Public companies may have to adopt new insider trading policies to prohibit officers and directors from trading in company stock during the gap period between the occurrence of a significant corporate event and the filing or furnishing of a current report on Form 8-K with respect to such event if the 8-K Trading Gap Act (the Act) becomes law. The House of Representatives overwhelmingly passed the Act on January 13, 2020.

A public company currently has up to four business days after the occurrence of a material corporate event before it must file or furnish a Form 8-K (the 8-K Gap Period). Current law does not prohibit insider trading per se during the 8-K Gap Period, absent a showing that the insiders have traded on material nonpublic information in their possession or violated the prohibition against “short swing” trading under Section 16(b) of the Exchange Act. The purpose of the Act is to address this perceived loophole by directing the SEC to issue rules, no later than one year after its enactment, to require a reporting company under the Exchange Act to “establish and maintain policies, controls, and procedures that are reasonably designed to prohibit executive officers and directors of the issuer from purchasing, selling, or otherwise transferring any equity security of the issuer, directly or indirectly” during the 8-K Gap Period.

The resulting amendment to the Exchange Act would authorize the SEC to exempt as it deems appropriate certain transactions from this general prohibition, including, among others, trading activities that “occur automatically” or “are made pursuant to an advance election”. Additionally, the amendment would require the SEC to exempt from its rules certain issuers registered under the Investment Company Act of 1940, and any reportable event where the issuer has announced such event in a press release in lieu of filing or furnishing a Form 8-K.

It remains to be seen whether the Act will ultimately become law. However, public companies may want to start looking at their insider trading policies now and consider voluntarily adopting additional restrictions on trading during the 8-K Gap Period in anticipation of the Act’s passage.