For today’s blog entry, I review recent Section 16 developments that Alan Dye of Hogan Lovells discussed during his session “Section 16 & Insider Considerations in Today’s Market” at this year’s NASPP Conference. If you missed Alan’s session, there’s still time to catch it. Conference attendees have until December 10 to access the session recordings.
Electronic Signatures: In late 2020, the SEC amended its rules to permit the use of electronic signatures for Forms 3, 4 and 5 and most other EDGAR filings. See “SEC Allows Electronic Signatures for Forms 3, 4, and 5” for more information.
Forms 144, 4, and 5: Also in late 2020, the SEC proposed amendments to Rule 144 and Forms 4 and 5. The proposed changes include mandating electronic filing of Form 144, aligning the Form 144 filing deadline with the deadline for Form 4, and developing an interface that would enable simultaneous completion and filing of Form 144 and Form 4. The SEC also proposed to amend Form 4 and Form 5 to add an optional checkbox to indicate that a reported transaction occurred pursuant to a Rule 10b5-1 plan. See “SEC Plans Changes for Forms 4, 5, and 144” for more information.
EDGAR Access: More recently, the SEC has proposed a new process by which filers and filing agents would gain access to the EDGAR system. See “SEC Announces Big Changes to EDGAR Access” for more information.
Share Withholding: A couple of years ago, a number of companies received notices from a plaintiff attorney challenging the exempt status of share withholding transactions. (See “Another Win on Section 16 Share Withholding Litigation” for the whole story.) These challenges seem to have been resolved favorably for the companies and insiders involved and Alan is not seeing any new challenges being brought.
Busted Trades: Sometimes, after an insider executes an open market transaction, it is discovered that the transaction triggers short-swing profits recovery. If discovered soon enough, the broker might be asked to “bust” the trade. In Connell v. Johnson (S.D.N.Y. 2020), a judge held that this strategy can be used to avoid having to recover profits. Alan notes, however, that based on a subsequent unrelated challenge, this decision might not be as definitive as we would like. Alan covers this development in his blog on Section16.net (“District Court Says ‘Busted Trade’ Isn’t Subject to Section 16(b)”).
Accuracy of Form 4: In this interesting development, an insider bought company stock and sold it almost, but not quite, six months later (according to his initial Form 4 filing reporting the sale). After the company received demand letters from several plaintiffs’ attorneys, the insider amended the Form 4 filing to indicate that the sale occurred 14 days later than originally reported and more than six months after the purchase transaction.
The sale was a private transaction and thus more complicated than an open-market transaction, hence the uncertainty over the actual sale date. Never-the-less, the court not only sided with the plaintiffs but considered whether the matter merited referral to the SEC for further enforcement (Alan notes that he cannot recall another instance where a court considered referring a Section 16(a) matter to the SEC).
This case seems to represent a significant failure of the company’s compliance procedures—this is exactly the sort of scenario pre-clearance procedures are designed to prevent. But it also points to the importance of accuracy in Form 4 filings. Giving the insider the benefit of the doubt that the sale date in the amended filing is the correct date, if that date had been reflected in the original filing, it is unlikely that the company would have received any demand letters and the whole matter could have been avoided. Alan covers this development in his blog on Section16.net (“Judge Considers Referring Insider to SEC for Potentially False Information in Form 4”).
Filing Delinquencies: Based on a review of 100 proxy statements, a little over 40% of companies disclosed filing delinquencies in 2020. This is consistent with a 2011 NASPP survey on this topic.
New Caption: As readers know, (“SEC Updates Item 405 Disclosure and Due Diligence Requirements”), in 2019 the SEC updated the caption that delinquencies are reported under. Among companies that reported delinquencies, five (a little over 10%) failed to use the new caption.
Disclosure of Non-Delinquencies: A primary reason the SEC changed the caption is to discourage companies from disclosing that they aren’t required to provide the disclosure because they didn’t have any reporting delinquencies (the SEC is trying to eliminate unnecessary information from proxy statements). Even so, 13 of the reviewed proxy statements (just over 20% of the companies that didn’t report any delinquencies) included this disclosure. Half used the new caption, half used the old caption or wrote their own caption, and one made the disclosure under both the old and new captions.
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