Section 16 Compliance is Not Recommended (Hint … It’s Actually Required)

Corporate Attorney Carl BarnesBy: Carl F. Barnes 

On September 10, 2014, the Securities and Exchange Commission issued a press release announcing a major enforcement initiative, disclosing charges against 28 officers, directors or major shareholders of publicly traded companies for violating federal securities laws requiring them to promptly report information about their holdings and transactions in company stock. Six publicly traded companies were also charged for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies. One of the individuals named in the release is fighting the charges. The other 27, and all six of the companies, settled, agreeing to pay penalties totaling $2.6 million.

Section 16 the Securities Exchange Act of 1934 requires directors and certain officers of publicly traded companies, and holders of more than 10% of any class of equity securities issued by publicly traded companies, to file reports on Form 4 disclosing changes in their beneficial ownership of the companies’ securities within two business days after the change. Since its adoption in 1991, Item 405 of Regulation S-K has required public companies to examine these filings and to disclose any late filings in in their annual proxy statements and Form 10-K.

The failure to adhere to the strict Section 16 deadlines has frequently been seen as a “foot fault,” but the SEC clearly thinks otherwise. As Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, said in the press release announcing the charges, “Officers, directors, major shareholders, and issuers should all take note: inadvertence is no defense to filing violations, and we will vigorously police these sorts of violations….”

Compliance with Section 16(a) is not the issuer’s responsibility: although companies frequently assist their insiders, it is the individual officer, director or shareholder who bears the legal responsibility. Companies, however, risk liability for failing to police and report violations as well as for failing to follow through with any assistance that they do offer.

What now? For most companies and insiders, just keep on doing what you’re doing. For others, though:

• Make sure that all Section 16 insiders grant several key officers, such as the president, the CFO and/or the general counsel, powers of attorney so that they are each authorized to sign and file the required reports on behalf of the insiders.

• Insist on prior notification of securities transactions by Section 16 insiders with those same key officers, so that they can ensure that the appropriate filings are prepared and made on a timely basis. Try to give them advance warning of option grants and other changes in beneficial ownership over which the company has control.

• Periodically confirm that the electronic filing codes each insider must have are up to date so that expired codes do not delay a filing while new codes are activated.

• Insist that insiders provide the Item 405 written representation each year that no Form 5 is required to be filed.

• And finally, don’t panic. Aim for perfection but remember that truly small numbers of filings that are late by a day or two are unlikely to attract enforcement scrutiny. At the same time, however, understand that the SEC is serious, and it is using advanced quantitative techniques to identify individuals and companies with especially high rates of filing deficiencies. And recognize that it’s not just about potentially embarrassing disclosures in your 10-K; it’s about cease and desist orders and serious monetary penalties for violating the securities laws.


For more on this topic, please contact Carl F. Barnes

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