those that sought more timely information since these inquires raise the most salient concerns with potentially conveying material information. I sought to also select questions that not only raised challenging issues, but ideally also ones that were routinely asked by investors.For instance, twenty-six different investors in the database asked managers of a biotechnology firm for an update on the firm’s cash position and cash burn rate.13 I worked with two investor relations officers (who have more than fifteen years of experience each and have collectively attended hundreds of private investor meetings) to script representative investor-manager conversations based on these questions.14In each vignette, the investor asks for a certain kind of information about the company, and the manager offers an answer (all seven vignettes are provided in the Appendix). Survey respondents read the vignettes and were asked: “Would you consider the information the investor received during the meeting with COMPANY to be a violation of Reg FD?”

Participating managers were randomly selected from a list of chief financial officers and investor relations officers of large publicly traded firms.15Participating “regulators”—specifically, individuals charged with investigating possible violations of the securities laws and helping enforce those laws—were shown the vignettes during an annual training conference.16 The order of the vignettes was randomized to avoid rank-order effects. I received completed surveys from thirty managers and seventy regulators.17 Managers responded to every vignette with significant disagreement, some seeing the disclosure as a potential violation of Reg FD and others deeming the information immaterial. In every case there were some managers who believed the disclosure was unambiguously illegal, while others found it “likely not” or “not” a violation of Reg FD. On average, 65% of the managers responding to each vignette stated that the depicted disclosure likely or certainly violated Reg FD. Even for the vignette that the most managers found acceptable (Situation A: expressing sell-side analyst interest), a significant minority—38%—still believed the information violated or likely would violate Reg FD. The aggregated responses for all the vignettes are shown in Table 1.

Perhaps even more notable is that regulators had equally mixed responses to the vignettes. Although these respondents are charged with supporting the enforcement of securities regulation like Reg FD, there was considerable heterogeneity in what regulators viewed as appropriate under the policy. On average, 62% of the regulators responding to a vignette stated that it likely or certainly violated Reg FD—a level nearly identical to the manager respondents. Regulators were not consistently more strict about finding Reg FD violations. In three of the seven vignettes, regulators were more prone than managers to view the dialogue as acceptable under Reg FD. None of the differences in responses between managers and regulators in the vignettes are statistically significant (as shown in last two columns of Table 1 through the χ2 test statistic).

The qualitative responses provide insight into how managers interpret Reg FD. Consider Situation A, where the hypothetical CFO tells investors that that additional analysts had expressed interest in covering the company. Here, 38% of managers and 48% of regulators said such a disclosure would likely or certainly violate Reg FD. Managers who believed this to be a violation of Reg FD explained that they felt the CFO’s disclosure would influence the company’s share price.

“Learning that specific analysts may initiate coverage on a company is insider information.”

“Launch of coverage can significantly impact the share price and is material information that an investor shouldn’t know. It’s a bad form of management to share that info, not to mention illegal under FD.”

In contrast, the 62% of managers who did not believe that Situation A violated Reg FD explained why they felt the information was immaterial:

“Additional sell-side coverage does not guarantee additional liquidity, neither does it indicate any movement in the company’s value up or down.”

“To allege a violation of Reg FD assumes coverage by the new analysts is both positive and differentiated from the existing analysts as to cause a material appreciation in share price.”

This variation in responses relies on the respondents’ assessments of whether additional analyst coverage is enough to move the price of a stock. Studies on analyst initiation decisions support the view that new analyst coverage is sufficient to generate changes in prices and liquidity, suggesting that the information could be viewed as material.18 At the same time, this does not resolve the question of a potential violation since these academic studies are not known to most investors. The regulation is based on the beliefs of “reasonable investors,” not academic researchers. Thus if analysts’ initiations are believed to be inconsequential to the average investor (despite academic research to the contrary), then under a strict interpretation of the regulation, it ought not be a violation. The variation in responses by managers reflects the ambiguity of what a “reasonable investor” understands about sell-side coverage and therefore what is material.

Others vignettes generated considerably higher percentages of respondents identifying a Reg FD violation. In Situation D, the hypothetical CEO discloses that she is likely to continue purchasing additional shares in the firm. Comporting with evidence that a CEO’s desire to purchase shares is a significant signal of a firm’s prospects, 69% of manager respondents judged that this was material information that had been disclosed in violation of Reg FD. However, some argued that a CEO’s personal views about the company stock are not material.

“Just because the CEO thinks the stock is worth purchasing doesn’t mean it will perform well.”

“I don’t feel like the intention to buy shares personally is significant enough to materially move the stock beyond what a track record of purchases would do.”

Notably, the second respondent stated, as did others, that the disclosure was not material because of how the situation “felt.” Thus, it appears that some managers evaluate the acceptability of providing a piece of information not by some well-defined definition of materiality or prior evidence of the impact of a particular action, but rather subjectively based on their intuitive impression of whether the information “feels” material. 19
“If you flipped the question to say he told the investor he would very likely be selling shares I would have said yes, a violation of Reg FD.”

Prior research finds that insider purchases tend to be more informative about future stock returns than sales because insider sales arise for both information and liquidity reasons.20
Thus, this manager appeared to rely on a different set of beliefs (i.e., sales occur for information, rather than liquidity reasons) to form his or her views of what conduct would be viewed as material.

In other instances, responses appear largely unguided by the regulation, but instead by what is perceived to be acceptable practice based on norms in the industry. This was most clear with Situation F, where the CEO discloses that there have been informal discussions about potentially selling the firm. Here, 72% of managers saw a likely violation of Reg FD. The 28% of managers who disagreeed cited the commonplace nature of such takeover discussions.

“M&A discussions between firms are common and disclosing that discussions have been held should not be considered material for disclosure purposes.”

“Most CEOs think their company is worth more than where it is trading . . . Informal meetings with competitors and strategic partners are not uncommon.”

Merger and acquisition (“M&A”) discussions are one of the few areas where the SEC has offered specific guidance related to Reg FD, suggesting that such information “should be reviewed carefully” because it is “more likely to be considered material.”21 But the guidance also includes the explicit warning that information about mergers is not per se material, and that determinations must still be made case by case.22 This vagueness may explain why even 24% of regulators said the M&A information conveyed in Situation F was unlikely to violate Reg FD.

In this situation, the guidance might have confused more than it clarified. One manager, an investment relations officer, strongly believed that the information discussed in the vignette would be a clear violation of Reg FD:

“Discussing M&A suitors, meetings, or discussions would be material non-public information. Period.”

Here, the IRO seems to be misinterpreting the SEC’s guidance by divining a bright-line rule where one does not actually exist.

The differences in perspectives suggest that there are discrepancies between how the regulation is written, how it is interpreted and, and how it is complied with by managers in practice. Managers may believe that some disclosures violate Reg FD, but still view it as acceptable behavior because it has become a widespread practice in their industry. In particular, several respondents explicitly discussed the divergence of Reg FD in practice from Reg FD “in theory.”

“By the letter of the law, if management is discussing anything they haven’t said publicly before about their strategy, it’s a violation of Reg FD. But realistically, management is going to answer strategic questions when asked.”

“Speaking from experience, investor relations and management routinely say things like ‘we have more analysts interested in us’ or ‘we’ve talked to this sell-side guy or that one’ in private investor meetings. It’s not best practice, but it’s also a reasonable assumption that anyone might make.”

One manager respondent suggested that how much information would be conveyed was less a function of what regulation guided, but more of a matter of who they were speaking with. In response to one vignette where the respondent believes the executive’s answer violated Reg FD, the respondent stated:

“I can say that the exact situation described here happens every day, and management typically wants to answer it. How clearly and how detailed they answer the question depends on who that investor is. If it’s Wellington or Fidelity, or a long-only type shop that they’d love to have as long-term investors, he’s going to bend over backwards and divulge information. If it’s a high-turnover hedge fund, he’ll be very careful. If it’s a no-name investment firm, the meeting wouldn’t even be happening.”

