United States: Planning for Electronic Filing and Website Posting of Section 16(a) Reports

By Ronald Mueller, Brian Lane, Amy Goodman, Stanton Eigenbrodt, Elizabeth Ising and Ari Lanin.

On May 7, 2003, the Securities and Exchange Commission (the “SEC”) published final rules under Section 16(a) of the Securities Exchange Act of 1934 requiring all Forms 3, 4 and 5 to be filed electronically and requiring companies to provide a separate posting of those filings on their websites¹Mandatory electronic filing and website posting requirements become effective for filings made on or after Monday, June 30, 2003.  The text of the Adopting Release is available on the SEC's website at http://www.sec.gov/rules/final/33-8230.htm.  We discussed these requirements in our Client Alert dated April 24, 2003.  This memorandum reviews the final rules and based on experience to date provides additional guidance for companies and insiders as they prepare to comply with these new requirements. 

Directors, executive officers and greater than 10% owners of a registered class of equity securities (collectively, “Insiders”) are required to file Forms 3, 4 and 5 (“Section 16 Reports”) pursuant to Section 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules thereunder.  Pursuant to Section 403 of the Sarbanes-Oxley Act of 2002, the SEC last year amended the Section 16 rules to require that most transactions be reported on Forms 4 that are filed within two business days of the reportable event.  Currently, Section 16 Reports can be filed electronically or by paper.  The most recent rule revisions also implement the mandate of Section 403 of the Sarbanes-Oxley Act by:

• Requiring Insiders to file all Section 16 Reports electronically.  The SEC has established a new website exclusively for that purpose; and
  
  
• Requiring that issuers post on their websites or otherwise provide an electronic link to each Section 16 Report.  The SEC rules require these postings to occur not later than the end of the business day following the date the Section 16 Report is filed. 

Electronic Filing of Forms 3, 4 and 5

The SEC has established a separate website for electronic filing of Forms 3, 4 and 5, which may be accessed at https://www.onlineforms.edgarfiling.sec.gov/.  Under this new filing system, Insiders can type Section 16 transaction data into an on-line template, add any applicable attachments and file the report.  This new website has been active since May 5, 2003, and the SEC no longer accepts electronic Section 16 Report filings through its traditional Edgar system.  However, Section 16 Reports filed through this new system can be viewed by the public through the SEC’s regular Edgar system. 

While the SEC’s electronic filing template is somewhat intuitive, it has two main drawbacks.  First, the SEC’s filing template has a number of data fields for which a response is required in order for the filing to be accepted, even though these entries often were not applicable or were left blank in the context of paper filings of Section 16 Reports.  We discuss below the changes that currently are necessary for electronically filed Section 16 Reports in light of these system limitations.  Second, the SEC’s system is designed primarily for low volume use, such as the individual Insider who is reporting a single transaction.  Because it would require an inordinate amount of time to enter and file a number of Section 16 Reports on the same day, and because of other limitations to the SEC’s website filing system (for example, work cannot be saved, and the system automatically logs off a user if the system is inactive for an hour) we strongly encourage companies that prepare and file Section 16 Reports on behalf of their insiders to utilize a third party vendor’s software or filing service to complete Section 16 Reports.  While we do not recommend any particular third party filing system, Attachment A to this memorandum lists contact information for a variety of third party software or filing services. 

June 30, 2003 Effective Date

Until Friday, June 27, 2003, filings may be made on paper or electronically using the new website.  On and after Monday, June 30, 2003, the SEC will no longer accept paper Form 3, 4 and 5 filings, and all Section 16 filings must be made electronically.  This requirement will apply to all attachments to Forms 3, 4 and 5, including powers of attorney, and to amendments of paper-filed Section 16 Reports.

Extended Filing Hours

In adopting the new rules, the SEC recognized that the current Edgar filing deadline of 5:30 p.m. Eastern Time could be difficult to meet, especially for Insiders filing from the West Coast.  As a result, the final rules extend the deadline for electronic filing of Section 16 Reports to 10:00 p.m. Eastern time on the date on which a Section 16 Report is due.  Thus, if a Form 4 is filed electronically before 10:00 p.m. Eastern time on its due date, it will be treated as timely filed²These extended hours will go into effect on June 30, 2003.

While the filing hours have been extended, the SEC's technical support hours have not.  Technical support continues to be available on weekdays until 7:00 p.m. Eastern time.

