Most companies have a firm handle on the stock ownership and trades made by their officers and directors (“insiders”). This knowledge is essential for the company and its insiders to comply with the reporting and short-wing profit rules of Section 16. However, a scenario in which we have occasionally seen a slip-up is when the insider enters into a dividend reinvestment plan (DRIP) with respect to shares of company stock held by his or her broker (especially where the insider has transferred company stock to some form of trust and it has become even further removed from the company’s oversight).
One problem that can arise in this scenario is that the company does not timely file a Form 4 for the acquisition of new stock—by way by way of a dividend—by the insider because it is not aware of the DRIP (and the insider forgets to inform the company). The only way to address this problem is through enhanced communication and follow-up with the insider as to all of his or her company stock holdings, perhaps with a specific question about any outside DRIPs that the insider may have established.
A second problem that can arise is that the insider sells company stock in a separate transaction, including under a Rule 10b5-1 plan, which then becomes a matchable transaction to the DRIP acquisition. Rule 16a-11 provides for an exemption for DRIP acquisitions made pursuant to a plan providing for the regular reinvestment of dividends or interest when the plan provides for broad-based participation, does not discriminate in favor of employees of the company, and operates on substantially the same terms for all plan participants. However, if the DRIP is maintained by the insider’s broker and not the company, we cannot automatically assume that it satisfies the 16a-11 exemption.
Again, the answer to this problem is enhanced communication and follow up with the insiders. If the company learns of a DRIP maintained by an insider’s broker, in-house or outside counsel can review it for compliance with the 16a-11 exemption. Most DRIPs established by large brokerage firms will be designed to mirror the DRIP maintained by the company, thus satisfying the 16a-11 exemption.