In practice, based on the few administrative proceedings that the SEC has initiated against firms for violating Reg FD, the SEC seems to take note of large, unexplained swings in the stock price.23 However, relying on stock price changes to identify Reg FD violations raises the problem of defining fraud by hindsight.24 Courts have consistently rejected the notion that information has to necessarily change an investor’s mind to be viewed as material. For instance, in SEC v. Mayhew, the court reasoned that “to be material, the information need not be such that a reasonable investor would necessarily change his investment decision.”25 None of the disclosures described in the vignettes would be considered per se material by a court. As the Supreme Court held in TSC Industries, Inc.. v. Northway, Inc., “only if the established omissions are ‘so obviously important to an investor that reasonable minds cannot differ on the question of materiality’ is the ultimate issue of materiality appropriately resolved ‘as a matter of law.’”26
Since both managers and regulators found the information disclosed as material in each vignette, none of the disclosures in the vignettes could be described as unambiguously material or immaterial.

Given the difficulty that managers—and regulators—seemingly have in assessing materiality in a consistent manner across the vignettes, one potential concern is that the vignettes themselves are unusually vague. Put differently, the concern is that there would be greater agreement among respondents if the vignettes included more specific information and facts.

There are two considerations which help mitigate this concern and support the premise that the responses accurately reflect the inability of individuals to consistently assess what is appropriate under Reg FD. First, although these vignettes were invented, they are representative of actual conversations as observed by two experienced investor relations officers and the author. Their realism was further confirmed by several of the surveyed managers. For example, one respondent commented:

“I’ve personally experienced this many times as an analyst and as an IRO. Of course, the investor is going to ask the question. And, of course, this is exactly how most management teams would answer the question.”

Thus the vignettes accurately reflected casual and vague nature of these private investor conversations in the real world. Any examination of how individuals interpret the restrictions created by Reg FD needs to be under representative circumstances as they arise in practice, rather than a more clinical and artificial context where any ambiguity has been removed. While greater information may help regulators resolve whether particular information ought to be conveyed under Reg FD, such detail is simply not representative of how most information is conveyed by managers during actual private meetings.

A second observation which suggests that managers’ inability to consistently ascertain what information can be provided under Reg FD is a function of the regulation and not the design of these particular vignettes is the conviction in managers responses which is unrelated to the specific information provided by firms. For example, the manager who wrote that “discussing M&A suitors, meetings, or discussions would be material non-public information. Period.” indicates that he/she felt that any conversation related to M&A was inappropriate. The specific information in the conversation about the M&A conversation was not pertinent to this manager’s determination (i.e., the only appropriate managerial response to an investor question about M&A is “no comment”). Perhaps even more significantly, numerous managers explicitly stated that that the amount of detail that would be appropriate to provide in response was not guided by Reg FD restrictions, but instead by who they were speaking with (e.g., “[h]ow clearly and how detailed they answer the question depends on who that investor is”). In this way, the determining factor such mangers consider in practice about what to convey is “who” the investor is, not what material information is formally restricted under Reg FD. Thus, even if more specific information was provided in each vignette, it is not clear that this would alter managers’ judgments since managers’ assessments of the appropriateness of the information conveyed is often divorced from the notion of materiality.

III. Clearer Expectations

The lack of agreement among managers leads to divergent practices that undermine Reg FD’s objective of creating a more level playing field where all investors have access to the same material information. As indicated by the survey responses, managers often confront this ambiguity by devising their own regulatory interpretations. For example, if managers observe competitors providing cash updates privately to investors during meetings, then such disclosures become tacitly accepted practice even when communicating such information violates both the spirit and literal reading of the regulation.

Managers also appear to decide how much information to convey based on who they are meeting with and whether providing the information is likely to benefit their relationship with the investor. Such decisions appear to more deliberately ignore regulatory restrictions, but the lack of enforcement limits the risk of such practices. Problematically, this means that Reg FD creates a greater burden on firms that more faithfully and conservatively adhere to the regulation, while posing little downside to managers who, at least in part, ignore it.

Private discussions have the opportunity to improve investors’ ability to more effectively allocate capital, thereby improving market efficiency. Yet, when some managers feel less constrained by the regulation than others, this creates a heterogeneous disclosure environment where some managers are providing more information to investors than others. To the extent that investors value this more privileged access, this can benefit managers and implicitly reward firms for violating the regulation. Moreover, to the extent that managers continue to provide quasi-material or material information to select investors they meet privately with, market participants as a whole gain a misleading impression that they are operating on a “level” information playing field—undermining the impetus for creating Reg FD.

In the eighteen years since the passage of the regulation, there have been thirteen Reg FD enforcement cases. One explanation for lack of cases, given the nearly ten million estimated private interactions that have occurred since Reg FD’s passage,27. On average, there were 4,640 publicly traded operating firms (i.e., non-REIT) each year since the passage of Reg FD, according to author calculations from CRSP data. Thus, there have been an estimated 9.5 million private meetings between managers and investors in the eighteen years since the passage of Reg FD.] is that managers largely abide by Reg FD’s restrictions, thereby creating few opportunities for SEC enforcement. Yet, in light of managers’ responses to the vignettes in this study, a more plausible explanation for the paucity of enforcement is that the SEC is effectively unable to “police” markets for Reg FD violations. Offline manager-investor meetings are, by definition, private. Thus, without any disclosure requirement on the part of firms, regulators cannot ascertain where or when such interactions occur, let alone the specifics of the discussion, unless information leaks out of a meeting. Lacking the ability to observe such interactions, the SEC is neither capable of evaluating such dialogue for its appropriateness (in contrast to public securities filings) nor capable of sanctioning private manager-investor communications that violate Reg FD.

A regulation that is heterogeneously interpreted by market participates and unable to be effectively enforced by regulators undermines rather than enhances market integrity. The heterogeneity in responses by both managers and regulators suggest that the regulation is failing to fulfill its original objective of creating a more level playing field with respect to information access. To amend the regulation and help it further achieve its original goal, four considerations must be taken into account. First, changes that would prevent or curtail institutional investors’ private access to senior executives could have negative externalities (e.g., hinder capital allocation decisions in the United States by large institutional investors) and face considerable political obstacles to passage. Practically speaking, some investors will continue to gain considerable private, one-on-one time with executives. Second, creating regulations that the SEC cannot effectively police is unsatisfactory policy. Therefore, changes to the regulations should recognize the impediments that the SEC currently faces in evaluating whether managers are providing information that violates Reg FD. Third, as the SEC itself acknowledged in its original rule, bright-line standards about what information is and is not material are unlikely to be effective and exhaustive. At the same time, for each vignette, at least some regulators found the dialogue appropriate and others inappropriate, suggesting a potential degree of arbitrariness depending on the individual characteristics of the specific regulator looking at the case. Creating a more consistent and rigorous set of guidelines of what can be appropriately disclosed, while avoiding bright-line standards, would help reduce ambiguity both among managers and regulators. Finally, in line with the original goal of the regulation, all investors should have access to information that may be viewed as material (i.e., that at least some investors see as material).

In line with these expectations, regulators could create a requirement that firms publicly disclose records of their private discussions shortly after each meeting in the form of detailed minutes or transcripts.28
Such a proposal would acknowledge the potential value of private interactions, but also provide for the fact that some information that managers convey to investors may be material to other investors. This disclosure requirement would also remedy regulators’ current inability to observe potential violations by making private material disclosure effectively moot.29 By disclosing all meeting contents, material information, even if privately communicated to an investor during a meeting, would be disseminated to all market participants. Regulatory enforcement could focus on firms that fail to disclose or do not adequately disclose their private interactions, rather than trying to assess whether a specific piece of information is material or not. This proposal would bolster transparency by providing investors access to all information disclosed by managers and place the SEC in a more effective position to enforce its policies.

There are several potential criticisms to the idea of requiring firms to publicly release meetings data in a timely manner. First, historically some institutional investors have conveyed proprietary insights during their private dialogue with executives. Timely public disclosure of an investor’s strategy could hinder an investor’s ability to capitalize on their plan. Investors could respond by becoming more nuanced in the information they convey to management to avoid its dissemination, or the investor could simply participate in public conversations (e.g., earnings conference call). Exceptions to public disclosure could also be made in some limited circumstances (e.g., private placement negotiation) where its immediate public disclosure could adversely impact firms. Second, between the time of the meeting and the public disclosure of the meeting conversation, investors who attended the meeting could be placed at an information advantage. Although this time could be short (perhaps less than 24 hours), other market participants would be at an information disadvantage during this time. One solution would be to prohibit investors who attend private meetings from trading until the records are publicly released. Alternatively, firms could publicly disclose when meetings are planned to occur so that other investors could choose to avoid trading during that time. While there are different externalities associated with each of these considerations, further analysis could seek to design policy to minimize any adverse effects. Finally, some firms are likely to object on the basis of the cost of preparing and releasing such records. However, many firms already prepare informal logs of questions that are frequently asked by investors during private meetings. The regulatory disclosure would simply be a more complete and rigorous compilation of the meeting dialogue. The monetary outlay associated with preparing minutes/transcripts would additionally not be a material expenditure for firms. Overall, it is possible to address many of the preceding concerns in designing an updated disclosure policy.

