"Alan Dye on the Latest Section 16 Developments"

Wednesday, January 26, 2005

It’s time to file Forms 5, and the SEC’s Item 405 grace period for filing late Section 16(a) reports expired on June 30.  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.  Set forth below are some reminders and compliance tips from Alan Dye, a partner at Hogan & Hartson L.L.P., a member of the NASPP Advisory Board, and the overseer of Section16.net.  After the introduction is a list of questions submitted by NASPP members and Section16.net subscribers for discussion during today’s teleconference.  Both an audio archive and a transcript of the teleconference will be made available later this week on both Naspp.com and Section16.net.

Electronic Filing Reminders

i.                2004 was the first full year during which reports were required to be filed electronically using the EDGAR system dedicated solely to Section 16 reports.

ii.              The expanded filing hours for EDGAR continue to be from 6:00 a.m. to 10:00 p.m. Eastern time, even though the pilot program permitting filing from 6:00 a.m. to 8:00 a.m. has never been officially extended.

iii.            SEC relief from Item 405 disclosure for electronically filed Forms 4 filed only one day late does not apply to any late reports filed after June 30, 2004.

iv.             Issuers should consider including mitigating disclosure when disclosing delinquencies attributable to difficulty complying with two-day reporting or electronic filing requirements.  There are plenty of sample disclosures on Section16.net.

Proposed Amendments to Rules 16b-3 and Rule 16b-7

          The SEC’s proposed amendments to Rules 16b-3 and 16b-7, to address the Third Circuit’s holding in Levy v. Sterling Holding Company, still have not been adopted.

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.  After the proxy season is over, I also will post a sampling of Item 405 disclosures, by category.


When to File a Form 5 (and When to Obtain a No Filings Due Certificate)

          I am a relatively new employee and will be filing Forms 5 for my company for the first time this year.  In past years the former stock plan administrator would file a Form 5 for nearly every insider for the following activity which had not yet been reported on Forms 4:

(a)      gains in company stock holdings due to investment in company stock under the 401(k) plan;

(b)      purchase of stock under the company's qualified ESPP;

(c)      credit of dividends to deferred stock accounts ("dividend reinvestments")

          According to my outside counsel, transaction types (a) through (c) should only be reported whenever a Form 4 or 5 is otherwise required to be filed.  So, because there are no other reasons why the Forms 5 should be filed (we report our gifts on Forms 4), I see no reason to file any Forms 5 and instead should send each insider a certification that no Form 5 is needed.

          Our SVP Finance, who works closely with our board, would rather have me file a Form 5 for each director instead of bothering them with the certifications that no Form 5 is needed.  At the conference in San Francisco I got the impression that there was a lot of needless Form 5 filing going on. 

1.       Am I right that no Forms 5 are necessary if only reporting transactions 1 through 3 above?

2.       How important is it to the SEC that we stop filing forms needlessly?

Reporting Partially Exercised Options on Form 3

3.       In 2004, two officers who had been dropped from the Section 16 list in 2002 were added back to the list, and I filed another Form 3 for each of them. On Table II, I reported what remained of employee stock options that had previously been exercised in part.  Should I instead have reported the entire amount originally subject to the options? The reason for the question is that my option tracking software, which is still showing the exercised portions of the options as "holdings."

Use of Old EDGAR Codes

4.       I filed a Form 4 in August.  Recently I was told that the filing person's CIK & CCC had changed in June, two months before the filing.  But, EDGAR accepted the electronic filing in August with the reporting person's old codes.  I would have expected the filing to be rejected if the numbers had changed.  Do I need to be worried that I have violated some SEC (or other) requirement?  If so, please tell me how I can fix the situation.

Filing Software

5.       Now that everyone has found some means to file their Section 16 forms electronically, my question is who (vendor-wise) has really established themselves as the market leader in this space?  I've noticed that both the "Section 16 Filers Portal" as well as the "Section 16 Filer Price Comparison Chart" on the Section16.net website are out of date.  Some companies have come and gone, others have changed their pricing models, and some have even changed their entire products.  Where does this market stand now? 

Changing the Address in Box 1

6.       One of our insiders used to be an insider of another company, and that company obtained the insider’s EDGAR access codes, which we are now using.  When we prepare a report for the insider, the address of her former company shows up in Box 1.  How can we change the address to our business address?

Form ID

7.       How can we be expected to file a Form 4 two days after a new insider joins the company if the SEC can’t process a Form ID that fast?

Filing the Power of Attorney

8.       Is it ok to file a power of attorney with an insider’s Form 3, even if the insider, not the attorney-in-fact, signed the Form 3?

Rule 10b5-1 Transactions

9.       Are transactions effected for an insider’s account pursuant to a Rule 10b5-1 plan entered into with a broker subject to Section 16?