Several important transition points should be noted regarding this extended deadline.  First, it only becomes effective on June 30, 2003.  Until June 27, 2003, if you file electronically after 5:30 p.m. the filing will not be accepted until the next business day and will be treated as filed on the next business day.  On and after June 30, 2003, filings are timely if they are transmitted for filing before 10:00 p.m. Eastern time.  Merely signing on to the SEC’s electronic website before 10:00 p.m. is not sufficient; a Section 16 Report form must be completed and transmitted before the 10:00 p.m. deadline to be deemed filed on that day.  Until the Edgar software is updated, which the SEC expects to happen in late July, forms filed after 5:30 p.m. Eastern time will be posted and given a filing date of the next day, but will be deemed timely filed.  In other words, if the filing has a time of receipt prior to 10 p.m. Eastern time on the SEC’s website, it will be deemed to have been filed that day³ Eventually, the SEC’s system will be revised to accept and immediately post for public access Section 16 filings that are made any time before 10:00 p.m. Eastern time. 

Adjustment of Filing Date for Technical Problems

If technical difficulties with electronic filing of a Section 16 Report result in a late filing, the filer can request that the Commission adjust the filing date under Rule 13(b) of Regulation S-T.  Rule 13(b) is available only if the filer attempted to file the Section 16 Report electronically with the SEC in a timely manner and was prevented from doing so due to technical difficulties beyond the filer's control.  A person requesting a filing date adjustment should fax a request letter to the SEC’s Office of EDGAR and Information Analysis (fax number 202-942-9542), identifying the late filing, describing the technical difficulty that caused the filing to be late, and confirming that the filing date adjustment is necessary to avoid the filing being late.  The SEC emphasized in the Adopting Release that failure to obtain Edgar filing codes for an Insider will not justify a filing date adjustment.  In light of the availability of Rule 13(b) filing date adjustments, the SEC rules do not provide an automatic deadline extension under Form TH for Section 16 Reports. 

Grace Period for Proxy Disclosure

An issuer's proxy statement and Form 10-K require disclosure under Item 405 of Regulation S-K of Insiders who file late Forms 3, 4 or 5.  Because the SEC recognizes that Insiders may experience temporary difficulties in gaining familiarity with and operating under the new filing system, the SEC has granted limited relief from the Item 405 disclosure requirement.  For Form 4 filings made between June 30, 2003 and June 30, 2004, issuers will not be required to provide Item 405 disclosure with respect to a late filing of a Form 4 if the form is filed no later than one business day following the filing due date.  It is important to note that this grace period:

• does not change the fact that a late filing is a violation of Section 16(a) of the Exchange Act, for which the SEC may bring an enforcement action; and
  
  
• applies only to Form 4 filings and not to Forms 3 and 5.

Amendments to Forms 3, 4 and 5

In connection with the foregoing changes to the Section 16 filing requirements, the SEC adopted various amendments to Forms 3, 4 and 5, including:

• Removing references to paper filings from the forms.
  
  
• Deleting Item 3 of Forms 3, 4 and 5 (IRS identification number), because the SEC noted that the item was voluntary in any event, and is not providing useful information.
  
  
• Clarifying in Form 4 that, for purposes of providing on the form the date of the transaction that triggered the reporting requirement (new Item 3 of Form 4), the date of the earliest transaction required to be reported should be used.
  
  
• Adding Instruction 8 to Form 3 and Instruction 9 to Forms 4 and 5 to expressly address the manner in which amendments to a previously filed Section 16 Report should be presented.  The instructions provide that if a Section 16 Report is being amended to include one or more transactions that were not reported on the form as originally filed, the filer should include on Table I or Table II of the amendment only the lines of information that previously were unreported and should not repeat lines of transaction information that were in the original form and are not being amended.  If a Section 16 Report is being amended to correct or change a line of transaction information that was reported incorrectly in the original form, the amended report should include only that line of information that is being amended.  Whenever a form is amended, the form is now required to include one or more footnotes explaining the amendment.  The SEC has stated informally that when amending Section 16 Reports for transactions that are reported on both Table I and Table II (such as an option exercise), the amended form should include only the lines of transaction information actually being corrected and should not repeat lines of information that originally were reported correctly.

