• SEC Adopts Rules Relating to Accelerated Filing Deadlines under Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act")
  • August 19, 2003 | Author: Timothy M. Sullivan
  • Law Firm: Hinshaw & Culbertson LLP - Chicago Office
  • New Form 4 Filing Deadline

    Section 403 of the Sarbanes-Oxley Act (the "Act") accelerates the Form 4 filing requirements by requiring that the form be filed before the end of the second business day following the day on which the subject transaction has been executed. This statement must indicate the beneficial ownership by that person at the date of filing and any changes in such ownership. Under the old rules, a Form 4 had to be filed within ten days of the end month in which a transaction occurred.

    Effective Date

    The accelerated filing requirements under Section 403 become effective on August 29, 2002. These requirements do not affect the reporting of transactions which occur before this date.

    SEC Rules

    The SEC adopted rules to implement Section 403 of the Act on August 27, 2002 (SEC Release No. 34-46421). According to the release:

    1. Form 4 has been amended to conform all references to the applicable filing deadline to the amended statutory filing deadline (by the end of the second business day following the day on which the transaction occurred) and to reflect that the Form 4 is no longer a monthly form (i.e., multiple reports may be due within one month).

    2. Rule 16a-6(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the small acquisitions rule, has been revised to conform the description of the Form 4 deadline contained in that rule to the amended statutory filing deadline.

    3. Rules 16a-3(f) and 16a-6(a) under the Exchange Act have been amended so that transactions between officers or directors and the issuer exempted from Section 16(b) short swing profit recovery by Rule 16b-3 (including transactions in derivative securities, which would include, without limitation, issuances, exercises, and cancellations and regrants of stock options, including repricings, and sales of shares by an insider to the issuer), formerly reported on an annual basis on Form 5, now have to be reported on Form 4 by the end of the second business day after the day on which the transaction occurred.

    4. Rule 16a-3(g) has been amended to calculate the two-business day Form 4 due date differently for the following transactions:

    (a) Transactions pursuant to arrangements that satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) where the reporting person does not select the date of execution; and

    (b) Discretionary Transactions (as defined in Rule 16b-3(b)(1)) pursuant to employee benefit plans where the reporting person does not select the date of execution.

    Transactions previously reported on Form 5 which are not covered by the rule 16a-3(f) amendments discussed below will remain reportable to the same extent as before and transactions previously exempt from Section 16(a) reporting will remain exempt. The SEC stated in the Release that: "acquisitions pursuant to Qualified Plans, Excess Benefit Plans, Stock Purchase Plans and the reinvestment of dividends or interest pursuant to broad-based dividend or interest reinvestment plans will remain exempt from Section 16(a) reporting." The SEC also noted that transactions pursuant to non-qualified deferred compensation plans and other dividend or interest reinvestment plan transactions (such as acquisitions pursuant to voluntary contributions of additional funds) will be reportable on Form 4 within two business days after the date of execution.

    Companies will continue to report insiders who fail to file such reports in a timely manner.

    Rule 16a-3(f) Amendments. Under Rule 16a-3(b), the following transactions previously reportable on a Form 5 will now have to be reported on Form 4 within two business days:

    • Grants, awards and other acquisitions from the issuer exempted by Rule 16b-3(d).

    • Dispositions to the issuer exempted by Rule 16b-3(e); and

    • Discretionary Transactions pursuant to employee benefit plans exempted by Rule 16b-3(f).

    Following these amendments, derivative securities transactions reportable on Form 4 will include, without limitation, issuances, exercises, and cancellations and regrants of stock options, including repricings.

    Exceptions to the Statutory Deadline. The new rules define the date of execution differently for the transactions described below, solely for Section 16(a) reporting purposes:

    • For a transaction pursuant to a contract, instruction or written plan for the purchase or sale of issuer equity securities that satisfies the affirmative defense conditions of Exchange Act Rule 10b5-1(c) where the reporting person does not select the date of execution, the date on which the executing broker, dealer or plan administrator notifies the reporting person of the execution of the transaction is deemed the date of execution, so long as the notification date is not later than the third business day following the trade date.

    • For a Discretionary Transaction where the reporting person does not select the date of execution, the date on which the plan administrator notifies the reporting person that the transaction has been executed is deemed the date of execution, so long as the notification date is not later than the third business day following the trade date.

    Under these exceptions, a reporting person must report the transaction on Form 4 before the end of the second business day following the deemed date of execution for the transaction. It should be noted that neither exception is available if the reporting person has selected the date of transaction execution, for example where a Rule 10b5-1(c) arrangement provides for a sale on the first business day of each month.

    The SEC expects the reporting person to make specific arrangements with the broker, dealer or plan administrator to provide the reporting person actual notice of transaction execution as quickly as feasible. The broker, dealer or plan administrator may use any means of communication to notify the reporting person that the transaction has been executed. The SEC anticipates that brokers and dealers will provide the information needed for Section 16(a) reporting purposes either electronically or by telephone.

    The new rule will be available to any transaction that satisfies the affirmative defense conditions of Rule 10b5-1(c), including transactions pursuant to employee benefit plans and dividend or interest reinvestment plans that are not exempt from Section 16(a) reporting. As indicated above, transactions pursuant to non-qualified deferred compensation plans and other dividend or interest reinvestment plan transactions (such as acquisitions pursuant to voluntary contributions of additional funds) will be reportable on Form 4 within two business days after the date of execution. If such a transaction satisfies the affirmative defense conditions of Rule 10b5-1(c), the date of execution for Form 4 reporting purposes may be calculated on the modified basis.