Restricted Stock Units

10.     Is a restricted stock unit a derivative security that should be reported in Table II, or is it acceptable to report RSUs in Table I?

11.     What if the insider defers receipt of the underlying stock upon vesting?

Directors by Deputization

12.     Can a director by deputization rely on Rule 16b-3 to exempt an acquisition of securities from the issuer?

Purchase in Directed Share Program

13.     One of our executives bought stock in a directed share program approved by the pricing committee in our IPO, and then sold stock less than six months later.  Can the purchase in the directed share program be considered exempt under Rule 16b-3?

Reimbursement of Section 16(b) Liability

14.     One of our insiders sold stock within six months of a non-exempt purchase, and we failed to identify the short-swing problem when we pre-cleared the sale.  Now a plaintiff’s attorney has submitted a letter demanding that we recover the profit.  Would it be permissible for the company to pay the claim, or to reimburse the insider the amount of the liability?

De Minimis Short-Swing Profits

15.     One of our insiders engaged in a purchase and sale within a period of less than six months, and we didn’t catch it until it was time to file the Form 4 for the second transaction.  The matchable trades resulted in a total profit of $1,200.  We’d rather not bother the insider by informing him of his 16(b) liability.  Will a plaintiff’s lawyer likely come after this claim anyway, or is it too small for them to pursue?

Insider’s Sale of Entity that Owns Issuer Stock

16.     One of our insiders, a ten percent owner, holds some of our stock indirectly through a wholly owned subsidiary.  If the insider sells the subsidiary, resulting in the insider’s disposition of our stock held by that subsidiary, will the sale be reportable on Form 4?  If so, will the sale be subject to Section 16(b)?

Grantor Retained Annuity Trusts

17.     Is an insider’s receipt of stock from a GRAT, as an in-kind distribution in payment of an annuity, reportable under Section 16(a) where the insider is the trustee of the trust and the sole annuitant, and the insider’s children hold the remainder interests?

18.     What if the insider removes issuer stock from the GRAT by substituting different assets having the same value?

8-K “Principal Officers” as Section 16 Insiders

19.     Is every person whose hiring triggers an obligation to file a Form 8-K under Item 5.02 also obligated to file a Form 3? 

20.     Does the instruction to Item 5.02 that allows a delay in filing a Form 8-K until the insider’s hiring is announced also allow delay in filing a Form 3?

General Counsel as Section 16 Insider

21.     Is the general counsel of a public company generally considered to be subject to Section 16?

Amendment of Vesting Terms of Outstanding Options

22.     We have been advised by our outside counsel that, if we amend outstanding stock options held by our executive officers to accelerate the vesting, we will need to disclose the amendment pursuant to Item 1.01 of Form 8-K.  Isn’t that inconsistent with the staff’s position that the vesting terms of an option are immaterial, and that amendments to the vesting terms therefore don’t have to be reported on Form 4 as a cancellation and regrant?

Section 16 Reporting Assistance as a Perquisite

23.     Since Section 16 reporting is a personal obligation of the insider, not the issuer, if the issuer prepares insiders’ reports for them, is that service disclosable as a perquisite in the issuer’s proxy statement?

Ownership of More than 10% of Class of Warrants

24.     We recently issued publicly traded warrants to purchase our common stock, as part of an offering of preferred stock.  The warrants are registered under Section 12(g) of the 1934 Act.  Is an owner of more than 10% of the warrants subject to Section 16 as a ten percent owner?

Death of Insider

25.     One of our insiders made a gift of stock that we planned to report on Form 5 after the end of the fiscal year, but the insider died before the end of the year.  Is there any need to report the gift?

Limited Partnership’s Pro Rata Distribution of Issuer Securities

26.     An investment fund owns more than ten percent of our common stock.  The general partner intends to distribute the shares to the partners (including the general partner) in a pro rata distribution based on their percentage interests in the partnership.  Will the fund’s distribution be a “sale” by the partnership, matchable with any purchases by the partnership within less than six months?

Who Should be Subject to Quarterly Blackouts?

27.     Most company’s have insider trading policies that impose black-out periods on certain “restricted persons”.   We struggle with the question of how wide a net to cast in deeming employees to be “restricted persons” and therefore subject to the blackouts – should we focus on everyone who might have access to material inside information or just those who routinely handle material inside information or just those who are in a policy making position? 

Average Price Reporting

28.     When an insider places a market sale order with a broker, the trade often is executed in a series of transactions at prices that are only pennies apart.  Is it permissible to report all sales that take place on the same day on a single line, and to report the weighted average sale price in Column 4 of Table I?

Column 8 of Table II

29.     When reporting an option grant or exercise, what should be shown in Column 8 of Table II as the price of the derivative security?

Column 9 of Table II

30.     When reporting the grant of an option, should Table II list all of the insider’s outstanding options, or should the number of shares underlying other options just be added to Column 9?

Deemed Execution Date

31.     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?