This was widely reported in the business press (including a mention on the front page of The Wall Street Journal) yesterday, but in case you missed it, on September 10, the SEC announced a major enforcement initiative in which it has brought enforcement actions against 28 insiders (directors, officers and ten percent owners) for failing to file timely Section 16(a) reports and Schedules 13D and 13G. As reported, 27 of the 28 have agreed to settle and apparently pay civil money penalties. Additionally, six public companies settled allegations that they failed to disclose their insiders’ Section 16(a) violations as required by Item 405 of Regulation S-K.

According to the SEC, the charges stem from an SEC enforcement initiative focusing on two types of ownership reports, Form 4 and Schedules 13D and 13G, that give investors the opportunity to evaluate whether the holdings and transactions of company insiders could be indicative of the company’s future prospects.  

Once excerpt from the SEC’s press release simultaneously provides cause for both alarm and optimism: “SEC enforcement staff used quantitative data sources and ranking algorithms to identify these insiders as repeatedly filing late. Some filings were delayed by weeks, months, or even years.” This is potentially good news because it suggests that the SEC only went after those “repeatedly filing late” “by weeks, months, or even years.” The bad news, however, is that the SEC has developed “algorithms to identify” late filing insiders.

For those of you not yet expert in the area, Section 16(a) requires that officers, directors, and 10% shareholders (“insiders”) must electronically file a Form 4 Statement of Changes of Beneficial Ownership of Securities with the SEC on or before the second business day after nearly any transaction involving company stock. Examples of transactions that an insider must report include:

  • Grants of stock options
  • Cashless exercise of stock options (and any sale of shares)
  • Grants of restricted stock or RSUs
  • Vesting (settlement) of restricted stock or RSUs
  • Open market purchases or sales of company stock
  • Transfers of shares from insider’s trust to a spouse’s trust
  • Discretionary transactions (volitional intra-plan transfers of company stock or a cash distribution funded by a volitional disposition (such as a loan) of company stock) under a 401(k) plan, ESOP, or stock purchase plan, and some non-qualified deferred compensation plans.

It is not clear whether this is the beginning of “a new era of enforcement of beneficial ownership requirements,” but it sure would be a good time to check your filings and compliance!