    Revised Forms 4 and 5. In addition to the revisions to Form 4 described in item (1) above, the new Form 4 provides that the holdings columns must report holdings following the reported transaction(s), rather than month-end holdings, and states that reportable Rule 16b-3 exempt transactions must now be reported on Form 4.

    Additional columns are being added to Form 4 and Form 5 to assist investors and the SEC in determining if the forms were filed on a timely basis as readily as with the current forms. Form 5 is also being revised to clarify that reportable Rule 16b-3 exempt transactions no longer may be reported on this form on a deferred basis.

    The SEC indicated in the Release that it will publish new forms as soon as possible. The SEC also noted:

    "Until amended forms are available, reporting persons should continue to use the current versions, but should modify box 4 on Form 4 to state the month, day and year of the transaction. When using the current forms to report a transaction with a deemed execution date computed pursuant to amended Rule 16a-3(g), a reporting person should include an asterisk next to the trade date in the transaction date column, and add a footnote to disclose the deemed execution date."

    Small Acquisitions. Rule 16a-6 permits small acquisitions to be reported on Form 5, subject to specified conditions. If the conditions are no longer met, the small acquisition must be reported on a Form 4. The SEC amended this Rule so the Form 4 will be due two business days after the deferral conditions are no longer met and so the Form 4 will not be available to defer reporting of small acquisitions from the issuer (including an employee benefit plan sponsored by the issuer). This will prohibit reliance on Rule 16a-6 to report transactions exempted by Rule 16b-3 on Form 5 which are now required to be reported on Form 4.

    Electronic Filing

    Section 403 of the Act requires that by July 30, 2003:

    (c) a Form 4 statement regarding a change in ownership will have to be filed electronically;

    (d) each such statement must be publicly accessible on an Internet site not later than the end of the business day following that filing; and

    (e) the issuer (if the issuer maintains a corporate website) shall provide that statement on that corporate website, not later than the end of the business day following the filing.

    The SEC had previously announced its intention to begin rulemaking to make the filing of Section 16(a) reports on EDGAR mandatory. The SEC has also indicated that it "will proceed expeditiously with that rulemaking and related system programming to assure adoption (of the electronic filing requirement) within the one-year period mandated by the Act" (see SEC Press Release, dated August 6, 2002). In a release dated April 12, 2002, the SEC proposed to amend Form 8-K to require, among other matters, the disclosure of transactions by executive officers and directors in the equity securities of their companies (see SEC Release No. 33-8090). With the enactment of Section 403, the SEC has stated that it will not require the reporting of these transactions on Form 8-K (see SEC Press Release, dated August 6, 2002).

    In the August 27, 2002 Release, the SEC encouraged the electronic filing of Section 16(a) reports. The SEC also stated that it "will accept electronically-filed Section 16(a) reports that are not presented in the standard box format and omit the horizontal and vertical lines separating information items, so long as the captions of the items and all required information are presented in the proper order." Reporting persons were instructed to submit Forms ID requesting EDGAR access codes as soon as possible to minimize processing delays. The SEC also encouraged companies to post Section 16(a) reports on their websites before the July 30, 2003 statutory implementation date.

    Comments

    The SEC has requested comments on the following:

    • Are there any other technical amendments necessary to implement Section 403 of the Act?

    • Do the amendments to Rule 16a-3(g) defining the date of execution differently for specified types of transactions make it feasible for insiders to report those transactions within the two-business day deadline?

    • Is any additional time necessary to make Form 4 reporting feasible for these transactions?

    • Do the new rules allow more time than is necessary for this purpose?

    • Do any other types of transactions require regulatory changes to make it feasible for insiders to report them within that statutory deadline.

    • What factors should we consider in making a feasibility determination?

    In the Release, the SEC also sought comment on "whether any changes are required in the treatment of stock options under Sections 16(a) and 16(b). One set of issues involves whether and how the six-month period of Section 16(b) should be applied and calculated in connection with stock options, exercises and the sale of the underlying stock." By way of example, the SEC asked for comment on whether "a six-month holding period [should] be required as a mandatory condition to exempt grants under Rule 16b-3(d), rather than be one of the alternative permissible bases for an exemption?"

    Comments are due on September 30, 2002.

    Suggested Procedures

    Set forth below are some matters to consider with respect to insider trading policies and procedures to insure that the appropriate data is captured and the Form 4 timely filed:

    1. Notify all insiders of these accelerated filing requirements.

    2. Because the SEC allows a person to authorize another to execute such forms, secure a power of attorney for each insider giving the appropriate officer or general counsel the authority to sign reports on the insider's behalf.

    3. Request that all insiders (including family members) clear all proposed transactions in the company's securities with the appropriate officer or the general counsel well in advance of the actual transaction.

    4. Select one person to prepare and circulate drafts of the report and require the insider to review the report.

    5. Designate one or more brokers who can handle these transactions so procedures can be established to facilitate these transactions.

    6. To facilitate filing reports on EDGAR, secure EDGAR access codes for each insider. (Under the current system, each insider will need his or her own EDGAR access code.)

    7. Update written insider trading policies and procedures so that they comply with the new requirements, circulate these new procedures to all insiders and persons responsible for gathering the data and preparing the report and consider securing a certification from the insiders that they have read the new acceleration requirements.

    8. If you are experiencing problems in establishing an effective program, consider a short blackout period commencing on August 29, 2002 so that you will have an opportunity to install the appropriate procedures.