In October 2013, SEC Chair Mary Jo White gave a speech at the Securities Enforcement Forum in which she declared an “enforcement mission” of the SEC to be implementation of the “broken windows” theory of crime deterrence made famous decades ago in NYC: “The [‘broken windows’] theory is that when a window is broken and someone fixes it – it is a sign that disorder will not be tolerated. But, when a broken window is not fixed, it ‘is a signal that no one cares, and so breaking more windows costs nothing.’” Likewise with securities law violations, “minor violations that are overlooked or ignored can feed bigger ones, and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines. And so, I believe it is important to pursue even the smallest infractions.“ Yesterday, with two announcements regarding multiple (mostly) settled charges for violations of requirements to make filings under Sections 16 and 13 of the Exchange Act, the SEC demonstrated that it had put theory to practice. As reported in the WSJ, SEC Director of Enforcement Andrew Ceresney “said the actions—‘the first time where we have systematically brought a series of cases in this area’—were designed to send a message about the need for companies, executives and investors to improve their compliance.”
First, the SEC announced charges against 28 officers, directors and major shareholders for failures to timely file Section 16(a) short-swing trading reports (Forms 3,4 and 5) or Schedules 13D and G (reports by beneficial owners of more than 5%). Six companies were also charged “for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies.” Ceresney observed in the press release: “Using quantitative analytics, we identified individuals and companies with especially high rates of filing deficiencies, and we are bringing these actions together to send a clear message about the importance of these filing provisions….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 through streamlined actions.” The reported penalties ranged from $25,000 to $150,000.
What is particularly interesting here are the charges against the public companies arising out of Section 16(a) filing deficiencies of their insiders. These relate principally to the failures of these companies to report the delinquencies or omissions in their proxy statements and annual reports as required by Item 405 of Regulation S-K. In some cases, however, the SEC contended that the company “was a cause of certain Section 16(a) violations by its officers and directors as a result of [the company’s] negligence in performing certain tasks it voluntarily agreed to undertake in connection with the filing of Section 16(a) reports on their behalf.” In that case, the company had voluntarily agreed to prepare and file of Section 16(a) reports for which the company had received timely notification of the transactions.
Although, as the SEC notes in the order, consistent with the common understanding, “insiders remain responsible for the timeliness and accuracy of their required Section 16(a) reports, the Commission has encouraged the practice of many issuers to ‘help their [officers and directors] or submit the  filings on their behalf . . . [in order] to facilitate accurate and timely filing.’” The message here is that companies that do volunteer to make filings on behalf of the insiders -– a common practice — take on that responsibility in the eyes of the SEC and can be held liable if the companies fail to timely file.
In another settled action separately announced yesterday, both an executive and his company were called on the carpet and required to pay fines by the SEC as a result of the CEO’s failure to file a Form 3, failure to timely report an aggregate of 11 transactions and failure to report 27 sales with an aggregate value of $1.5 million, as well as the CEO’s and company’s failure to disclose the missing and late reports in the company’s 10-Ks and proxy statements. These failures to disclose resulted in charged violations of Section 13(a) and 14(a) of the Exchange Act (including Rule 14a-9 regarding omission of material facts). Because these documents were incorporated by reference into the company’s Form S-8 registration statement, the company was also charged with fraud under Section 17(a)(2) of the Securities Act, which does not require scienter.
SEC representatives indicated in the press release that these failures are “not merely a technical lapse… because investors are consequently denied important and timely information about how an insider is potentially viewing the company’s future prospects….” Moreover, the CEO’s “sales would have been viewed by a reasonable investor as significantly altering the total mix of available information about [the company] given his executive position as well as the size and frequency of his sales of the company’s stock.” Notably, there was no allegation of any Section 16(b) liability. The CEO agreed to pay a $175,000 penalty and the company a $375,000 penalty. The company was also required, among other things, to engage an independent compliance consultant, certify in writing that it has adopted the consultant’s recommendations and mandate training for its Section 16 reporting persons.