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Form 5 filings, if needed, are due 45 days after the end of a company's fiscal year or within six months of an individual ceases to be an insider. If December is your year end, now is the time to start reviewing your Section 16 filings to determine if any Form 5 filings are required for your insiders.
Some transactions are exempt from Form 4 reporting requirements under Rule 16b-6 and may instead be reported on a Form 5. There are two types of transactions that are eligible for this deferred reporting: acquisitions and dispositions through gift or inheritance and "small acquisitions." Although these types of transactions are not required to be reported on a Form 4, insiders may choose to report them on a Form 4.
Many companies encourage Form 4 reporting of transactions that are eligible for deferred reporting. While these transactions themselves may not need to be reported on a Form 4, they do impact the total holdings which must be reported on a Form 4 any time there is a reportable acquisition or disposition of common stock. Reporting the actual transaction on a Form 4 provides clarity for potential investors or shareholders and reminds insiders that the transaction is only eligible for deferred reporting, not exempt from reporting altogether.
Small acquisitions are particularly tricky because they may not exceed $10,000 when aggregated over the preceding six months. Additionally, a disposition of the same class of securities that is not exempt from Section 16-b in the proceeding six months disqualifies an acquisition from deferred reporting; it must be included on a Form 4 within two days of the disposition. Simply reporting the acquisition on a Form 4 in the first place eliminates the need to track the total value of small acquisitions and monitor for matching dispositions.
Form 4 and Form 3 Errors
The other reason a Form 5 may be required is if transactions or holdings were either missed or not reported correctly on a Form 4 or Form 3 during the year (or the past two years if the individual became an insider in the current year). Of course, nobody wants to have to file a Form 5 for this reason (see Barbara's blog entry, "Ignore the Romeo & Dye Model Forms At Your Own Risk"). For these errors, insiders do not need to file a Form 5; a late or amended Form 4 may also be used. If an issue is discovered prior to the year-end reconciliations, the correction should be reported immediately. Additionally, only Form 4 errors from the same year can be included on a Form 5. If there is a Form 4 transaction between the end of the year and the Form 5 filing deadline, it should not be reported on the prior year's Form 5, regardless of whether or not it was reported timely and correctly on a Form 4.
Know Your Insiders
Your company should have a process in place to confirm if a Form 5 is needed for each of your insiders. This can be done by reconciling reported transactions and holdings in combination with a questionnaire or other verification completed by the insiders. If it appears no Form 5 is needed, have your insiders confirm your findings in a signed statement.
Form 5 Details
For small acquisitions that are eligible for deferred reporting on a year-end Form 5, use "L" as the transaction code. Code G is used for gifts (either acquisitions or dispositions) and code W is used for acquisitions or dispositions by will or the laws of descent and distribution.
If incorrectly reported holdings from a Form 3 are being reported on the Form 5, add a "3" to the transaction code. When reporting a missed or incorrectly reported Form 4 transaction on a Form 5, no special code is needed. Use the footnotes to explain any Form 3 or Form 4 item included on the Form 5. A Form 5 has checkboxes to indicate that it includes line items that should have been reported on a Form 3 or Form 4, but EDGAR will automatically check the appropriate box based on the transaction code.
For more information on Forms 3, 4, and 5, see the NASPP's Section 16 portal. The most comprehensive resource on Section 16 filings is the Romeo & Dye Section 16 Annual Service, which includes the Section 16 Deskbook along with the Section 16 Updates Quarterly Newsletter.
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