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Section 16 Exit Reporting

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January 18, 2011 | Barbara Baksa

Section 16 Exit Reporting

With Alan Dye's annual Q&A webcast coming up next week, I've got Section 16 on my mind, so I thought I'd address an issue that comes up quite frequently in the NASPP Q&A Discussion Forum: the required reporting when an insider ceases to be subject to Section 16.  I've found that many people assume that all transactions that occur in the six months after Section 16 status ceases are reportable, but this is not true. In many cases, no post-Section 16 reporting is required at all.

Previously Unreported Transactions

First off, any reportable transactions the insider engaged in while still subject to Section 16 that haven't yet been reported still have to be reported. For example, suppose an insider gifts stock; since gifts are reportable on Form 5, the gift may not be reported immediately. If the insider ceases to be subject to Section 16 prior to when the gift is reported, this doesn't let the insider off the hook: the gift still must be reported.

Probably the smart thing to do is to check for any unreported transactions whenever an insider ceases to be subject to Section 16 and file a Form 4 to report those transactions at that time, so you don't forget about them later. Even so, when reviewing insider transactions and holdings for Forms 5, it's a good idea to include individuals that ceased to be subject to Section 16 during the past year, to make sure nothing was missed (and to get a statement from them that no Form 5 is due).

No Reporting Necessary for Exempt Transactions

Once someone ceases to be subject to Section 16, none of his/her exempt transactions is reportable, no matter how shortly the transactions occur after cessation of insider status. Thus, option exercises and forfeitures of restricted stock that occur after an individual is no longer subject to Section 16 generally are not reportable.

Moreover, cancellations and forfeitures of derivative securities, such as options and restricted stock units, for no value are never reportable, even if they occur while the holder is subject to Section 16.

Reporting Might Be Required for Non-Exempt Transactions (But Then Again, Might Not)

Non-exempt transactions (such as open market purchases and sales) that occur after cessation of insider status may be reportable, but only if they occur within six months of an opposite-way, non-exempt transaction that the individual engaged in while still an insider. 

For example, assume an insider terminates employment and is no longer subject to Section 16 as of her last day of employment.  She did not engage in any non-exempt transactions in the six months prior to her termination. After termination, she engages in a same-day sale exercise.  The exercise should be an exempt transaction; as such, it is not reportable.  The sale is a non-exempt transaction, but, as such, it would only be reportable if it occurred within six months of a non-exempt purchase that the insider had engaged in prior to her termination.  We know that this isn't the case, since she had no non-exempt purchases within the six months before her termination. Thus, the sale also is not reportable.

Now, let's take the same scenario, but, this time, let's assume that the insider purchased stock on the open market five months prior to her termination. An open market purchase is a non-exempt transaction.  This fact changes things a bit.  As an exempt transaction, the post-termination exercise still does not have to be reported. The sale of the exercised shares will have to be reported if it occurs within six months of the pre-termination open market purchase:  

  • If the sale occurs within the first month after the insider terminated, the sale will be within six months of the purchase and, thus, will be reportable. Incidentally, this is the exact situation in which short-swing profits recovery is also required; assuming the sale price is higher than the purchase price, the company might as well get started on that also. 
  • If the sale occurs more than one month after the insider terminates, it will be more than six months after the open market purchase and the sale will not be reportable (nor will any profits have to be recovered). 

More Next Week

Be sure to tune in next week, when I will cover who is responsible for post-termination Section 16 reporting, the Exit box, Forms 144, and best practices. 

Got Questions on Section 16?
Alan Dye has the answers. Email your burning Section 16 questions to and Alan will answer them during his popular, annual Q&A webcast on Section 16.  This year's webcast will be held on January 25; this is your one chance all year to get answers from one of the nation's foremost authorities on Section 16--don't miss it!

Quick Survey on Section 16
Take our quick survey on Section 16 and find out how your practices compare to your peers'.  With only 12 questions, the survey can be completed in less than five minutes!

NASPP "To Do" List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing "to do" list for you here in my blog. 

- Barbara

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