Website Posting of Section 16(a) Reports

New Exchange Act Rule 16a-3(k) requires each issuer that maintains a company internet website to post on its website all Forms 3, 4 and 5 filed by the issuer’s Insiders with respect to the issuer’s securities.  The forms must be posted to the website by the end of the business day after filing.  A company’s website posting of Section 16 Reports should be in place by June 30, 2003, but need only provide access to Section 16 Reports filed on or after June 30, 2003.  Each Section 16 Report must remain available through the issuer’s website for at least a 12 month period after it is filed.

An issuer can satisfy this requirement either by posting the Section 16 Reports directly on its website or by hyperlinking to the reports via a third party, such as the SEC’s Edgar website, provided that it satisfies the following conditions:

• the filings must be available through the website by the end of the business day after the date on which the form is filed;
  
  
• the filings must be made available free of charge;
  
  
• the display format must allow retrieval of all information in the filings;
  
  
• access to the filings cannot be so burdensome that intended users cannot effectively access the information;
  
  
• the filings must include any attachments or exhibits;
  
  
• access to the forms must be through the issuer website address normally used for disseminating information to investors; and
  
  
• the hyperlink must be directly to the Section 16(a) filings, or a list of the filings⁴

If a hyperlink is used, it must be a separate hyperlink only for Section 16(a) filings and not a hyperlink to all of an issuer’s SEC filings.  It is possible to link to the Section 16 filings with respect to an issuer on the SEC’s Edgar website in a manner that does not require an update each time a new Section 16 Report is filed, by using the following URL and inserting the issuer’s ten-digit Edgar CIK code for the string of “z”:

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=zzzzzzzzzz&owner=only

In addition, the link must be clearly captioned to indicate that it is a link to the Section 16 filings of the issuer’s Insiders⁵

In connection with the requirement that the filings be posted to the website on the business day after filing, several commenters on the proposed rules express concern whether, especially with more than 10% shareholder Insiders, issuers could get notice of filings in time to post them on the website.  The SEC notes that an issuer should coordinate with its Insiders to receive reports in a medium that will enable the issuer to meet the deadline.  Of course, hyperlinking to the SEC’s Edgar website will satisfy the posting requirement without having to depend on Insiders to deliver filings to the issuer.

Practical Tips for Dealing with the New Rules

Obtaining Edgar Filing Codes

Companies need to make sure now that all of their officers and directors have Edgar CIK and CCC codes so that they will be able to file reports via the new system.  While the issuer can file the reports on behalf of the officers and directors, each officer and director need his or her own set of filing codes.  To obtain Edgar filing codes, a Form ID must be filed with the SEC.  The form is available on the SEC's website at http://www.sec.gov/about/forms/formid.pdf.  We understand from the SEC that once the Form ID is faxed to the SEC, it takes about a week or two to obtain the filing codes.  That time frame is very likely to lengthen during the first month or two of mandatory electronic filing.

When obtaining Edgar codes for an Insider, it is important to determine whether the Insider already has Edgar filing codes, which may be the case if the Insider is a director or executive for another public company.  If a Form ID is submitted for an Insider who already has Edgar codes, the existing codes will be cancelled and new codes issued.  This could cause the Insider to be late in filing Section 16 Reports with respect to another company if the Insider (or the other company, acting on the Insider’s behalf) seeks to file a Section 16 Report using the filing codes that have been cancelled.  In order to avoid confusion in obtaining Edgar filing codes, issuers that are assisting their Insiders should contact the corporate secretary’s office at other public companies where the Insider is also an executive officer or director, to inquire whether that other company has applied or is applying for Edgar codes on behalf of the Insider.  Companies that have already obtained Edgar filing codes for their Insiders should proactively contact and provide those codes to other public companies where the Insider is also an executive officer or director.

Given the tight filing deadlines for Forms 4, it is also increasingly important to obtain Edgar filing codes for new Insiders as soon as possible, perhaps even before the issuer actually hires or appoint a new executive or director.  For instance, while a Form 3 generally is not due until 10 days after the new Insider's start date, if the Insider receives an option grant on his or her hire date, a Form 4 would be due within two business days, which would not be possible if Edgar codes had not been obtained previously.

In past newsletters on Section 16 issues, we have suggested that an issuer designate more than one person to help its Insiders with their Section 16 filings.  Those designated persons should have their own Edgar codes as filing agents to allow them to make filings on behalf of Insiders.  Filing agent codes can be obtained using Form ID.

