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.
“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.