This post is applicable to public companies and their officers and directors.
On September 10, 2014, the Securities and Exchange Commission announced (http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678) that it had brought charges against a total of 34 individuals and companies pursuant to a new enforcement initiative designed to penalize non-compliance with the beneficial ownership filing requirements under Section 16, as well as Sections 13(d) and (g), of the Securities Exchange Act of 1934. All but one of the parties settled with the SEC; the penalties paid by the individuals and companies ranged from $25,000 to $150,000.
Section 16(a) imposes reporting requirements on certain beneficial owners of public company securities, including officers, directors and 10% beneficial owners. Among other requirements under Section 16(a), insiders are generally required to report changes in their ownership of company securities within two business days after any such transaction, unless an exemption applies. While the responsibility for complying with these requirements ultimately rests with the insider, it is common for companies to prepare such reports on their insiders’ behalf or otherwise assist with compliance. If insiders do not timely file Section 16(a) reports, public companies are required to disclose such filing deficiencies in their Form 10-K (and proxy statement, if applicable), and the failure to provide these disclosures could lead to anti-fraud charges. Therefore, to avoid these penalties, it is critical for companies to have strong compliance procedures in place.
The SEC’s enforcement sweep focused on serial late filers; in certain instances, multiple transactions were reported several years beyond the deadline. Although, as noted above, compliance with these requirements is the insider’s responsibility, the SEC imposed penalties on six companies for contributing to their insider’s late filings and/or failing to properly report these deficiencies in their SEC filings.
In the wake of the SEC’s enforcement initiative, which is supported by algorithms and other data sources, it would be prudent for public companies to examine their internal compliance procedures to ensure that processes are in place to ensure that their insiders’ reports are filed on a timely basis. Below are tips companies may implement to ensure compliance:
- Educate, as well as periodically remind, insiders and other company officials about the Section 16 reporting requirements, including the importance of timely filings and the consequences of violations.
- Require insiders to pre-clear transactions with the company’s compliance personnel; among other benefits, doing so will alert those responsible about potential upcoming Section 16 reporting obligations.
- Have each insider designate one or more company officials and/or another third party (e.g., outside counsel) as his or her attorney-in-fact to sign Section 16 reports in case the insider is unavailable.
- Only work with brokers that are knowledgeable about Section 16, as well as Rule 144, requirements.
- Solicit information from insiders about Section 16 filings as part of the company’s year-end procedures and file any required Forms 5 by the 45th day after the company’s fiscal year end.
- Properly disclose any late Section 16 transactions in the company’s Form 10-K and/or proxy statement.
- Advise departing insiders about any continuing Section 16 reporting obligations.