According to an analysis of the legislation by the Davis Polk firm, the bill would not necessarily substantially reduce insider trading. Most companies have policies such as blackout periods prohibiting trades when insiders have material, nonpublic information. However, the bill carries several new compliance requirements for public companies, including:
- Trading-related compliance policies and procedures would be required by federal securities law;
- Policies and procedures to address nonmaterial information if the company is required to file an 8-K or elects to do so at its own discretion, including unanticipated circumstances, unlike regular blackout periods that align with quarterly earnings releases.
As it is written, the legislation raises several risks for public companies, including:
- The risk of SEC enforcement action against a company if the SEC concludes that a company’s policies are not reasonably designed or not rigorously and evenly enforced;
- The need to identify and clearly convey to insiders the date the company decides a disclosure needs to be filed;
- A company could be investigated for trading inside the “gap” even if the trade was inadvertent or automatic.
According to the analysis, the legislation could lead to the unintended of consequence of companies making fewer discretionary disclosures. Further, the legislation implies that there is bipartisan support for the idea that companies bear some legal responsibility for insider trading, as opposed to the individual and/or the broker/investment advisor that completed the trade.
The legislation is the result of a quantitative study by law professors at Harvard and Columbia, including Professor Robert Jackson, who is currently an SEC Commissioner about to return to academia. The authors found "systemic abnormal returns" of trades made prior to an 8-K filing and urged Congress and the SEC to consider whether further restrictions should be imposed.