On September 10, 2014, the Securities and Exchange Commission (the “SEC”) announced charges against 28 officers, directors and investment firms for failing to make timely filings of reports on Form 41 and Schedules 13D and 13G2 under the Securities Exchange Act of 1934, as amended. In addition, the SEC brought charges against six public companies for contributing to the failure of their officers and directors to file timely reports. Thirty-three of the 34 individuals and companies charged by the SEC agreed to settle with the SEC and pay fines ranging from $25,000 to $150,000.3
The SEC’s recent charges are intended to warn the corporate community that the SEC does not view filing violations as trivial and that ignorance or forgetfulness is no excuse. Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated: “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.”4 Mr. Ceresney also noted that the SEC is now using quantitative analytics and algorithms to identify those individuals or firms that repeatedly are late in making these filings.5 In addition to avoiding SEC charges and fines, another reason to ensure that these obligations are met is that the failure to make Form 4 filings on time must be disclosed in the proxy statements filed by companies in connection with annual meetings of shareholders.
Accordingly, officers, directors, major shareholders and issuers should make sure that they are up-to- speed on the SEC’s filing requirements and are making timely and accurate filings. We recommend that public companies take the following steps to ensure compliance with Section 16 filing requirements:
- Confirm that officers and directors understand the scope and importance of the SEC filing requirements and particularly that making these filings correctly and on time ultimately is their personal responsibility, even though their companies may have agreed to assist them in doing so. We believe it is prudent for companies to regularly brief their officers and directors on the importance and the mechanics of meeting these obligations.
- Companies often assist their officers and directors with respect to making Form 3 and Form 4 filings.Companies that do so should make sure that there is no misunderstanding about what the company is, and is not, doing for the officer or director. As the recent SEC charges indicate, the failure of a company to do what it agreed to do might give rise to separate violations against the company for “contributing” to the violations of its officers and directors.
- Consider whether the company’s insider trading policies address the SEC filing requirements relating to stock ownership. A “best practice” is for insider trading policies to require pre-clearance of any transactions by officers or directors in the company’s securities. Requiring pre-clearance, in addition to fostering compliance with the company’s insider trading policy, also gives the company a “head start” in preparing the required reports.
- Review internal company processes to confirm that there is a pre-determined and widely known line of communication for officers and directors to report transactions to the company and that the employee in charge of receiving this information is properly trained on the SEC’s reporting requirements and has access to counsel familiar with the SEC’s rules regarding Section 16(a) reporting.
- Consider obtaining powers of attorney from all reporting persons so that the company can assist in making the appropriate filings in a timely manner.
- If any officers, directors or major shareholders have a Rule 10b5-1 trading plan, confirm that it contains a provision directing such person’s broker to transmit transaction information to the person responsible for preparing and filing the necessary SEC reports.