• SEC Proposes Rules to Implement Sarbanes-Oxley's Audit Committee Independence Requirements
  • August 5, 2003
  • Law Firm: Perkins Coie LLP - Seattle Office
  • The Securities and Exchange Commission has proposed rules that will require public companies' officers, directors and principal shareholders who are subject to Section 16(a) of the Securities Exchange Act of 1934 to electronically file their Forms 3, 4 and 5 beneficial ownership reports. The rules will also require public companies to post these reports on their Web sites. Section 403 of the Sarbanes-Oxley Act of 2002 requires these rules. They are intended to complement the SEC's August 27, 2002 rules, which require Form 4 beneficial ownership reports to be filed within two business days following the transaction resulting in a change in ownership.

    Foreign private issuers, as defined in Rule 3b-4 promulgated under the Exchange Act, are not required to comply with the proposed rules, as the proposed rules do not affect the foreign private issuer exemption for compliance with Section 16.

    The SEC intends to implement the proposed rules as soon as practicable before July 30, 2003, and is accepting comments on the proposed rules through February 10, 2003. Although the final rule may not be in effect until the end of July, public companies should begin obtaining EDGAR filing codes for their Section 16 reporting persons as soon as possible so that those persons are ready to file electronically. Companies may also want to consider starting electronic filing and Web site posting of Section 16 reports now in order to minimize any implementation difficulties once the final rules are in effect.

    Required Electronic Filing of Forms 3, 4, and 5

    Currently, Section 16 reporting persons may file reports on Forms 3, 4 and 5 in paper form or electronically on the SEC's EDGAR system. The proposed rules will eliminate the paper filing option. They will not affect the current hardship exemptions from electronic filing. However, the SEC has indicated that hardship exemptions will be available "infrequently" and that failure to obtain an EDGAR identification number or access code in a timely manner will not justify a hardship exemption. The SEC has proposed minor changes to Forms 3, 4 and 5 to facilitate the electronic filing requirement.

    Electronic Filing Procedure

    By the effective date of the proposed rules, the SEC plans to implement a new Web-based filing system for these forms that will be used instead of the existing EDGARlink filing system. The initial version of the new Web-based system will permit reporting persons to access the SEC's Web site to fill out and submit the forms.

    In order to file, reporting persons will need the same codes that are currently required to file on EDGAR. Companies and other third-party service providers will continue to be able to submit forms on behalf of reporting persons. However, because the reporting person is ultimately legally responsible for the filing, the SEC's intention is to create a system that is relatively easy for reporting persons to use in filing their own reports.

    Required Web Site Posting of Forms 3, 4, and 5

    The proposed rules will also require that public companies post on their Web sites all Forms 3, 4 and 5 filed for their equity securities by the end of the business day after filing. A company can satisfy this requirement by providing access to the reports directly or by hyperlinking to the reports via a third-party service, so long as the following conditions are met:

    1. The forms are made available in the appropriate time frame;

    2. Access to the forms is free of charge to the user;

    3. The display format allows retrieval of all information in the forms;

    4. The medium to access the forms is not so burdensome that the intended users cannot effectively access the information provided;

    5. The access includes any exhibits or attachments;

    6. The forms are accessible for at least 12 months;

    7. Access to the forms is through the Web site address the issuer normally uses for disseminating information to investors; and

    8. Any hyperlink is directly to the forms (or to a list of the forms) and not just to the home page or general search page of the third-party service.

    Text of Proposed Rule

    This Update is only a summary of the SEC's proposed rules. You can find the full text of the proposed rules at http://www.sec.gov/rules/proposed/33-8170.htm.