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Questions Posed for Today's Webcast
"Alan Dye on the Latest Section 16 Developments"
Wednesday, January 14, 2004
Now that the SEC has completed its overhaul of Section 16, companies
are facing a host of new challenges. As reflected by the many questions
posed daily on the electronic forums of Section16.net and Naspp.com, the
issues you face today vary widely in scope and complexity. To get the
latest from the expert, join:
Alan Dye, Partner, Hogan & Hartson
Note that questions submitted late may not appear below, but will be
included with the transcript that will be posted after the live webcast.
What’s New for FY 2003
A. Mandatory Electronic Filing
i. Reports must be filed electronically using EDGAR system
dedicated solely to Section 16 reports.
ii. EDGAR filing hours have been expanded, from 6:00 a.m.
to 10:00 p.m. Eastern time.
iii. SEC has offered relief from Item 405 disclosure for electronically
filed Forms 4 filed only one day late during the one-year period
beginning June 30, 2003.
iv. Issuers should consider including mitigating disclosure when
disclosing delinquencies attributable to difficulty complying with
two-day reporting or electronic filing requirements.
B. Issuer Website Posting
i. If issuer does not link to a third party website, issuer
should consider instructing insiders to submit copies of their reports
to the issuer electronically, pursuant to Rule 16a-3(e).
ii. SEC says issuer also should post the instruction on its
corporate website.
C. Levy v. Sterling Holding Company, LLC
Electronic Filing Issues
A. The two most common electronic filing errors are:
i. Submitting a filing using the wrong EDGAR access codes;
and
ii. Submitting the same report more than once.
B. If helping filers delete erroneous filings continues to
absorb a significant amount of the staff’s time, the staff may stop
allowing deletions of reports.
C. EDGAR Access Codes
i. Each insider must have his or her own CIK and CCC
number.
ii. Do not use the issuer’s EDGAR codes.
iii. Do not use the filing agent’s EDGAR codes.
iv. Do not use a joint filer’s EDGAR codes.
D. Avoiding Duplicative Filings
i. Do not become impatient, and re-file a report, if you do
not receive an immediate acceptance message from the EDGAR system.
The system sometimes is slow to send an acceptance message.
ii. After submitting a report, check the SEC’s website to
see if the filing was received. If it wasn’t, look at the issuer
filings to see if the report was filed using the issuer’s codes.
E. Filing Date Adjustments
i. Filing date adjustments will be made in response to
technical problems only.
ii. To obtain a filing date adjustment, the filer must
request an adjustment promptly, generally within one day, by fax.
F. The staff is interested in suggestions to improve the filing
system. They are particularly interested in knowing whether the
extended acceptance hours (until 10:00 p.m.) are useful.
Common Reporting Questions
A. When is a Form 5 required?
i. A Form 5 is required to be filed by any insider who
engaged in a transaction during the fiscal year that has not previously
been reported on Form 4 and that either (i) was exempt from Section
16(b) and permitted to be reported on Form 5 (e.g., gifts) or
(ii) should have been reported on Form 4, but was not.
ii. A Form 5 is not required to be filed to report gifts or
other Form 5 transactions that have already been reported.
iii. A Form 5 is not required to be filed to update the insider’s
holdings of shares under a 401(k) plan, dividend reinvestment plan, or
employee stock purchase plan.
iv. A Form 5 is not required to be filed to provide a list of all of
the insider’s holdings of issuer securities, in Table I or Table II.
B. When reporting the grant or exercise of an option, what
should be reported in Column 8 of Table II as the “price of derivative
security”?
i. Where the insider does not pay or receive money or other
consideration in connection with an option transaction, as in the case
of a grant or exercise, the insider should insert a zero in Column 8, or
footnote the column to explain that no money was paid or received for
the option.
ii. Do not repeat in Column 8 the exercise price of the
option.
iii. Do not leave Column 8 blank.
C. When reporting a transaction involving an employee stock
option, what should be reported in Column 9 of Table II as the “number
of derivative securities beneficially owned following the reported
transaction”?
i. Column 9 should report the number of shares underlying
the reported derivative security (and all other derivative securities of
the same class, if any) immediately following the reported transaction.
ii. Do not report in Column 9 the number of shares of
underlying stock for which the option was exercised.
iii. Do not report in Column 9 the aggregate number of shares
underlying all of the derivative securities the insider owns.
