The Corp Fin staff has been working to dig itself out of the backlog created by last year’s extended government shutdown, and according to Olga Usvyatsky’s “Deep Quarry” Substack newsletter, that’s contributed to a growing delay in releasing staff comment letters. Olga worries that the lag in releasing comment letters may result in them becoming “historical artifacts rather than a timely alert about issues identified by the SEC during the review process.”

She also identifies another issue that may be of more concern to lawyers and compliance officers – the possibility that a growing delay in releasing comment letters may enhance opportunities for insider trading:

A long dissemination lag may also create an opportunity for insiders to trade on information that is not yet publicly available, according to academic research. For instance, research by Dechow, Lawrence, and Ryans (2016, TAR) finds that insider selling increases prior to the public release of SEC comment letters — especially for firms with high short positions, and that stock prices exhibit a delayed negative reaction once the letters are disclosed. The results are especially salient for SEC reviews raising revenue recognition concerns.

Would longer dissemination lag and delays in SEC scrutiny exacerbate insider trading? Ultimately, this is an empirical question.

My guess is that’s an empirical question that the SEC might be interested in as well, particularly if resource constraints at the agency make it more difficult to return to a timelier dissemination of completed comment letter exchanges. In this environment, companies may want to police more closely transactions by insiders who are aware of the contents of unreleased staff comment letter exchanges in order to avoid potential insider trading issues.

– John Jenkins