SEC Comment Letters Are A Big Insider Trading Loophole

New York Times business writer Gretchen Morgenson looks at a study of insider trading activity following company receipt of SEC “comment letters.” Sometimes these letters are precursor to an investigation of financial disclosures relating to revenue recognition, and they may presage events that will lower the value of the company stock. Comment letters and the back-and-forth that follow them – per SEC rules, apparently on the grounds that the correspondence needs to be scrutinized and purged of confidential company information – are not made public until at least 20 days after the process has begun. During that period insiders can, apparently legally, trade on the basis of information they have about the correspondence. Morgenson opines: “Corporate insiders already have a lot of advantages over outside investors. Eliminating this one — executives’ ability to trade ahead of a potential accounting problem — seems like a no-brainer.”