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SEC Enforcement Actions for Section 16 Reporting Violations

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September 25, 2014 | Jennifer Namazi

SEC Enforcement Actions for Section 16 Reporting Violations

Over the past year, I've blogged about various enforcement actions pursued by the Securities and Exchanges Commission, many with no warning or indication that the targeted area was one of concern. Enforcement has been a self proclaimed focus of the SEC for a while now, and the latest string of actions sends a message that even small violations are subject to scrutiny. Once again, we have a new area targeted for the SEC's scrutiny, and it's one where most of us in equity compensation have a great deal of familiarity: Section 16 reporting. That's right, reporting insider transactions (mainly those on Form 4 in this case) and also those on Schedules 13D and 13G. Another string of violations was discovered where companies failed to disclose insiders’ violations in the Proxy Statement per Item 405 of Regulation S-K.

A Slew of Section 16 Enforcement Actions

On September 10th, the SEC announced enforcement actions against 34 individuals and companies (28 individuals and investment companies, and 6 publicly traded companies). The actions brought against the individuals were for failing to promptly report their changes in holdings as required under Section 16 of the Securities and Exchange Act. The actions brought against the companies were for their contribution to the filing failures or for failing to report filing delinquencies.

What Else is Up for Grabs?

On the same day that the SEC announced the Section 16 enforcement actions, they also announced that they had filed fraud charges against a biotech company and its CEO. The fraud charge stems from a failure to report $1.5 million in sales of the company stock by the CEO over a two year period. Ouch, on the surface that seems to be pretty blatant. While that's one example of an egregious set of violations, some of the other actions taken the by SEC in the other Section 16 cases seem to indicate that they want to send a message that no transaction is too small. With more advanced monitoring and analysis capabilities, the SEC appears to by saying that "a violation is a violation".

It Ain't Cheap

The penalties for the said violations haven't been cheap. Most of the cases (all but one) were settled with the SEC for amounts ranging between $25,000 and $100,000 for individuals, $60,000 to $100,000 for investment companies, and $75,000 - $150,000 for companies who contributed to the delinquency of their officers and failed to properly report delinquent filings.

Next Steps

Some of you may be wondering what you can do to determine if there is risk to your company. There's no telling if the SEC will continue their review in this area. However, given that there have been many areas of investigation and given that the SEC has said that enforcement is an area of focus in terms of initiatives, companies should take a look at their Section 16 compliance practices to identify any potential areas of concern (filing failures) or any process gaps.

If you want to get some further insight on the matter you may consider attending Alan Dye and Peter Romeo's session "Section 16 & Insider Considerations in Today's Market" at the NASPP's 22nd Annual Conference next week. I'm betting this topic will be on the table for discussion.

My next blog will be photos of the Conference - live from Las Vegas. Maybe not everything that happens in Vegas stays in Vegas! I look forward to seeing many of you next week!




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