Lawmakers Revive Bill To Ban Insider Trading Amid '8-K Gaps'

Jul 16, 2021
In The News

Lawmakers are reviving a bill that would ban stock trades by company leaders during the window between a major corporate event and its public disclosure, giving the bill a second shot in what is now a Democratic-controlled Senate.

The 8-K Trading Gap Act, which the House passed last year but never advanced in the GOP-led Senate, was reintroduced Thursday by Sen. Chris Van Hollen, D-Md., and Rep. Carolyn Maloney, D-N.Y., in their respective chambers.

The lawmakers say the bill would close what they consider a loophole that facilitates insider trading by barring executives from trading during the four-day gap between when an event happens and when the company publicly files a U.S. Securities and Exchange Commission Form 8-K to alert the public and shareholders.

An 8-K form would cover events such as bankruptcies, mergers and acquisitions, regulatory and criminal investigations, and changes in leadership. The "8-K Trading Gap" is the title of a 2015 study co-authored by former SEC Commissioner Robert J. Jackson Jr., which found "systematic abnormal returns" during 8-K gaps.

"Time and again we've seen corporate executives take advantage of the 8-K trading gap by selling off bundles of shares prior to a major announcement," Van Hollen, a member of the Senate Banking Committee, said in a statement. "It's clear this gap gives corporate insiders a massive unfair advantage over the public."

Maloney, a member of the House Financial Services Committee, noted that the bill had broad bipartisan support in the House last year, having been approved 384-7. Since the bill died in the Senate last year, Democrats won control in the upper chamber.

"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," Maloney said.

Sen. Sherrod Brown, D-Ohio, who now chairs the Senate Banking Committee, as well as ranking member Pat Toomey, R-Pa., did not immediately respond to requests for comment.

In an update to clients that was issued after the bill passed the House last year, Davis Polk & Wardwell LLP warned the bill could result in more SEC enforcement actions. The memo said most public companies have these policies in place as a precautionary measure but will need to adapt them to comply with prospective SEC guidelines.

"By prohibiting trading without reference to intent, the rules would make SEC enforcement investigations much more likely when trading occurs within 8-K Gaps, even if that trading were inadvertent," it said.