IV. Conclusions

Managers should not be forced to play a game of roulette when privately meeting with investors. While managers could take a conservative approach and either not engage in private meetings or not provide any information that any investor could view as material, such a choice would likely prove detrimental to both the firm and the efficiency of capital allocation within capital markets. At the same time, managers who divulge information risk violating Reg FD, albeit without necessarily intending or even appreciating that they are doing so.

Although Reg FD operates in a civil context, the constitutional doctrine of vagueness, which prohibits ambiguous criminal codes, offers an apt warning to regulators. The Supreme Court has held that it violates the Fifth Amendment to “take[] away someone’s life, liberty, or property under a criminal law so vague that it fails to give ordinary people fair notice of the conduct it punishes, or so standardless that it invites arbitrary enforcement.”30 It is not clear why securities regulations such as Reg FD, which have sweeping personal consequences for individuals and firms who are sanctioned, should be held to a lesser standard.31 When both regulators and the regulated disagree vehemently among themselves and between each other over the appropriate interpretation of a rule, it verges on being “standardless.” Such arbitrariness should give all parties pause.


Figure 1: Vignettes Responses

Figure 1 presents histograms showing the percentage of respondents that answered “no,” “likely not,” “likely yes,” or “yes” to the question “Would you consider the information the investor received during the meeting with COMPANY to be a violation of Reg FD?” after reading each vignette. The blue bar represents the frequency of responses by managers (n=29 except in Situation B where n=30) and the orange bar represents the frequency of responses by regulators (n=70). The seven vignettes (labeled Situation A through Situation G) are presented in the Appendix.

Table 1: Vignettes Responses Aggregated by “Yes” and “No” Responses

Table 1 shows the responses of both managers and regulators to the question “Would you consider the information the investor received during the meeting with COMPANY to be a violation of Reg FD?” after reading each vignette. The No column aggregates the “No” and “Likely Not” responses, and the Yes column aggregates the “Yes” and “Likely Yes” responses. The Pearson Chi-square test (χ2 test) evaluates observed differences between aggregated Yes and No responses between managers (n=29 except in Situation B where n=30) and regulators (n=70). The table shows the Pearson χ2 test statistic and the associated p-value. The seven vignettes (labeled Situation A through Situation G) are presented in the Appendix.

For the appendix to this essay, please see the PDF version.

  1. See, e.g., Lauren Cohen et al., Sell-Side School Ties,65 J. Fin.1409 (2010) (showing that prior to Reg FD, sell-side analysts outperformed their predictions by nearly ten percent a year on average when they shared an educational background with members of senior management at a firm); Andreas Gintschel & Stanimir Markov, The Effectiveness of Regulation FD, 37 J. Acct. & Econ.293 (2004) (showing that after Reg FD, the impact of analyst reports on stock prices diminished by 28%).
  2. See 17 C.F.R. § 240.10b-5 (2018).
  3. See Regulation FD, 17 C.F.R. § 243 (2018).
  4. See, e.g., Joanna E. Barnes, Regulation FD Will Result in Poorer Disclosure and Increased Market Volatility, 29 Pepp. L. Rev.3 (2002).
  5. Lawrence D. Brown et al., Managing the Narrative: Investor Relations Officers and Corporate Disclosure, J. Acct. & Econ.(forthcoming 2018).
  6. See Brian J. Bushee et al., Do Investors Benefit from Selective Access to Management?, 2 J. Fin. Reporting, no. 1, 2017, at 31; David Solomon & Eugene Soltes, What Are We Meeting For? The Consequences of Private Meetings with Investors, 58 J.L. & Econ.325 (2015).
  7. See 17 C.F.R. § 243.101 (2018).
  8. Selective Disclosure and Insider Trading, 60 Fed. Reg.51,716, 51,721 (August 24, 2000) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449(1976)).
  9. See, e.g., Latham & Watkins, The SEC’s Regulation FD—Fair Disclosure(2000), https://www.lw.com/upload/pubContent/_pdf/pub302.pdf [https://perma.cc/BUZ8-BCPG
  10. There have been only thirteen enforcement cases since the enactment of Reg FD. See Martin Bengtzen, Private Investor Meetings in Public Firms: The Case for Increasing Transparency, 22 Fordham J. Corp. & Fin. L.33, (2017). For a discussion of the ambiguity of Reg FD, see alsoJohn L. Campbell et. al., Selective Disclosure After Regulation Fair Disclosure: More than Simply ‘Completing the Mosaic’? (Kelley School of Business, Research Paper No. 16-52, 2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2803308 [https://perma.cc/SK7Y-5Z7Z
  11. See Selective Disclosure and Insider Trading, 60 Fed. Reg.51,716, 51,722 (August 24, 2000) (“At the same time, an issuer is not prohibited from disclosing a non-material piece of information to an analyst, even if, unbeknownst to the issuer, that piece helps the analyst complete a “mosaic” of information that, taken together, is material.”)
  12. See Jihwon Park & Eugene Soltes, What Do Investors Ask Managers Privately? (April 9, 2018) (unpublished manuscript), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3087369 [https://perma.cc/99GG-FJMC
  13. The cash questions served as the basis for the Situation C vignette shown in the Appendix.
  14. To protect firm managers, the dataset recorded the investors’ questions but not the managers’ answers. Thus, the manager responses provided in each vignette are plausible answers that reflect the experience of the investor relations officers who helped design the vignettes, rather than the literal response of managers in the Park and Soltes (2018) field work.
  15. Firms were selected from the CRSP/Compustat database if they met all of the following criteria: They held at least one earnings conference call in 2016, had a share price of greater than $5, were an operating firm (i.e., not a holding firm or REIT), and were incorporated in the United States. From these 2,695 firms, I randomly selected 150 firms and went to each firm’s website to find an e-mail contact for their investor relations officer or chief financial officer, of which I found 134 direct e-mail addresses.
  16. Under the terms of confidentiality that were agreed to in order to distribute this survey at the training conference, the author is not permitted to publicly disclose the name of the agency whose employees responded to the vignettes.
  17. The study was submitted to Harvard University’s Committee on the Use of Human Subjects (IRB). Harvard’s IRB exempted the study under 45 C.F.R. 46.101(b)(2). For the managers, twenty-nine completed all seven vignettes while one manager completed only the Situation B vignette (i.e., Describe Contract Proposals After Election). While this manager did not complete the survey in its entirety, I included this manager in the relevant analysis of Situation B.
  18. See Bruce C. Branson et al., Information Conveyed in Announcements of Analyst Coverage, 15 Contemp. Acct. Res.119 (1998); Cem Demiroglu & Michael Ryngaert, The First Analyst Coverage of Neglected Stocks, 39 Fin. Mgmt. 555 (2010); Paul J. Irvine, The Incremental Impact of Analyst Initiation of Coverage, 9 J. Corp. Fin.431 (2003); Kevin K. Li & Haifeng You, What is the Value of Sell-side Analysts? Evidence from Coverage Initiations and Terminations, 60 J. Acct. & Econ. 141 (2015).
  19. For a discussion of how intuition can contribute to the decision to engage in misconduct, see Eugene Soltes, Why They Do It: Inside the Mind of the White-Collar Criminal(2016).
  20. See, e.g., Josef Lakonishok & Inmoo Lee, Are Insider Trades Informative?, 14 Rev Fin. Stud.79 (2001).
  21. Selective Disclosure and Insider Trading, 60 Fed. Reg.51,716, 51,721 (August 24, 2000).
  22. Id.
  23. Yvonne Ching Lee Lee, The Elusive Concept of “Materiality” Under U.S. Federal Securities Laws, 40 Willamette L. Rev. 661, 677 (2004).
  24. For a discussion of fraud by hindsight, see G. Mitu Gulati et al., Fraud by Hindsight, 98 Nw. U.L. Rev. 773(2004).
  25. 121 F.3d 44, 52 (2d Cir. 1997).
  26. 426 U.S. 438, 450(1976) (quoting Johns Hopkins Univ. v. Hutton, 422 F.2d 1124, 1129 (C.A.4 1970)).
  27. According to an informal survey conducted by Ipreo, the average firm conducted 114 private, one-on-one investor meetings in 2015. Ipreo, Corporate Access Survey (2016), https://ipreo.com/blog/corporate-access-survey-2016/ [https://perma.cc/TBA2-KHW9
  28. An earlier precedent is with quarterly earnings conference calls. For background of the environment, see Brian J. Bushee et al., Open Versus Closed Conference Calls: The Determinants and Effects of Broadening Access to Disclosure, 34 J. Acct. & Econ.149 (2003).
  29.  Other markets have required disclosure of private meetings. Although there are questions about the quality of disclosure, beginning in 2009, listed firms on the Shenzhen Stock Exchange in China were required to disclose investor meetings within two days of their occurrence. SeeQiang Cheng, Seeing is Believing: Analysts’ Corporate Site Visits,21 Rev. Acct Stud.1245 (2016).
  30. Johnson v. United States, 135 S. Ct. 2551, 2557 (2015).
  31. See Nicholas Kappas, A Question of Materiality: Why the Securities and Exchange Commission’s Regulation Fair Disclosure is Unconstitutionally Vague, Note, 45 N.Y.L. Sch. L. Rev. 651 (2001).

