House Passes Bill to Close Insider Trading Loophole
16 January 2020: A loophole that allows corporate executives to trade on information before it’s disclosed to the public and company shareholders is to be closed by a new 8-K Trading Gap Act.
Under the current system, if a company has a “significant corporate event” it must disclose it to the public by filing Form 8-K within four days of the event. During this four-day gap, company executives are aware of the significant event while the general public and investors are not. The Bill, which was passed by the House on 13 January, amends this current system to prohibit executives from trading during the four-day gap.
Commenting on the Bill, Senator Chris Van Hollen, who introduced companion legislation, said, “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. 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.”
The Bill must now pass in the Senate. The House has also passed a number of other Financial Services bills since the new year – including a bill that would require the Federal Reserve Board to issue reports on cybersecurity with respect to the functions of the Federal Reserve System and to enhance cyber protections at prudential banking regulators and financial institutions.