On September 10, the U.S. Securities and Exchange Commission (“SEC”) announced charges against 28 officers, directors and major shareholders for violating Sections 13 and 16 of the Securities Exchange Act of 1934 (the “Exchange Act”).1 The SEC also brought charges against six publicly-traded companies. All of the charges were in connection with delinquent filings or the failure to report delinquent filings. Prior to these charges, the SEC has not brought charges for similar violations even though delinquent filings are commonplace.
Section 16(a) of the Exchange Act requires that directors, officers and beneficial owners of over 10% of a registered class of equity securities report their beneficial ownership and transactions with the SEC on Forms 3, 4 and 5. Transactions reported on Form 4 must be filed within two business days of the transaction giving rise to the reporting obligation, which is the shortest time period required for filings under Section 16(a) of the Exchange Act. Additionally, registrants are required pursuant to Item 405 of Regulation S-K to disclose in their proxy statement any late filings made by those subject to Section 16(a). Sections 13(d) and 13(g) of the Exchange Act require beneficial owners of over 5% of a class of equity securities to report their ownership on Schedule 13D or Schedule 13G.
The SEC settled with 33 of the 34 individuals and companies for fines ranging from $25,000 to $150,000 for an aggregate of $2.6 million in fines. Using quantitative analytics, the SEC was able to identify and target those individuals and companies that had high rates of filing deficiencies. The Director of the SEC’s Division of Enforcement, Andrew J. Ceresney, said, “[o]fficers, 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.”
These charges represent a new era of enforcement under Sections 13 and 16 and highlight the importance of ensuring that reports under Sections 13 and 16 are timely filed. Officers and directors should ensure that those responsible for their filings are timely notified of transactions in order for the filings to be made in a timely fashion. Companies who have voluntarily taken on the responsibility of making filings on behalf of their officers and directors should ensure they have a system that allows for timely filings to be made. Additionally, companies should annually review the Section 16(a) filings to ensure compliance with Item 405 of Regulation S-K.