Shaming Big Pharma

*Sharon Yadin is Associate Professor, PAC School of Law. sharon@yadin.com. She would like to thank Ron Shapira, Barak Orbach, Oren Perez, and Yoav Dotan for their helpful thoughts and comments and Peres Academic Center for supporting this research. She also wishes to thank the editorial team at the Yale Journal on Regulation.

The FDA recently published a list of top branded drug companies that are suspected of purposely blocking competition from the generic drug industry. Calling out big pharma by “naming and shaming” them into good behavior is an innovative, still largely experimental, regulatory tool designed to harness public opinion and build on pharma’s reputational sensitivities. This Essay analyzes the FDA’s new initiative as a form of regulation by shaming, points to crucial flaws in the agency’s use of the tactic, and suggests key points for improvement.


Novartis, Mylan, Roche, Pfizer, Celgene, Actelion—all these are examples of mega pharmaceutical companies that were recently “named and shamed” by the Food and Drug Administration (FDA).1 This “shaming list,” which was uploaded to the FDA’s website, includes the names of more than 50 branded drug companies that allegedly tried to block competition from generic drug companies.2 The drugs that these generics are trying to produce and sell for a more affordable price to patients range from acne medication to blood thinners, pain killers, antipsychotic drugs, and drugs prescribed for treating cancer and other serious diseases.3 FDA Commissioner Scott Gottlieb has stated that he hopes that the publication of the list will discourage this type of bad behavior by branded drug companies.4 This initiative is indicative of the growing interest of the FDA and other health regulators in adopting “naming and shaming” tactics toward drug companies.5 Can such “regulation by shaming” work?

In general, the term “shaming” is often perceived negatively, causing shaming to be regarded as illegitimate.6 However, shaming can be useful when applied properly by regulatory agencies. In this Essay, I discuss the concrete characteristics and theoretical framing of the innovative regulation recently employed by the FDA, and I argue that, generally, shaming pharma can work but not in the manner in which it was executed in the case of the recent pharmaceutical company “shame list.” I explain how, in this instance, the FDA employed shaming tactics ineffectively, as it failed to convey the message to the public in a comprehensible and accessible manner. In conclusion, I suggest guidelines for successful regulatory shaming that the FDA can administer in the future, drawing on the regulatory shaming tactics employed by regulators in other fields and on regulatory shaming theory and principles. 7

I. Naming and Shaming by the FDA

“Naming and shaming” tactics have been used by the FDA with regards to the pharma industry in recent years, mainly through online publication of non-compliance and warning letters.8 For example, the FDA posted on its website a table listing companies that failed to meet the regulatory requirements of the Pediatric Research Equity Act (PREA),9 primarily the obligation to conduct pediatric studies, along with copies of non-compliance letters issued by the agency and the companies’ responses to these letters.10 According to the FDA, when a company fulfills the requirement to conduct relevant studies, the date it does so is added by the agency to the last column of the table,11 and thus this online database is kept updated.

It now seems that the FDA is interested in further exploring and experimenting with this approach. Only a few months ago, in May 2018, the agency published an online “black list,” in which it named dozens of branded drug companies that are supposedly using unlawful or unethical means to attempt to impede competition from generic drug companies.12

“Generics” are the unbranded versions of branded drugs that appear after the latter have lost patent and regulatory protection.13 Generics contain the same active ingredients, but not necessarily the same inactive ingredients, as branded drugs.14 As generics are not based on the expensive research and development efforts invested in the branded drugs, they cost between 80% and 85% less than the brand-name equivalent.15 Thus, generic drugs can provide an affordable alternative for patients in need.

According to the FDA, potential applicants for generic drug approval are being prevented from obtaining samples of certain branded products named in the list, which are necessary for attaining FDA approval of generic drugs.16 Branded drug samples are vital for generic applicants because the applicants need to demonstrate to the FDA that their version of the product is bioequivalent to the branded drug.17 A generic drug developer generally needs 1,500 to 5,000 units of the branded drug to perform studies needed to gain FDA approval.18

The list names branded drug companies that failed to provide the necessary samples despite requests from prospective generic applicants, and despite the fact that no regulatory restrictions with regard to the samples’ safety and distribution were imposed.19 Generally, the FDA may impose distribution limitations on branded products, as part of an FDA safety program called REMS (Risk Evaluation and Mitigation Strategy).20 But according to the FDA, some companies are falsely arguing that safety issues prevent them from distributing drug samples to generic companies.21 For example, according to the list, one branded drug company (Celgene) that was authorized by the agency to distribute samples to generic companies was nevertheless the subject of 13 complaints received by the FDA from generic companies that were unable to receive such samples.22

The FDA’s publication included open condemnation of big pharma conduct. In the text accompanying the list of companies, the agency explained that “‘gaming’ tactics were being used to delay generic competition,”23 and in a statement, the FDA Commissioner asserted that the pharma companies on the list “have potentially been blocking access to the samples of their branded products.”24 Despite efforts made by the Commissioner to stress that publishing the list was merely an attempt to promote transparency,25 the data, the accompanying text, and the statement made to the press are all indicative of shaming.26

Indeed, this step was clearly intended to draw public attention to big pharma misconduct. As the FDA Commissioner stated regarding the list, “We’ll continue to look at more ways we can expand upon today’s action and call public attention to situations where the careful balance that Congress sought between product innovation and access may be being disrupted.”27 The Commissioner also stated that the agency’s decision to publish the list was rooted in the idea that “no patients should be priced out of medicines they need to support their health” and that it was intended to “increase competition as a way to help make drugs more affordable and improve access.”28

It is worth noting that the FDA’s efforts to maintain competition in the pharma industry are somewhat secondary to, or even beyond, its main mandate. Overall, the agency—which is located within the Department of Health and Human Services—is responsible for regulating drugs for safety and effectiveness and is thus considered “the gatekeeper of the American pharmaceutical marketplace.” Meanwhile, the main agency responsible for addressing anticompetitive business practices is the Federal Trade Commission (FTC). This possible tension was addressed directly by the FDA Commissioner, who stated that the agency’s efforts to improve generic drug competition aimed to improve access and affordability and that the FDA will cooperate in this with the FTC.

