On July 15, 2021, members of Congress introduced the bicameral 8-K Trading Gap Act of 2021 (the “Act”). This Act is similar to a piece of legislation titled the “8-K Trading Gap of 2019”, which was introduced and passed by the house with an overwhelming 384 votes to 7 votes in 2020 only to fail in the Senate. The Act is intended to require the Securities and Exchange Committee (SEC) to promulgate rules which will eliminate the ability of insiders to make trades during what is known as the 8-K Trading Gap — the four-day period of time between the occurrence of a reportable event and the company’s deadline to inform the public about the event by filing a Form 8-K.
If enacted, the Act would amend the Securities and Exchange Act of 1934 (15 U.S.C. 78(a) et seq.) to require the SEC to adopt rules that would require a publicly traded company to “establish and maintain policies, controls, and procedures that are reasonably designed to prohibit executive officers and directors” of the company from purchasing, selling or otherwise transferring, directly or indirectly, any equity security interests in the company in certain circumstances. This amendment is designed to counter a longstanding practice of directors, officers, and other insiders from trading between the period of time when a reportable event occurs and when that event is required to be reported by the company to the public on its 8-K filing.
What types of reportable events would the 8-K Trading Gap Act apply to?
The Act would apply to events that are covered by the first six sections of Form 8-K. These sections include certain events, including, but not limited to: (1) the entry or termination of a material definitive agreement; (2) bankruptcy or receivership; (3) acquisitions or dispositions of assets and other business combinations; (4) financial results; (5) creation or acceleration of direct or off-balance-sheet financial obligations; (6) costs of exit activities; (7) material impairments; (8) notice of delisting or material noncompliance with a listing standard; (9) unregistered sales of equity; (10) material modifications of shareholder rights; (10) changes in accountants; (11) non-reliance on financials; (12) changes in control; (13) new and departing officers and directors and executive compensation; (14) changes to charters, bylaws or fiscal years; (15) suspension of trading under an employee benefit plan; (16) amendment or waiver of codes of ethics; (17) change in shell company status; (18) shareholder voting results; and (18) shareholder nominations and various events related to asset-backed securities, among other events.
The Act would also apply to events covered by Section 7 (Regulation FD Disclosure) and Section 8 of Form 8-K by prohibiting insiders from trading between the date the company determines it will disclose the event and the filing or furnishing of the 8-K. Pursuant to Section 8, a company is required to disclose any events, with respect to which information is not otherwise called for by Form 8-K, that the company deems important for security holders to know.
Businesses Must Have Clear Policies to Prevent Insider Trading
While most publicly traded companies have internal policies to prevent insider trading, the Act would require publicly traded companies to establish and maintain these policies as a matter of law, which creates a new risk that the SEC may initiate an enforcement action if a company’s policies are deemed unreasonable. Further, the Act would arguably require publicly traded companies to adopt policies and procedures to address non-material information if such information is either required to be included on a Form 8-K or voluntarily disclosed by the company on the same form.
While the Act creates certain exemptions to events described in Sections 1 through 6 of the Form 8-K and vests the SEC with discretion to exempt transactions that “it determines are appropriate,” if the Act is passed by Congress and signed into law, it will present a significant risk to publicly traded companies who do not establish or adopt the types of policies that will be required by the rules promulgated by the SEC. This type of legislation is not going away any time soon. As such, publicly traded companies should familiarize themselves with the Act and determine how it will affect their respective businesses in an effort to minimize liability and the risk of an SEC enforcement action.
If you have questions about any of this, don’t hesitate to contact our Corporate & Securities attorneys.