Transitioning from Paper to Electronic Filings

As noted above, the SEC’s new electronic filing system has a number of data fields for which a response is required in order for the filing to be accepted.  As a result, it is not possible to simply prepare a Form 3, 4 or 5 in the manner that was used for paper filing and then enter the information in exactly the same format for electronic filing.  Until the SEC completes further programming on the new electronic filing system, each line of data entered on a Form 4 or Form 5 must report a transaction and the post-transaction holdings.  This means that it is no longer possible to include a line of information showing only the Insider’s direct and indirect holdings, except for those holdings that are directly affected by the transaction reported on the form.  Instead, the form must disclose those holdings in a footnote.  For example, if an Insider reports an option exercise and sale of shares owned directly, then a footnote to the Form 4 will be necessary to report the Insider’s direct holdings through a 401(k) plan and to report indirect holdings by family members and trusts.  On the back of Forms 4 and 5, the new system currently requires a dollar figure for the exercise or conversion price of derivative securities and requires disclosure of a purchase price for derivative securities, meaning that Insiders may have to enter a zero with an explanatory footnote if the conversion price cannot be expressed in dollars or if there was no purchase price.  Insiders are also required to enter an exercisability and an expiration date.  The SEC has issued Frequently Asked Questions about the new rules, available on the SEC's website at http://www.sec.gov/divisions/corpfin/sec16faq.htm, which among other things covers some of the workarounds to address these issues. 

Powers of Attorney

The General Instructions to Forms 3, 4 and 5 permit Section 16 forms to be executed by a person authorized to sign for the reporting person, as long as the written authorization for such person (i) is attached to the form for which it is being used, or (ii) previously has been filed with the Commission and remains in effect, or (iii) is filed via an amendment to the form for which it is first used as soon as practicable after such use.  Before June 30, 2003, these powers of attorney may be filed in paper at the SEC.  On and after June 30, filers must attach an electronic copy of the power of attorney to a Section 16 Report.  We understand that the easiest way to do so is to place the power of attorney in a text file where none of the columns are more than 80 characters wide.  We suggest that clients submit to the SEC in paper format any revised or additional powers of attorney on or before Friday, June 27, 2003 to avoid the need thereafter to attach such documents to electronic filings.

The General Instructions also state that a power of attorney must “indicate that the reporting person authorizes and designates the named person or persons to file the Form on the reporting person's behalf, and state the duration of the authorization.”  However, the Staff recently indicated in their “Section 16 Electronic Reporting Frequently Asked Questions” that powers of attorney must include an “expiration date.”  The Staff's reference to an expiration date is unclear and, until further guidance is forthcoming, we do not recommend creating new powers of attorney to include an expiration date.  Instead, we believe that it is sufficient for a power of attorney to state that it remains in effect until revoked in writing or that it remains in effect for so long as the reporting person remains an Insider.

Preparing for Filing Electronically

Issuers that assist their Insiders in filing Section 16 Reports need to have trained personnel available who are able to make the required filings in a timely fashion.  If filing directly through the SEC’s new website, all of the information has to be manually input into the correct fields for each filing, unless third party software is used.  Thus, enough time should be allowed to make required filings prior to the 10 p.m. Eastern time deadline.  In addition, to the extent issuers have not already purchased third party software for their Section 16 reports, they may want to consider doing so.  Third party software can include such functions as keeping track of ownership information that will automatically populate the form, allowing users to save draft forms, and automatically accessing and filing the forms on the SEC website.  Regardless of whether relying directly on the SEC’s filing website or utilizing third party software, issuers should ensure that a number of people are trained in order to be able to make timely and accurate filings. 

Preparing for Section 16(a) Reports on Website

As discussed above, Section 16(a) filings for an issuer's Insiders will be required to be posted on an issuer's website starting on June 30, 2003.  A number of companies already have links to their Insiders' Section 16(a) filings on their websites.  Using an alternative approach, some companies, rather than posting a hyperlink, are putting the reports directly on their website and sorting them by Insider.  While the second approach makes it easier to find a particular Insider's filings, given the approaching deadline the most convenient way to quickly comply with the new requirement will be to put a hyperlink to the SEC Edgar website in the company's investor relations website.

ATTACHMENT A
THIRD PARTY SECTION 16 FILING SERVICES

Set forth below is a list and contact information for some of the vendors of Section 16 filing programs.  This information is provided solely as a convenience and is not intended to endorse any of the following systems.  Gibson, Dunn & Crutcher LLP cannot verify the effectiveness of these alternative systems and does not recommend any particular third party filing system.