SEC Announces Enforcement Initiative for Delinquent Securities Holding and Trading Reporting by Corporate Insiders and Public Companies

by Wilson Sonsini Goodrich & Rosati
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On September 10, 2014, the Securities and Exchange Commission (SEC) announced charges against 13 officers or directors and 15 major shareholders of publicly traded companies for violating Section 16(a), Section 13(d), and/or Section 13(g) of the Securities Exchange Act of 1934, which require certain corporate insiders and major shareholders to timely report information about holdings and transactions in registered classes of company equity securities.The SEC also charged six public companies with contributing to the filing failures or neglecting to report the violations.

Section 16(a) requires that officers and directors and beneficial owners of more than 10 percent of a class of a company's registered shares file Forms 3, 4, and 5 with the SEC to report their beneficial ownership and changes in ownership. Form 3 must be filed no later than the effective date of the registration statement for the shares or, if the class of shares is already registered, within 10 days of the person becoming a director, officer, or beneficial owner. Form 4 must be filed within two business days of any change in ownership of the shares, subject to certain exceptions. Form 5 must be filed within 45 days after the calendar year end to report any transactions that should have been reported on Form 4 and certain transactions eligible for deferred reporting.

Section 13(d) and Section 13(g) require persons owning or acquiring more than 5 percent of a class of a company's registered shares to report their beneficial ownership by filing Schedule 13D or, if they are eligible, Schedule 13G. Unless eligible to file the shorter-form Schedule 13G, persons who acquire beneficial ownership of more than 5 percent of a class of registered equity securities must file Schedule 13D within 10 calendar days after the relevant trade date. Owners eligible to file Schedule 13G—generally speaking "passive investors"—depending on certain characteristics of their ownership, are required to file Schedule 13G within 10 days after the acquisition, within 10 days after the end of the month in which certain acquisitions were made, or within 45 days after the end of the calendar year.

In addition to the reporting obligations of officers, directors, and beneficial owners, publicly traded companies are required to disclose any late reporting under Section 16(a) by company insiders in their annual proxy statements and Form 10-K.

In the last several years, the SEC typically charged individuals and companies with Section 16(a) reporting violations only in connection with charges for violations of other federal securities laws. In this case, the SEC used quantitative analytics to identify individuals and companies whose reporting delinquencies were particularly prevalent and brought the actions to emphasize the importance of the filing requirements. Regarding the enforcement initiative, Andrew J. Ceresney, director of the SEC's enforcement division, said, "Officers, directors, major shareholders, and issuers should all take note: inadvertence is no defense to filing violations, and we will vigorously police these sorts of violations through streamlined actions."Observers have noted that the action is part of the SEC's "broken windows" strategy that SEC Chairwoman Mary Jo White announced almost a year ago and is named for the police strategy of reducing serious crime by not tolerating even the smallest infractions.

Of the 34 individuals and companies charged, all but one have settled with the SEC and agreed to pay fines varying from $25,000 to $150,000. The SEC will pursue the remaining charge in an administrative proceeding.

In light of the SEC's heightened focus on Section 16(a) and Section 13(d) and (g) reporting requirements and the current analytical tools at the SEC's disposal that facilitate data gathering in support of these enforcement actions, officers, directors, major beneficial owners, and issuers should ensure that they are familiar with the filing requirements and have established policies and procedures to guarantee theirtimely compliance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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