Risk & Compliance

House Passes Bill to Close ‘8-K Trading Gap’

The current system that allows insiders to trade on information about a significant corporate event is "a total abuse of the public trust."
Matthew HellerJanuary 15, 2020

The House of Representatives overwhelmingly passed a bill to close a loophole that allows corporate insiders to trade company shares before the public disclosure of a significant corporate event.

According to a 2015 study, the loophole has created an opportunity for insiders to make “meaningful” profits during the four-day window that the U.S. Securities and Exchange Commission gives companies to file a Form 8-K reporting a significant development.

Under the 8-K Trading Gap Act passed by the House on 384-7 vote, public companies would be required to have policies and procedures reasonably designed to prohibit insiders from trading company stock after the company has determined that a significant corporate event has occurred, but before it is publicly disclosed.

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“Corporate executives shouldn’t be allowed to trade on significant information ahead of the public and investors, but that’s exactly what’s happening because of this legal loophole,” Rep. Carolyn Maloney (D-N.Y.), the sponsor of the bill known as H.R. 4335, said in a news release.

“I hope the bill will pass the Senate quickly. It’s just commonsense,” she added.

Sen. Chris Van Hollen (D-Md.) has introduced the Senate companion bill. “When a corporation faces a big change — like a data breach, merger, or acquisition — public transparency is crucial to prevent insider trading and protect retail investors,” he said. “But under the current system, corporate insiders have a head start on the public, allowing them to sell off stock or cash in on private information. This is a total abuse of the public trust.”

Researchers at Columbia and Harvard universities reported in the 2015 study that corporate insiders have “earn[ed] economically and statistically meaningful profits” from stock trades during the 8-K trading gap

On average, insiders netted about 0.4 percentage point over a broad market index between the time of their trades and the market close after the 8-K disclosure, with those gains, realized over the span of a few days, being much larger on an annualized basis.

The study recommended that firms consider extending trading “blackout” periods to significant reportable events.