On January 14, 2020, H.R. 4335, the “8-K Trading Gap Act of 2019” (the “Act”) was passed by the U.S. House of Representatives. The bill received bipartisan support and passed by a vote of 384 to 7.
Under the Act public companies would be required to establish and maintain internal policies, controls and procedures reasonably designed to prohibit executive officers and directors from trading company stock after the company has determined that a significant corporate event has occurred, but before the event is publicly disclosed in a Form 8-K filing. The gap in time where an event has occurred, but the company has not yet filed the relevant Form 8-K is commonly known as the trading gap. Most companies already have internal policies in place to prevent trading during this period, but the passage of the Act would make these policies a regulatory requirement. The Act requires all issuers subject to reporting requirements under section 13(a) or 15(d) of the Securities Exchange Act of 1934 to implement these policies. Although the Act specifically references only Form 8-K filings, since all issuers subject to the aforementioned reporting requirements are implicated, we recommend that all reporting companies, including foreign private issuers, either examine their current policies or create policies to prohibit trading during the trading gap period.
If the Act passes in the Senate, within one year of enactment the SEC would be required to adopt rules requiring reporting companies to establish these policies. The proposed law also permits the SEC to exempt certain transactions that it deems appropriate, including ones that occur automatically, are made pursuant to advance election or comply with Rule 10b5-1(c), unless the trading plan pursuant to which the transaction was made was adopted during the trading gap period.
Though most reporting companies already have and maintain these kinds of policies, with the passage of the Act into a law, the SEC would have the enforcement power to evaluate these policies. Additionally, with the total ban on trading during the trading gap period, companies will no longer be able to argue that a trade was permitted during the gap because the information that precipitated the filing of the 8-K was not material. The Act will now be voted on in the Senate, where it appears likely to pass.
If you have any questions, please contact your relationship attorney at Seward & Kissel LLP.
