The Securities and Exchange Commission recently announced that it had reached dozens of settlements in a crackdown on repeated delinquencies in the timely filing of forms required by Sections 16(a), 13(d) and 13(g) of the Securities Exchange Act. The SEC indicated that its goal is to send a clear message about the importance of these filing provisions. While the rules have not changed, these actions serve as a wake-up call to companies and insiders to be vigilant about their reporting obligations.
The provisions of Sections 16(a), 13(d) and 13(g) require major shareholders and directors and officers of public companies to timely report information about their holdings and transactions in company securities. These filings allow other investors to consider the impact that such holdings and transactions might have on a company’s future.
Although the deadlines are mandatory, rather than guidelines, late filings have not generally led to SEC action absent other violations, such as short swing profit penalties under Section 16. While these are individual or shareholder filings, companies are obligated to disclose late filings under Section 16(a) in their annual reports and/or proxy statements. Financial penalties, however, though technically possible, have generally not been imposed against companies or insiders.
The status quo shifted on September 10, 2014, when the SEC revealed that it had charged 28 officers, directors and major shareholders of public companies for repeated late filing of Forms 4 and Schedules 13D and 13G, as well as charged six public companies with contributing to or failing to report filing failures. The SEC stated that it had targeted individuals and companies that it had identified, using quantitative data sources and ranking algorithms, as those whose rates of filing deficiencies were particularly high. Of the 34 charged, 33 settled with the SEC, agreeing to pay penalties totaling $2.6 million.
Under Section 16(a), an officer, director or, in certain cases, beneficial owner of more than 10% of a registered class of a public company’s securities must initially file a Form 3 to report ownership of company securities at the time of effectiveness of the company’s IPO or, if already public, within ten calendar days after the person becomes an officer, director or more than 10% beneficial owner. Subsequently, such persons must file a Form 4 to report most transactions in the company’s securities within two business days after a transaction.
Under Sections 13(d) and 13(g), a Schedule 13D or 13G must be filed by a beneficial owner of more than 5% of a registered class of a public company’s securities to report the owner’s holdings or intentions with respect to the company. When a person’s beneficial ownership first reaches the 5% threshold, a Schedule 13D must be filed within ten calendar days after that occurrence. Subsequently, the Schedule must be amended “promptly” following any material change to the information reported. Alternatively, a Schedule 13G, which can be used by beneficial owners who are considered “passive investors” in lieu of the more onerous Schedule 13D, must be filed within ten calendar days of the shareholder hitting the 5% threshold, or in some cases within 45 calendar days after the end of the year in which the filer became obligated to make the filing. With certain exceptions, a filer must amend a Schedule 13G within 45 days of the end of any year in which any changes to the information in the filing occurred.
Although, for now, the SEC seems to be focusing on the most egregious offenders, it reminded the public that “The reporting requirements in the federal securities laws are not mere suggestions, they are legal obligations that must be obeyed. Those who fail to do so run the risk of facing an SEC enforcement action.”
WHAT THIS MEANS FOR YOU
Public companies should note that the SEC has charged not only delinquent filers but also companies that failed to stop or report such delinquencies. To minimize the risk of an SEC enforcement action, public companies should take the following steps:
- Companies should inform their officers, directors and major shareholders of the transactions that trigger filing requirements and of filing deadlines, and regularly remind them of their reporting obligations.
- If a company has agreed to assist its officers, directors or major shareholders with the required filings, it should make it clear that such persons need to timely communicate all transactions in the company’s securities, preferably while such transactions are still in the planning stages, before execution.
- If, after a company has taken the above actions, late filings under Section 16(a) still occur, the company should be sure to disclose them as required in its annual reports and/or proxy statements.
Directors, officers and major shareholders of public companies should remain educated about their filing obligations under Sections 13 and 16 and make sure to keep applicable companies informed about their transactions to ensure timely reporting. Any time a transaction is under consideration, these persons should plan in advance for their reporting and, if not sure about their obligations, err on the side of checking with the applicable company or its counsel.