January 23, 2020

Congress Moves to Close the “8-K Trading Gap”

Last week, the House passed the “8-K Trading Gap Act” by a vote of 384 to 7. This Troutman Sanders memo explains how this bill could impact insider trading policies if it becomes law. Here’s an excerpt (also see this Cooley blog and this Davis Polk memo):

A public company currently has up to four business days after the occurrence of a material corporate event before it must file or furnish a Form 8-K (the 8-K Gap Period). Current law does not prohibit insider trading per se during the 8-K Gap Period, absent a showing that the insiders have traded on material nonpublic information in their possession or violated the prohibition against “short swing” trading under Section 16(b) of the Exchange Act.

The purpose of the Act is to address this perceived loophole by directing the SEC to issue rules, no later than one year after its enactment, to require a reporting company under the Exchange Act to “establish and maintain policies, controls, and procedures that are reasonably designed to prohibit executive officers and directors of the issuer from purchasing, selling, or otherwise transferring any equity security of the issuer, directly or indirectly” during the 8-K Gap Period.

Under the current version of the bill, the SEC would be permitted to exempt transactions under Rule 10b5-1 plans that were adopted outside of the gap period – and the prohibition wouldn’t be triggered when an event is announced in a press release or publicly disseminated in a Reg FD-compliant way. A similar bill has been introduced in the Senate.

This follows another insider trading bill that the House passed last month. Meanwhile, a former Congressman was just sentenced to 26 months in prison for insider trading (a case that Broc and John blogged about when it broke).

XBRL: Check Your Public Float!

Time to double check your XBRL data. Here’s a recent announcement about XBRL “scaling errors” from the SEC’s Division of Economic Risk & Analysis:

DERA staff has observed that some filers are inconsistently reporting public float values. For example, one filer reported a public float of $800 million in its HTML filing, but reported a public float of $8 billion in its XBRL data. Filers should carefully review their XBRL data to ensure scaling accuracy. Furthermore, filers should verify that information in their HTML filing is consistent with their XBRL data.

See the “Staff Observations & Guidance” for other data quality reminders.

Non-Financial Disclosure: What “Audit Assurance” Looks Like

One of the suggestions that keeps turning up for ESG disclosures is that companies should explain how they verify the accuracy of the info or provide some external assurance – for example, see the Chamber’s recent “best practices.” This 16-page memo from the Center for Audit Quality discusses shareholders’ increasing interest in non-financial info and notes some industry guidance for auditors on how to review it.

From the company perspective, this 52-page guide – from the World Business Council for Sustainable Development and the Institute of Chartered Accountants in England & Wales – is even more helpful because it explains what the assurance process would look like, how to decide whether it’s right for your company, and how to enter into an assurance engagement. The report shows that this endeavor doesn’t have to be “all-or-nothing” – e.g. a project’s scope could range from:

– Site visits to head office only, no detailed tests, only reviews

– Site visits to 5 of 10 locations, detailed tests at 2 sites and a review of information at other locations

– Site visits to 7 of 10 locations, detailed tests at all 4 major sites and a review of information at other locations

Liz Dunshee