Earlier this month, in a bipartisan vote of 384 to 7, the U.S. House of Representatives passed the 8-K Trading Act of 2019. A similar bill has been introduced in the Senate and given the bipartisan support in the House, is likely to pass in the Senate when considered. The proposed law stems from academic research that suggests corporate insiders that trade around the filing of Forms 8-K regularly beat the market in the four days preceding the filing of a Form 8-K.

Basics of the 8-K Trading Act of 2019

The new law, when it becomes effective, requires the SEC to issue rules requiring issuers to establish and maintain policies, controls and procedures that are reasonably designed to prohibit executive officers and directors of issuers from purchasing, selling or otherwise transferring equity securities of the issuer, directly or indirectly, with respect to an event described in Items 1 through 6 of Form 8-K between the occurrence of the event and the filing or furnishing of the related 8-K.

For events covered by Items 7 and 8 of Form 8-K, the rules would prohibit those types of transactions by the covered individuals between the date on which the issuer determines that it will disclose such event on Form 8-K and the filing or furnishing of the Form 8-K.

The proposed law would permit the SEC to exempt certain transactions from these prohibitions, including those that occur automatically, are made pursuant to advance elections or comply with Rule 10b5-1(c), except that Rule 10b5-1(c) transactions are not exempt if the trading plan was adopted during the otherwise closed window periods of the rule.

What does the bill mean for companies filing Form 8-K?

In many cases, companies’ existing insider trading policies already prohibit trading in a company’s shares during the blackout periods. The new rules are aimed at situations when the insider possesses material, non-public information. The new rules, though, would now make trading in a company’s shares during that period flatly prohibited outside of the few narrow exceptions, eliminating arguments that the information, though it triggered a Form 8-K filing, was not material and, as a result, trading by the insider was not prohibited. If the proposed law is enacted, public companies will need to evaluate their insider trading policies to determine whether changes are necessary to address trading in this 8-K trading gap.