Year-End Compliance Checklist
An updated
year-end compliance checklist, for companies having a December 31
fiscal year end, has been posted on
Section16.net.
Questions
Early Item 405 Disclosure
1. Several of our insiders filed late Forms 4 during 2003,
and we will disclose those reporting delinquencies in the proxy
statement we are preparing for the 2004 meeting of shareholders.
After the end of the fiscal year, in early January 2004, one of our
insiders filed another late Form 4. We would like to disclose that
reporting delinquency in the current proxy statement, along with the
2003 delinquencies. Can we do that, and thereby avoid disclosing
the late filing in next year’s proxy statement?
Transfer of 10% Position to Wholly-owned Subsidiary
2. We are a publicly traded company and own more than 10%
of the outstanding stock of XYZ Corporation, which also is publicly
traded. We filed a Form 3 when we acquired the XYZ stock.
We now plan to create a wholly owned subsidiary and to transfer the XYZ
stock to that subsidiary. Will the transfer be exempt from
reporting under Rule 16a-13 as a change in form of beneficial ownership?
Mistaken Filing of Form 3
3. For reasons I still can’t figure out, while trying to
file a Form 4 for one of my insiders, I mistakenly re-filed his Form 3,
which was originally filed in 1999. Unfortunately, the Form 3, as
filed, omitted all of the information from both Table I and Table II
that was included in the original filing. Is there a way to get
the Form 3 deleted from the electronic filing system? If not, what
should I do, if anything?
Former Insider’s Resumption of Insider Status
4. One of our vice-presidents was considered a Section 16
officer until 1999, when we re-evaluated our list of Section 16 officers
and concluded that he should no longer be considered subject to Section
16. Since then, the vice-president’s policy-making function has
been expanded, and we plan to designate him as a Section 16 insider at
the next board meeting. The vice-president never filed an exit
report indicating that he was no longer subject to Section 16. Do
we need to file a new Form 3, or can we just resume filing Forms 4?
Date of Acquisition of Phantom Stock
5. We are implementing a non-qualified deferred
compensation plan which will offer phantom stock as an investment
alternative. To avoid having to file Forms 4 for all of our
participating insiders every pay period, we plan to accumulate insiders
contributions and sweep them into the phantom stock fund as of the last
day of each quarter, based on the closing price of our common stock on
that date. Our plan administrator tells us that it cannot generate
reports of the allocations of phantom stock until five days after the
end of the quarter. Can we measure the two-day deadline for filing
Forms 4 from the date the allocations are made?
Discretionary Transactions
6. One of our insiders plans to transfer money held in our
401(k) plan from a mutual fund to the company stock fund. I
understand that the resulting acquisition of company stock will be
exempt from Section 16(b) under Rule 16b-3(f) so long as the insider’s
transfer election is made at least six months after his last election to
engage in an opposite-way discretionary transaction under any of the
company’s employee benefit plans. Would the insider’s cashless
exercise of an employee’s stock option within the last six months, which
resulted in an open-market sale of common stock, be a “discretionary
transaction” that would make Rule 16b-3(f) unavailable to the 401(k)
plan transfer, or is a stock option plan not an “employee benefit plan”?
7. Our 401(k) plan has a company stock fund in which
several insiders participate. The plan administrator recently
decided to eliminate all company stock accounts below a certain size by
selling the company stock held in those accounts and transferring the
sale proceeds to a money market fund. Our plan documents permit
the plan administrator to do this unilaterally, so participants had no
voice in the decision to liquidate their accounts. We were unaware
of the administrator’s action and therefore did not file Forms 4 to
report the dispositions by insiders. Is it possible to take the
position that the sales were not “discretionary transactions” and
therefore were not reportable?
Deferred Reporting of Small Acquisitions
8. We maintain a non-qualified deferred compensation plan
under which participants can elect to defer compensation into a phantom
stock account. Deferred compensation is transmitted to the trustee
of a rabbi trust, who invests the money in common stock. In some
cases, purchases for the account of participating insiders amount to
less than $10,000. Is it possible to defer reporting these
acquisitions in reliance on Rule 16a-6? We recognize that the rule
no longer applies to purchases from the issuer, but the rabbi trust
purchases the shares in the open market.
Counting Business Days
9. Our compensation committee will meet on a Saturday this
year, and at the meeting will approve restricted stock grants to
executives. Will Forms 4 be due on Tuesday or Wednesday?