The existence of generic drug companies, ensuring fair competition in the market, is in the public interest and is therefore a regulatory goal. Laws such as the Federal Food, Drug and Cosmetic Act (FDCA)29 and the Drug Price Competition and Patent Term Restoration Act (“Hatch-Waxman”)30 to strike a balance between the need to encourage the development of new drugs, which is typically an expensive and lengthy process,31 and the need to make these drugs affordable to all patients. As long as the branded drug company enjoys exclusivity in marketing, based on its patent, the price of the drug can remain as high as the pharma company desires in order to recoup its research and development costs and make a profit.32 The term of a new patent is generally twenty years from the date on which the application was filed with the Patent and Trademark Office, which can occur anytime during the development of a drug.33 When a branded drug company no longer enjoys exclusivity in the market, generic drug companies can enter the market and supply patients with cheaper versions. In reality, though, branded drug companies constantly deploy various means to impede competition from generics—from filing frivolous drug patents and citizen petitions to engaging in various other anti-competitive strategies, such as paying generic manufacturers to delay their entry into the market, reaching anti-competitive agreements, shifting market demand to a new formulation of a drug, and withholding samples.34 These practices are an ongoing concern of legislators and regulators in the health industry.

II. Regulation by Shaming

Shaming is often perceived negatively as a phenomenon that needs to be eradicated35 in which citizens, and sometimes even the state in the criminal context,36 shame other citizens.37 It is often regarded as a despicable act that can cause irreparable harm to individuals.38 Civilian shaming may be based on nothing more than false accusations or insults39 designed to humiliate and inflict pain.40 But administrative shaming is something different. It can achieve regulatory goals effectively, since it is cheaper and faster than other forms of regulatory sanctions, either criminal or administrative, and when designed properly it can efficiently deter organizations from non-compliance.41 Unlike civilian shaming, regulatory shaming is subject to public law norms; it does not aim to humiliate or hurt individuals’ feelings, but to inflict reputational harm on business organizations42 and nudge them in the right direction. Regulation by shaming adds to a growing toolkit of innovative regulatory apparatuses that are meant to enforce norms without relying solely on “command and control.”43 Much like its sibling—disclosure regulation44—regulatory shaming takes place in the “expressive space” of regulation,45 in which the regulator conveys messages and “speaks” to the public. Shaming is not to be confused with the concept of transparency, as it is designed to encourage action by third parties against a non-compliant firm, and it focuses on a condemning rather than an informative message.46

Shaming initiatives by regulatory agencies are becoming more and more common.47 These policies take many forms, including “naming and shaming,” star ratings, color ratings, league tables, public statements, publication of enforcement actions, and publication of inspection results.48 All of them aim to harm the reputation of companies that fail to comply with regulations or that are thwarting regulatory goals in some other way. Shaming highlights actions by these regulated entities that may be illegal or unethical and allows the administrative agency to publicly condemn a specific action (or non-action) of a named company or companies. For instance, regulators shame companies for non-compliance with workplace safety regulations, environmental regulations, or health regulations.49 They also shame companies for “gaming the system” through legally grey area tactics,50 and for overly high salaries paid to CEOs.51

The idea of regulatory shaming is to convey a message to a shaming community—such as employees, investors, peers, consumers, interest groups, politicians, or the general public—which will then act in accordance with the negative feelings invoked by the adverse publication.52 The shaming community can feel betrayed, disgusted, appalled, outraged,53 or otherwise disappointed with the shamed organization or with its behavior. But the main point is that these feelings are translated into action. Without some form of response from the public or other third parties, regulatory shaming cannot work. Customers can protest, file complaints, or boycott the products sold by the condemned regulatee; shareholders may withdraw their investment; employees can demonstrate or even strike; peers and competitors may refuse to engage in any kind of business ventures with the company; and suppliers may refuse to work with it.

Regulation by shaming harnesses firms’ sensitivity to reputational damage. A qualitative research study into environmental regulation found that corporate officials care not only about complying with formal regulations but also with their “social license,” that is, public expectations with regard to environmental performance.54 Public opinion, influenced by a trustworthy organ of the state that openly condemns a company’s actions, can cause financial damage to firms.55 Adverse publications made by administrative agencies can thus become a powerful tool in regulatory enforcement endeavors.56

But in order for regulatory shaming to work, there are several essential components to the shaming process:

  1. Choosing a topic for regulatory shaming that third parties (shaming communities) will be interested in or passionate about
  2. Identifying the right shaming group—those people who can and will act in order to influence the company’s behavior
  3. Taking a regulatory moral stand that is non-controversial and that the shaming community can easily agree with
  4. Properly shaping a shaming message that is well-communicated and specifically designed for the chosen shaming group
  5. Disseminating the shaming message through suitable media channels

These are important steps that need to be carefully implemented in order for the shaming action to fulfill its public interest goal. Shaming initiatives that fail may cause more harm than good. Regulators that do not succeed in correcting market failures through adverse publications may suffer all kinds of consequences.57 For example, they may themselves be scolded by the targeted companies or by third parties, including the intended shaming community. They may harm their relationship with the industry in general and with the shamed entity in particular, causing irreparable damage to regulatory goals and hurting industry willingness to cooperate and comply with regulations and with the regulator in general. They may jeopardize their reputations as professional regulators, and they may become entangled in costly and prolonged legal battles with the shamed regulatees.58


III. What’s Wrong with the FDA’s Shaming Tactic?


Generally, shaming big pharma can be an effective part of the FDA’s regulatory agenda with regards to fair competition in the drug market, for several reasons.

First, the public can easily identify with the need to keep drugs affordable and can be expected to react strongly to branded companies’ attempts to manipulate the market.59 Obviously, patients who depend on a specific drug cannot afford to boycott it. However, public attention to adverse behavior of specific drug companies can, in principal, deter the drug industry in general (as well as specific companies) from engaging in unethical or illegal practices. For instance, Eli Lilly, one of three companies in the world that hold a patent for insulin, was recently the target of harsh public criticism and outrage due to a very steep increase in its product prices.60 It was subject to protests outside its Indianapolis headquarters, as well as calls for tighter regulation and more transparency, and for greater affordability and accessibility of insulin, from advocacy groups such as Patients for Affordable Drugs and the American Diabetes Association.61 Consequently, the House of Representatives is conducting an inquiry into insulin pricing, with the intent of eventually introducing legislation.62 Furthermore, many pharma companies, including those listed in the FDA’s shame list, also sell generics63 and are thus in competition with other companies in a manner that facilitates consumer leverage. Therefore, though medication is clearly different from sportswear in terms of consumer choice, regulatory shaming that is directed towards patients and patient advocacy groups can certainly be effective.

There are also other effective shaming audiences that the FDA can reach, such as potential investors and current shareholders in the pharma industry, and pharma employees. These stakeholders can also play an important role in the “private regulation” process being advanced by the FDA. For example, many investors are unwilling to invest in companies with whose values, actions, and goals they cannot identify,64 a common phenomenon with tobacco, alcohol, and arms companies.65 Sometimes, such investors are driven by fear that investing in such companies may in turn cause them to be personally shamed by others who consider such investments immoral.66 These issues are central to an approach known as “corporate social responsibility” (CSR), which now plays a prominent role in investors’ considerations.67 Under the terms of CSR, the corporate entity is understood through a communitarian prism, which focuses on the social and moral aspects of the corporation’s community activities, rather than its own individualistic interests.68 FDA shaming of pharmaceutical companies for intentionally manipulating the market in order to keep prices high, and hurting patients in need, may trigger a similar effect with pharma shareholders and potential investors. Additionally, pharma employees who learn that their company is acting in a way that is not considered socially responsible may elect to strike, thus causing the company not only indirect reputational harm but also direct financial losses.

The second reason why shaming can be an important tool for the FDA’s regulatory agenda is that the big pharma companies named in the FDA’s list generate annual revenues of billions of dollars.69 With such large sums at the disposal of the regulatees, monetary sanctions may well be an ineffective form of regulatory enforcement and deterrence.70 Indeed, drug prices have been and still remain a major concern of public health regulators and legislators, who have been largely unable to restrain rising drug prices.71 It is thus worth considering other, more sophisticated sanctions, even if only as a complementary measure. Furthermore, since this shaming is mostly directed toward big drug companies, the risk of over-deterrence and of causing disproportionate reputational damages is relatively small.72

Finally, because the drug industry is heavily regulated,73 it is familiar with regulatory intervention and is therefore less likely to be hostile to regulatory endeavors to enforce regulation, minimizing the regulatory risks of shaming.74

Therefore, in theory, shaming big pharma can work. However, the FDA’s recent list of shame was lacking in both form and in substance, failing to include items 4 and 5 (and possibly 2) in the list of critical stages for successful regulatory shaming, as presented in the previous section.75 The FDA’s shaming list is extremely uncommunicative in both the language used and in the ways in which the data has been processed, organized, and presented, and it was not distributed through appropriate channels for effective impact. These findings suggest that the agency has not fully considered the shaming process, its relevant participants, and its intended results and effects.

