In overwhelming bipartisan vote, House passes bill to address the 8-K trading gap

In 2015, an academic study, reported in the WSJ, showed that corporate insiders consistently beat the market in their companies’ shares in the four days preceding 8-K filings, the period that the researchers called the “8-K trading gap.” The study also showed that, when insiders engaged in open market purchases—relatively unusual transactions for insiders—during that trading gap, insiders “are correct about the directional impact of the 8-K filing more often than not—and that the probability that this finding is the product of random chance is virtually zero.” The WSJ article reported that, after reviewing the study, Representative Carolyn Maloney, D.N.Y., a member of the House Financial Services Committee, characterized the results as “troubling” and said she was preparing legislation to address the issue. Five years later, in January 2020, by a vote of 384 to 7, the House has passed HR 4335, the “8-K Trading Gap Act of 2019.” A substantially similar bill has been introduced in the Senate.  Given the remarkably bipartisan vote in the House—and assuming that the legislation isn’t suddenly tinged with politics—the bill appears likely to pass in the Senate as well…sometime.

BlackRock puts sustainability at the center of investment strategy, expects more transparency in sustainability disclosure

Was it the heartbreaking photos of scorched koalas in Australia?  Was it the pressure from activists such as As You Sow, which submitted a shareholder proposal asking for a report on how the company plans to implement the new Business Roundtable statement of purpose?  (See this PubCo post.) Was it the press reports, like this one in the NYT, highlighting what appeared to be stark inconsistencies between the company’s advocacy positions and its proxy voting record? Was it the protests outside of the company’s offices by climate activists?  The letters from Senators? The charges of greenwashing? Whatever the precipitating factor, in this year’s annual letter to CEOs, Laurence Fink, CEO of BlackRock, the world’s largest asset manager, announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” What’s more, he made clear that companies need to step up their games when it comes to sustainability disclosure.

Audit committee chairs identify effective practices for audit quality improvement

In December, the PCAOB posted a report on the results of its 2019 conversations with almost 400 audit committee chairs, focused on audit committee perspectives on audit quality assessment and improvement, auditor communications, new auditing and accounting standards, and technology and innovation. Valuably, the report identifies practices—not necessarily endorsed by the PCAOB—that the committee chairs found to be most effective for improving audit quality across these categories. The report also includes a few PCAOB staff responses to FAQs raised during the conversations.

Will the Delaware Supreme Court revive exclusive federal forum provisions for ’33 Act claims?

Yesterday, the Delaware Supreme Court heard the appeal in Sciabacucchi v. Salzberg (pronounced Shabacookie!) in which the Chancery Court held invalid exclusive federal forum provisions for ’33 Act litigation in the charters of three Delaware companies. Few of the justices revealed their inclinations, so it’s difficult to predict the outcome.  We’ll have to wait for the Court’s final decision.

Trends and practices in director engagement with shareholders

In this article, representatives of The Conference Board and Rutgers Law School discuss the current phenomenon of  director engagement with shareholders.  While company managements have long engaged with shareholders at annual meetings and investor presentations, the notion of director engagement with shareholders is a more recent development.  Why is shareholder engagement increasingly being added to the job description of the corporate director?  The article posits several theories for the trend and, based on a survey of corporate secretaries, general counsel and investor relations officers at public companies, identifies the most common engagement topics, provides data on frequency of engagement and highlights emerging practices  related to director engagement.

New Statement on Key Reminders for Audit Committees

Yesterday, SEC Chair Jay Clayton, SEC Chief Accountant Sagar Teotia and Corp Fin Director William Hinman posted a “Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities.”  As the year draws to a close, given the vital role of audit committees in the financial reporting system, the Statement is intended to provide “observations and reminders on a number of potential areas of focus for audit committees.  Issuers and independent auditors also should be mindful of these considerations with an eye toward ensuring that audit committees have the resources and support they need to fulfill their obligations.”

Happy New Year Everyone!

SEC proposes to amend auditor independence rules

Recently, SEC Chief Accountant Sagar Teotia hinted at possible forthcoming changes to the auditor independence rules, remarking that, in connection with the recent changes related to lending relationships, the SEC “also received comments on other aspects of auditor independence rules.  In conjunction with that feedback, the Chairman directed the staff to formulate recommendations to the Commission for possible additional changes to the auditor independence rules for potential rulemaking.” However, the nature of the potential changes remained something of a mystery. The proposal to amend the auditor independence rules has now been released.  According to the press release issued today, the proposal is intended to modernize aspects of the independence rules to minimize the potential for “relationships and services that would not pose threats to an auditor’s objectivity and impartiality [to] trigger non-substantive rule breaches or potentially time consuming audit committee review of non-substantive matters.”  It is important to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client.  For example, an independence violation may cause the auditor to withdraw its audit report, requiring the audit client to have a re-audit by another audit firm.  As a result, in most cases, inquiry into the topic of auditor independence should be a menu item on the audit committee’s plate. The comment period will be open for 60 days.