Forfeiture of Restricted Stock
10. Has the SEC staff offered any guidance regarding the
obligation to report a forfeiture of restricted stock that occurs
simultaneously with an insider’s termination of employment?
Joint and Group Reporting
11. We file joint reports on behalf of a group of
partnerships and individuals who collectively own more than 10% of a
public company’s common stock. One of the partnerships is bringing
on a new general partner who will become a member of the group but who
will not bring any new shares to the group’s collective ownership.
Must the new general partner file a Form 3, or can he instead be added
to the next Form 4 filed on behalf of the group?
Dispositions Pursuant to Domestic Relations Order
12. One of our insiders is getting a divorce, and the
domestic relations order will require him to transfer some of his stock
appreciation rights to his ex-wife.
(a) Will the insider be required to
report the transfer on Form 4 within two business days?
(b) Will the ex-wife’s exercise of the
SARs be reportable by the insider?
Pre-nuptial Agreement
13. If an insider marries someone who owns company stock,
but the parties enter into a pre-nuptial agreement pursuant to which
each waives any right to the other’s property owned prior to the
marriage, will the insider avoid being deemed to have a reportable
pecuniary interest in the spouse’s shares?
Joint Ownership
14. If an insider has individually owned shares reissued
in the name of the insider and his or her spouse, as joint owners, is
the reissuance reportable?
15. What if spouses who own shares jointly have them
reissued, half in the insider’s name and half in the spouse’s name?
Late Electronic Filing Before June 30, 2003
16. I filed a Form 4 electronically on May 22, 2003 to
report a transaction that occurred on May 20, 2003. The report was
not accepted until 5:35 p.m. Eastern time, 5 minutes after the cut-off
time, and therefore was not deemed officially filed until May 23, 2003
at 8:00 a.m. We are prepared to disclose this late filing in our
proxy statement, but I feel we shouldn't have to. The SEC had
already made the decision to extend the filing day until 10:00 p.m., but
the new deadline had not gone into effect. Is there a way to request
that the SEC allow an exception and not consider the filing to be
late?
Delinquency Box on Cover of Form 10-K
17. We filed an electronic report one day late after June
30 and therefore do not have to disclose it under Item 405. Can we
still check the box on the cover page of the Form 10-K that affirms no
delinquent filings?
Amendment of Vesting Terms
18. The Compensation Committee of our Board of Directors
is planning to shorten the vesting period for all outstanding restricted
stock from five years to three years. Will the amendment require
that we file Forms 4 for all affected insiders?
Reporting All Holdings
19. Do you consider it a “best practice” to list in every
Form 4 all of the insider’s holdings of both derivative and
non-derivative securities?
Amending a Paper Form 4
20 We need to amend a Form 4 that was filed in paper
before June 30, 2003. How should we do that?
Changes to Electronic Filing System
21. Is the SEC going to fix the electronic filing system
to eliminate the need to report a running tally in Column 5 of Table I,
allow footnotes to be attached to the boxes above Table I, allow
amendments that do not re-report an unchanged line item, and allow
insiders to leave the price column blank when reporting gifts, grants or
awards?
Date of Earliest Transaction When Adding A Transaction by
Amendment
22. If you amend a previously filed Form 4 to add a
transaction that occurred earlier than the transaction that you reported
in that Form 4, what would you show as the date of earliest transaction
reported in Box 3 of the amendment?
Form 5
23. Is it true that the SEC is going to eliminate Form 5?
Deemed Execution Date
24. What is the maximum number of days between an
execution date and a deemed execution date?
25. Is it necessary to report a deemed execution date for
an eligible transaction where the Form 4 is filed within two business
days of the actual execution date? What if the actual and deemed
execution dates are the same?
Hybrid Securities
26. Is it now settled that hybrid preferred stock, which
is convertible at a fixed price or, if lower, a floating price, is
reportable as a derivative security?
Gifts During Window Periods
27. Do you see any reason to prohibit insiders from making
gifts of company securities during a closed window period? How
about option exercises?
Named Executive Officers
28. Our CEO was terminated during the third quarter of
2003 but is being paid severance through June of 2004. The
severance paid to the former CEO in 2004 would make him one of the top
five highest paid employees in 2004. Do we need to include the
former CEO as a named executive officer in the proxy statement filed in
the spring of 2005?
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