Figure 1 below shows the FDA’s list (for convenience, only the first few rows are presented).76 A quick glance reveals that the list is not at all designed to be easily accessible for the general public, which is not fluent with the pharma regulation terminology used by the FDA both in the table itself and in the “explanatory” text in the webpage in which the table appears.


Figure 1: Excerpt from the FDA’s Pharma “Shame List” (2018)

Yadin Figure 1

For instance, terms like RLD, REMS, and ETASU are used as the building blocks for this table, which is even called “RLD Access Inquiries.”77 Of the five columns in the table, only the names of the companies and the names of the drugs in columns 1 and 2 are easily understood. Footnotes to the accompanying text which attempt to explain some technical terms only add to the confusion by using even more pharma jargon.78 The table is thus immediately comprehensible only to people within the pharma industry; for a person from outside the pharma industry to understand it would require reading and re-reading the accompanying text (over 2,000 words) as well as the data provided in the table.

Even for those who are able to decipher the lingo in which the FDA describes the condemned behavior of big pharma, the data is very confusing. It includes both pharma companies on which regulatory restrictions on sharing drug samples have been imposed (for safety reasons) and companies that have no such restrictions. However, in an accompanying statement, the FDA Commissioner explains that branded drug companies should always make available “a path to securing samples of brand drugs for the purpose of generic drug development.”79 Also, different kinds of anti-competitive behaviors are described by the agency in the explanatory text, including contractual restraints imposed by branded drug companies on sellers, such as pharmacies.80

Thus, the FDA publication obscures, diffuses, and dilutes its main message, and thereby fails to realize the full potential of regulatory shaming of the pharma industry.

Examples of regulatory shaming by other regulatory agencies show how the FDA could have done a much better job of shaping its message and making it comprehensible to relevant shaming communities. For example, the webpage in which the FDA lengthily explains the idea of the list and its complex database uses dense pharma regulation terminology and lacks any graphic support besides the table itself.81 By contrast, the Department of Health and Human Services provides an online rating of nursing homes that is based on a highly intuitive five-star scale, incorporating an easily understood graphic measuring tool (see Figure 2).82 In this form of regulation by shaming, each rated facility is assigned a star rating based on its weighted score from recent health inspections, its staff-resident ratio, and clinical data, saving the public the task of wading through the underlying data and navigating technical language.83 The star ratings are posted online, which can shame poorly rated nursing homes into doing better in the inspected areas.


Figure 2: Medicare, “Nursing Home Compare”

Yadin Figure 2


Another example is the Environmental Protection Agency’s (EPA) Toxics Release Inventory (TRI) program (see Figure 3), in which the agency publishes facility-based information regarding air, water, and land pollution, as well as compliance status.84 Here, significantly non-compliant facilities are marked red, while compliant facilities are marked blue.


Figure 3: EPA Toxics Release Inventory Program

Yadin Figure 3


The methods used by the Department of Health and Human Services and the EPA, in which data are formulated and presented in a clear and communicative manner, can be very effective in soliciting public attention and facilitating corporate shaming to achieve regulatory goals.

The chosen distribution methods for the FDA’s message were also flawed. The list of pharma companies was only mentioned on a few of the FDA’s Twitter accounts,85 with a concise informative notification (see Figure 4) referring the readers to the FDA Commissioner’s statement.86


Figure 4: FDA Tweet about its “Shame List”


This relative paucity of communication is particularly surprising given that the FDA has a fairly heavy social media presence and conducts extensive interactive media activity. The agency sends out email alerts to subscribers and provides RSS feeds and also maintains a Facebook page in both English and in Spanish, a Pinterest page with dozens of infographics, more than 20 Twitter accounts, a blog, a YouTube channel, and a Flickr page, most of which are updated daily, even several times a day.87 (last visited Aug. 28, 2018).]

By contrast, an example from the Occupational Safety and Health Administration (OSHA) shows how social media, as well as administrative agencies’ webpages and news releases, can be properly harnessed for regulatory shaming. Figure 5 below is an example of OSHA’s almost daily tweets on enforcement actions taken against companies that violate workplace safety regulations.88 The tweet links to a webpage (news release) in which the agency clearly and concisely explains the case,89 without unnecessary OSHA jargon or undecipherable data (see Figure 6).


Figure 5: OSHA Shaming Tweet


Figure 6: OSHA News Release


In short, the FDA’s efforts at shaming big pharma would be much more effective if it was to follow the five-step process laid out in this Essay.90 First, it must choose a topic that people are interested in or passionate about. Drug companies’ behavior can generally be considered a fitting subject for shaming since patients are dependent on these companies for their health. Therefore, issues that relate to illegal or unethical practices of pharmaceutical companies, such as price gouging, exclusion of competitors, or poor transparency regarding their activities, can be considered good candidates for regulatory shaming. Second, the FDA should carefully identify the right shaming audience, and consider patients, health advocacy groups, investors in the pharma sector, pharma employees, and the pharma industry in general. Defining the right target group will improve the effectiveness of any regulatory shaming effort. Third, the FDA should consider whether its moral stand regarding the pharma industry is fully shared by the targeted shaming communities. In all of these first three steps, the FDA’s regulatory shaming of big pharma is on fairly solid ground, though some improvements may be needed in step two.

The final two steps, however, need significant improvement if the FDA’s shaming tactics are to achieve more effective results. The fourth step is that the FDA must shape its shaming message in a much more communicative manner. The message needs to be simple and direct. Instead of lengthy text embedded with pharma jargon, or undecipherable charts and data, use should be made of short statements; infographics; easily digestible numbers, scores, and ratings; and intuitive and attractive design. Messages of this type are far more suited to most shaming audiences, as well as to the media, and thus can be much more effective in changing drug companies’ behavior. In this regard, short messages that name specific companies can be more effective than general sector-wide shaming; and converting data into simple ratings and scores can offer a more straightforward message for widescale dissemination.

And fifth, proper use of social media and digital media in general is crucial for regulatory communication with the public in today’s world. Short shaming messages and related graphics are highly suited for platforms such as Facebook and Twitter. The FDA should harness multiple media outlets that have high visibility in order to disseminate the message as broadly as possible, and can issue repeated publications as needed. These communications can also include reports to the public on how FDA shaming efforts have helped change pharma companies’ behavior, thus encouraging further public participation in “private regulation” based on regulatory shaming.



The FDA has been accused by some commentators of being an agency that engages in “regulatory silence”—that is, it is reluctant to take action that may be viewed as aggressive or outside the clear scope of product safety and efficiency.91 But in fact, the FDA has shown real initiative in the regulatory tools arena, experimenting with “naming and shaming” of drug companies that engage in anti-competitive behavior to impede competition from generics. Though some may consider shaming to be “soft” rather than “hard” regulation, it is definitely not passive or neutral, and it is a clear example of “thinking outside the box.” Naming and shaming practices are most certainly an embodiment of the FDA’s regulatory philosophy, developed in the 1970s, which advocates achieving the general objectives of the law in creative ways that do not violate statutory restrictions.92

The rising prices of drugs across the country are currently a major public policy problem, one with which regulators are still grappling.93 Under these circumstances, there is a great need for creative regulatory solutions. Only recently, the Department of Health and Human Services proposed requiring that TV ads for prescription drugs include their list price, in order to incentivize drug companies to lower their prices.94 Officials in the Department have also declared that they intend to shame drug companies that do not comply with the new rule once it is passed.95

It therefore seems that in the health industry, regulatory shaming is more relevant than ever. But can shaming big pharma work? Can it efficiently achieve regulatory goals, such as enhancing competition in the pharma industry and bringing down drug prices? Can shaming by the FDA in other regulatory fields work as well? And can it also work for other health regulators? The answer to all these questions, in my opinion, is yes.96 But first, the regulatory agency has to properly identify the intended shaming group (the general public, the pharma industry, investors, etc.) and then both correctly formulate the shaming message and select the appropriate media channels, so as to communicate its message in an efficient and accessible manner.

