Earlier this month, the SEC announced charges against six public companies for contributing to their insiders’ failure to properly file Form 4s or for violating the Item 405 proxy disclosure requirements for late insider filings. In addition to issuing cease-and-desist orders, the SEC imposed fines ranging from $75,000 to $150,000 per company.
This is noteworthy for a few reasons:
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The SEC’s charges were part of an unusual, sweeping enforcement initiative that also resulted in charges against 28 officers, directors and shareholders for stock ownership reporting violations. In the past, the SEC has not spent much time or resources enforcing such violations. Apparently, the SEC staff is now employing new “quantitative data sources and ranking algorithms” to root out repeat offenders and impose penalties. This initiative may indicate a new focus on these filings going forward.
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As far as I know, the SEC has never held a company responsible for an insider’s stock ownership reporting. In fact, it has been a consistent mantra within corporate legal departments and compliance manuals that such filings are the insider’s, not the company’s, responsibility, even though it is common practice for companies to prepare and file these reports for their insiders. In fact, some of the orders noted that the company caused the violations due to its negligence in performing certain filing-related tasks it had voluntarily agreed to do. Although these enforcement actions were directed at egregious violations, they nevertheless constitute a departure from previous staff practice.
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Item 405 requires specific proxy statement disclosure of any late filing or non-filing of Forms 3, 4 or 5 known to the company based on its review of its insiders’ filings. The staff is now emphasizing that boilerplate disclosure based on inadequate due diligence or non-specific disclosure (for example, “some of our insiders filed late”) does not comply and will no longer pass muster.
What does this mean for companies?
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Companies now should be sure that their compliance programs include effective preparation and filing of insider stock ownership reports. Although most companies already include this as part of their ongoing compliance, it’s time to re-visit those processes to be sure they are working satisfactorily.
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Insiders should be re-educated as to the importance of timely and accurate report filing, including the increased possibility of individual, and now company, liability.
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Be sure that your proxy statement preparation process includes a review of insider EDGAR filings in order to catch obvious filing violations.
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Update the company’s list of Section 16 insiders at least annually to be sure it reflects any changes in management structure, and be sure to notify all such persons that they are on that list.
