Last week, the Securities and Exchange Commission (the “SEC”) announced charges against 28 officers, directors and principal shareholders for failing to make timely filings under Sections 16(a), 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) and commenced charges against six publicly-traded companies for contributing to untimely filings. As a result of these recent enforcement actions, public companies and their insiders are advised to take extra steps to ensure that such SEC filings are timely and accurately made.
Under Section 16(a) of the Exchange Act, directors, officers and beneficial owners of more than 10% of a registered class of securities are required to file beneficial ownership reports on Forms 3, 4 and 5. Under Sections 13(d) and (g), beneficial owners of more than five percent of a registered class of voting securities are required to file beneficial ownership reports on Schedule 13D or Schedule 13G.
To identify the filing delinquencies, the SEC utilized quantitative analytics and ranking algorithms. In some cases, untimely filings were made months and even years after the required filing periods. The failures to file Section 16(a) reports (such as Form 4 reports) included not only open market transactions but also transactions related to equity awards and 10b5-1 plans. Most of the violators have settled with the SEC. The settlement penalties ranged from $25,000 to $150,000 and totaled $2.6 million.
The SEC has said that it plans to continue enforcing filing violations even if such violations are inadvertent, as emphasized by Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, when the enforcement actions were announced: “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.” These enforcement actions are evidence of the SEC's “broken windows” strategy to enforce even minor violations.
In response to these recent SEC enforcement actions, issuers and their officers, directors and principal shareholders should take steps to reduce the risk of untimely filings. Issuers should review their compliance and reporting procedures and make the necessary adjustments to improve their reporting processes. Officers, directors and principal shareholders should work with issuers to ensure timely and accurate filings and review all filings made by issuers on their behalf.