Although this Essay has focused on deficiencies in the implementation of the regulatory shaming approach by the FDA, some elements of its approach were entirely correct. One of the smartest things the FDA did was to publicly notify, in advance, that regulatory shaming was going to take place in a certain subject area. In fact, the head of the FDA stated almost a year in advance that the agency had identified that “gaming tactics” were being employed by branded drug companies to impede competition from generics and that the agency planned to publicize the letters it had received from authorized generics that had requested samples from branded drug companies and were denied.97 Announcing regulatory shaming ahead of time can create deterrence in the drug industry and reduce unwanted behaviors by big pharma companies, even before the shaming itself takes place.

In conclusion, regulatory shaming holds great promise for curtailing bad behavior by big pharma. Regulators in health and other sectors, as well as legal scholars, should further develop this interesting and innovative approach to regulation.

  1. See Reference Listed Drug (RLD) Access Inquiries, U.S. Food & Drug Admin. (FDA), https://www.fda.gov/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApproved/ApprovalApplications/
    AbbreviatedNewDrugApplicationANDAGenerics/ucm607738.htm [https://perma.cc/K3E5-C9DZ] (last visited Aug. 27, 2018) [hereinafter FDA list]. The list was published on May 17, 2018. See FDA Statement, Statement from FDA Commissioner Scott Gottlieb, M.D., On New Agency Efforts to Shine Light on Situations Where Drug Makers May Be Pursuing Gaming Tactics to Delay Generic Competition, U.S. Food & Drug Admin. (FDA), https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm607930.htm [https://perma.cc/SA29-QNAN] [hereinafter Statement from FDA Commissioner].
  2. See id.; FDA list, supra note 1.
  3. See id.
  4. See Statement from FDA Commissioner, supra note 1.
  5. See, e.g., FDA Statement, Statement from FDA Commissioner Scott Gottlieb, M.D., On New Agency Actions to Further Deter ‘Gaming’ of the Generic Drug Approval Process by the Use of Citizen Petitions, U.S. Food & Drug Admin. (FDA), Oct. 2, 2018, https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm622252.htm [https://perma.cc/H9XB-K9N3].
  6. See, e.g., James Q. Whitman, What Is Wrong with Inflicting Shame Sanctions?, 107 Yale L.J. 1055, 1055-56 (1998).
  7. See Sharon Yadin, Regulatory Shaming, 49 Envtl. L. (forthcoming 2019), https://ssrn.com/abstract=3290017 (developing the theory and basic principles of “regulatory shaming”).
  8. See, e.g., Warning Letters and Notice of Violation Letters to Pharmaceutical Companies, U.S. Food & Drug Admin. (FDA), https://www.fda.gov/Drugs/GuidanceComplianceRegulatoryInformation/EnforcementActivitiesbyFDA/
    WarningLettersandNoticeofViolationLetterstoPharmaceuticalCompanies/default.htm [https://perma.cc/VDJ6-FSFR] (last visited Aug. 30, 2018).
  9. Pediatric Research Equity Act of 2007, Pub. L. No. 110-85, 121 Stat. 866 (codified as amended in 21 U.S.C. § 301).
  10. See Non-Compliance Letters under 505B(d)(1) of the Federal Food, Drug, and Cosmetic Act, U.S. Food & Drug Admin. (FDA), https://www.fda.gov/drugs/developmentapprovalprocess/developmentresources/ucm343203.htm [https://perma.cc/9ETR-C7EK] (last visited Aug. 30, 2018).
  11. See id.
  12. See Statement from FDA Commissioner, supra note 1.
  13. See Kathleen Craddock, Improving Generic Drug Approval at the FDA, 7 Mich. J. Envtl. & Admin. L. 421, 423 (2018).
  14. See Cheryl Spector, Generic Copies: Are They New Drugs, 3 Cardozo L. Rev. 131, 131 (1981).
  15. See Shyam Goswami, Windfall Profits and Failed Goals of the Bayh-Dole Act, 19 J. Gender Race & Just. 375, 382 (2016).
  16. See FDA list, supra note 1.
  17. See Statement from FDA Commissioner, supra note 1.
  18. See FDA list, supra note 1.
  19. See id.
  20. See Risk Evaluation and Mitigation Strategies (REMS), U.S. Food & Drug Admin. (FDA), https://www.fda.gov/Drugs/DrugSafety/REMS/default.htm [https://perma.cc/M9VL-VKK4] (last visited Nov. 3, 2018).
  21. See FDA list, supra note 1.
  22. See id.
  23. See id.
  24. See Statement from FDA Commissioner, supra note 1.
  25. See id. See also Beth Mole, Shame, Shame, Shame — FDA has Named Names of Pharma Companies Blocking Cheaper Generics, arsTECHNICA (May 17, 2018), https://arstechnica.com/science/2018/05/fda-to-start-naming-names-of-pharma-companies-blocking-cheaper-generics [https://perma.cc/EW6Y-XUPS].
  26. See also infra Part II; Yadin, supra note 7 (discussing the difference between shaming and transparency).
  27. See Statement from FDA Commissioner, supra note 1.
  28. See id.
  29. 21 U.S.C. § 301 (2015).
  30. Pub. L. 98-417, 98 Stat. 1585 (1984).
  31. See, e.g., Margaret Gilhooley, FDA and the Adaptation of Regulatory Models, 49 St. Louis U. L.J. 131, 132 (2004); Jordan Paradise, Regulatory Silence at the FDA, 102 Minn. L. Rev. 2383, 2395 (2018).
  32. See Craddock, supra note 13, at 425-26; Christine S. Paine, Brand-Name Drug Manufacturers Risk Antitrust Violations by Slowing Generic Production through Patent Layering, 33 Seton Hall. L. Rev. 479, 480-81 (2003).
  33. See 35 U.S.C. § 154(a)(2). For more information see Frequently Asked Questions on Patents and Exclusivity, U.S. Food & Drug Admin. (FDA), https://www.fda.gov/drugs/developmentapprovalprocess/ucm079031.htm#howlongpatentterm [https://perma.cc/XU3P-EH5R] (last visited Sep. 2, 2018). There are also “exclusivity periods,” given for six months to seven years upon approval of certain drugs, regardless of a patent. See id.
  34. See Paine, supra note 32, at 479-81; Paradise, supra note 31, at 2398.
  35. See, e.g., Whitman, supra note 6, at 1055-56.
  36. In criminal contexts, the government, mostly through the judiciary, shames offenders by publishing information about crimes and criminals after crimes are committed. See, e.g., Dan M. Kahan, What Do Alternative Sanctions Mean?, 63 U. Chi. L. Rev. 591, 631-32 (1996).
  37. See generally Kristine L. Gallardo, Taming the Internet Pitchfork Mob: Online Public Shaming, the Viral Media Age, and the Communications Decency Act, 19 Vand. J. Ent. & Tech. L. 721 (2017); Kate Klonick, Re-Shaming the Debate: Social Norms, Shame, and Regulation in an Internet Age, 75 Md. L. Rev. 1029 (2016).
  38. See, e.g., John Braithwaite, Crime, Shame, and Reintegration 68 (1989); Danielle Keats Citron, Hate Crimes in Cyberspace 11 (2014).
  39. See, e.g., Emily Chiang, Institutional Reform Shaming, 120 Penn St. L. Rev. 53, 84 (2015).
  40. See id.
  41. See Yadin, supra note 7.
  42. See id.
  43. See id. The legal concept of “regulation” is often perceived as control or constraint. See Barak Orbach, What is Regulation?, 30 Yale J. on Reg. Online 1, 4 (2012).
  44. Disclosure regulation focuses on requiring manufacturers and service providers to actively reveal information about their products. See Yadin, supra note 7.
  45. See generally Alex Geisinger, Reconceiving the Internal and Social Enforcement Effects of Expressive Regulation, 58 Wm. & Mary L. Rev. Online 1, 8-9 (2016).
  46. See Yadin, supra note 7.
  47. See id.
  48. See infra Part III. See also Yadin, supra note 7.
  49. See id.
  50. As discussed in the FDA example which is the focus of this Essay.
  51. The Securities and Exchange Commission (SEC) recently adopted a shaming strategy through a regulation that requires companies to disclose the compensation ratio between their median employee (by salary) and their CEO. See 15 U.S.C. § 78I note (2012); 17 C.F.R §§ 229, 240, 249 (2015).
  52. See Yadin, supra note 7.
  53. See generally Cass R. Sunstein, Growing Outrage, Behavioural Public Policy (Aug. 30, 2018), https://www.cambridge.org/core/journals/behavioural-public-policy/article/growing-outrage/07A7377940D8BA0E503DDB8C10EEC70F#.W4lw6NdmaBE [https://perma.cc/27Z7-CU3U].
  54. See Dorothy Thornton et al., General Deterrence and Corporate Environmental Behavior, 27 Law & Pol’y 262, 264 (2005).
  55. See, e.g., Andrea A. Curcio, Painful Publicity—An Alternative Punitive Damage Sanction, 45 DePaul L. Rev. 341, 372-76 (1996).
  56. See generally Yadin, supra note 7.
  57. See generally Barak Orbach, What is Government Failure?, 30 Yale J. on Reg. Online 44 (2012) (discussing the concept of “regulatory failure”).
  58. Regulatory shaming may sometimes be legally problematic. Examples of possible illegality of regulatory shaming include harsh reputational damage; publication of citations prior to final orders, which implicates due process; and lack of statutory authority to sanction by public shaming. See, e.g., Eric J. Conn & Casey M. Cosentino, Hot Off the Press: Two Attorneys Argue That OSHA’s Enforcement Press Releases Violate the Federal Administrative Procedure Act, EHSToday (Sep. 1, 2011), http://www.ehstoday.com/standards/osha/hot-off-press-0901 [https://perma.cc/EV8Z-TDPD]. Since shaming practices vary from one agency to another, and even within the same agency, each with a different legal basis, a complex generalized analysis in this regard will remain outside the scope of this Essay.
  59. See supra Part II (Items 1-3).
  60. See Nathaniel Weixel, Skyrocketing Insulin Prices Provoke New Outrage, The Hill (June 21, 2018), https://thehill.com/policy/healthcare/393378-skyrocketing-insulin-prices-provoke-new-outrage [https://perma.cc/W44W-PTEG].
  61. See id.; John Russell, Lilly Insulin Prices Come Under Microscope, IBJ (Aug. 26, 2017), https://www.ibj.com/articles/65163-lilly-insulin-prices-come-under-microscope [https://perma.cc/ZL8K-PMFQ].
  62. See Weixel, supra note 60.
  63. See, e.g., Sheila Kaplan, F.D.A. Names and Shames Drug Makers to Encourage Generic Competition, NY Times (May 17, 2018), https://www.nytimes.com/2018/05/17/health/drug-prices-generics-fda.html [https://perma.cc/7DLY-29C4].
  64. See, e.g., Douglas M. Branson, Corporate Social Responsibility Redux, 76 Tul. L. Rev. 1207, 1219 (2002).
  65. See id.
  66. See id.
  67. See id.
  68. See id. at 1217. See also Oren Perez, Reuven Cohen & Nir Schreiber, Governance through Global Networks and Corporate Signaling, Reg. & Governance (forthcoming 2019), https://ssrn.com/abstract=3265793 [https://perma.cc/XV4L-Q365] (discussing the reasons why companies adopt CSR schemes) (manuscript at 4-5).
  69. For instance, Roche grossed more than $42.2bn in 2017; Pfizer—$52bn; Novartis—$49bn; and Bayer—$29.1bn. See Vasanthi Vara, The World’s Biggest Pharmaceutical Companies by Revenue in 2018, Pharmaceutical Technology (June 20, 2018), https://www.pharmaceutical-technology.com/features/worlds-biggest-pharmaceutical-companies-2018 [https://perma.cc/PAY3-D3QA].
  70. Between 1991 and 2015, financial penalties imposed amounted to just five percent of the $711 billion in net profits made by the eleven largest global drug companies during just ten of those twenty-five years (2003-2012). See Twenty-Five Years of Pharmaceutical Industry Criminal and Civil Penalties: 1991 Through 2015, PUBLICCITIZEN (March 31, 2016), https://www.citizen.org/our-work/health-and-safety/twenty-five-years-pharmaceutical-industry-criminal-and-civil-penalties-1991-through-2015 [https://perma.cc/6EBH-97YL].
  71. See generally U.S. Dep’t. of Health & Human Servs., American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs (May 2018), https://www.hhs.gov/sites/default/files/AmericanPatientsFirst.pdf [https://perma.cc/ZAQ7-YLSQ].
  72. See Yadin, supra note 7.
  73. See, e.g., Adrian Towse & Patricia M. Danzon, The Regulation of the Pharmaceutical Industry, in The Oxford Handbook of Regulation 548, 548 (Robert Baldwin, Martin Cave & Martin Lodge eds., 2010).
  74. See supra Part II.
  75. See id.
  76. See FDA list, supra note 1.
  77. REMS stands for “Risk Evaluation and Mitigation Strategy”; ETASU, for “Elements to Assure Safe Use”; RLD for “Reference Listed Drug”.
  78. Such as GDUFA II, ANDA, and RS. See FDA list, supra note 1. GDUFA stands for “The Generic Drug User Fee Act”; ANDA for “Abbreviated New Drug Application”; and RS for “Reference Standard.”
  79. See Statement from FDA Commissioner, supra note 1.
  80. See FDA list, supra note 1.
  81. See id.
  82. See Nursing Home Compare, CTRS. for Medicare & Medicaid Servs., https://www.medicare.gov/nursinghomecompare/search.html [https://perma.cc/74WB-QGVS] (last visited Aug. 27, 2018). Figure 2 is an example of a low-star rating given to a specific nursing home in New York.
  83. See id.
  84. See Toxics Release Inventory (TRI) Program, Envtl. Prot. Agency,
    http://www.epa.gov/toxics-release-inventory-tri-program [https://perma.cc/X4YG-NWHT] (last visited Aug. 27, 2018). Figure 3 is an example of a rating that signals non-compliance, including significant non-compliance of a specific company found in the EPA’s database.
  85. See, e.g., FDA Media Affairs (@FDAMedia), Twitter (May 17, 2018, 6:57 AM), https://twitter.com/FDAMedia/status/997113935747829760 [https://perma.cc/WLS7-RX5R].
  86. In the statement page, another link provides access to the table itself.
  87. See Interactive Media, FDA, U.S. Food & Drug Admin., https://www.fda.gov/NewsEvents/InteractiveMedia/default.htm [https://perma.cc/Z63B-Q99P
  88. See OSHA (@OSHA_DOL), Twitter (June 29, 2018, 7:50 AM), https://twitter.com/OSHA_DOL/status/1012709797282680832 [https://perma.cc/M8YD-LQEK].
  89. Meanwhile, the FDA Commissioners’ statement was 1,200 words long. See Statement from FDA Commissioner, supra note 1.
  90. See supra Part II.
  91. See Paradise, supra note 31, at 2409-10; Carl Tobias, FDA Regulatory Compliance Reconsidered, 93 Cornell L. Rev. 1003, 1004, 1009 (2008).
  92. See Gilhooley, supra note 31, at 132.
  93. See generally American Patients First, supra note 71.
  94. See What You Need to Know about Putting Drug Prices in TV Ads, HHS.gov, (Oct. 15, 2018), https://www.hhs.gov/about/news/2018/10/15/what-you-need-to-know-about-putting-drug-prices-in-tv-ads.html [https://perma.cc/J7PE-4ZA].
  95. See Amy Goldstein & Carolyn Y. Johnson, Drugmakers May Have to Disclose Prices of Medicine in Television Ads, Wash. Post (Oct. 15, 2018), https://www.washingtonpost.com/national/health-science/tv-ads-for-drugs-will-send-patients-to-websites-with-pricing-information/2018/10/15/b74ac344-d090-11e8-b2d2-f397227b43f0_story.html?utm_term=.47f67cc81e3a [https://perma.cc/69E9-9BFP].
  96. These, of course, warrant additional study. But see generally Yadin, supra note 7.
  97. See Jayne O’Donnell, FDA Chief Says Drug Makers Are Gaming the System to Slow Generic Competition; Vows Action, USA Today (Aug. 15, 2017), https://www.usatoday.com/story/news/politics/2017/08/15/fda-chief-says-drug-makers-gaming-system-slow-generic-competition-vows-action/568698001 [https://perma.cc/A8ZX-KXQ4].