On Wednesday, the SEC announced that it had levied charges against (i) 28 officers, directors and major shareholders of public companies for failing to file timely reports regarding their holdings and transactions in their respective companies' equity securities and (ii) six public companies for contributing to filing failures by their insiders or failing to report their insiders' filing delinquencies.  Emphasizing the importance of filing ownership reports in a timely manner, Andrew J. Ceresney, Director of the SEC's Division of Enforcement, stated that "[o]fficers, 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."  The head of the SEC's New York Regional Office conducting the investigation noted that "[t]he reporting requirements in the federal securities laws are not mere suggestions, they are legal obligations that must be obeyed.  Those who fail to do so run the risk of facing an SEC enforcement action."

A copy of the press release announcing the charges can be found here.

Who Are "Insiders" and What Are They Required to File?

Federal securities laws generally require directors, key officers and certain beneficial owners (collectively referred to as "Insiders") to file ownership reports, including Forms 3, 4 and 5 and Schedules 13D and 13G, regarding their positions in a company's equity securities at certain specified times, including  upon the closing of certain transactions in a company's equity securities.  Directors, key officers and owners of more than 10% of a public company's outstanding equity securities are required to make Form 3, 4 and 5 filings. Persons or groups who directly or indirectly acquire or have ownership of more than 5% of any class of a company's equity securities are required to make Schedule 13D and 13G filings.  These ownership reports seek to (i) allow investors to evaluate whether the holdings and transactions of Insiders are indicative of the company's future prospects, (ii) discourage Insiders from profiting by trading on the basis of superior information that they may have obtained through their position with the company and (iii) require beneficial owners of significant positions in a public company's securities to disclose their intent, if any, to influence the company with respect to their ownership of equity securities. 

How Did the SEC Identify these Repeated Filing Failures?

The charges stem from an SEC enforcement initiative focusing on the delinquent filing of, or the failure to file, certain of the ownership reports discussed above, namely Forms 4 and Schedules 13D and 13G.  To implement the enforcement initiative, the SEC used "quantitative analytics" and "ranking algorithms" to identify Insiders and beneficial owners who repeatedly failed to file ownership reports in a timely manner.  The enforcement initiative revealed many filings that were delayed by weeks, months, or even years, in clear violation of reporting obligations.  Companies that failed to report their Insiders' filing delinquencies in their annual proxy statements were also subject to enforcement.

What Were the Penalties Stemming from the Charges?

Thirty-three of the 34 offenders have agreed to settle the charges, refrain from future filing violations and pay financial penalties totaling $2.6 million.  One Insider has contested the charges levied against him.

Are There Practical Tips to Ensure That Ownership Reports Are Timely Filed?

Yes.  The obligation to file ownership reports, including Forms 3, 4 and 5 and Schedules 13D and 13G, lies with the Insider or beneficial owner.  However, companies and Insiders may wish to reconsider or implement the following:

  • Review the triggering events and deadlines for the various ownership reports:
    -  Form 3:  This initial ownership report must be filed within 10 calendar days of becoming an Insider.
    - Form 4:  This current ownership report is triggered by a trade or other acquisition or disposition of company equity securities by an Insider and must be filed within two business days.
    - Form 5:  This annual ownership report is required to report certain transactions not required to be reported on Form 4 (including gifts, inheritances and certain smaller acquisitions) and must be filed within 45 calendar days after the end of the company's fiscal year.
    - Schedule 13G:  This annual report applies to certain "passive" beneficial owners and must be filed within 45 calendar days following the end of the calendar year and in the event of certain transactions.
    - Schedule 13D:  This more lengthy annual report applies to certain "nonpassive" beneficial owners and must be filed within 45 calendar days following the end of the calendar year and in the event of certain transactions.
  • Designate a single officer to oversee and monitor the timely filing of Insider ownership reports.
  • Consider requiring preclearance of transactions by Insiders and their family members.
  • Establish relationships and procedures with approved brokers and encourage Insiders to make trades in company equity securities through those approved brokers.
  • Obtain a power of attorney from each Insider that allows an officer of the company to sign ownership reports on behalf of that Insider.
  • Apply for SEC EDGAR filing codes for new Insiders well in advance of filing deadlines, as this process can take several days.
  • Ensure that the board of directors annually approves a list of those persons deemed to be Insiders who must file ownership reports.
  • Ensure that D&O questionnaires (i) ask each director and officer to list all changes in beneficial ownership of the company's equity securities that occurred during the previous fiscal year, and (ii) include a certification or, at a minimum, a question pursuant to which the Insider may indicate that no ownership report is required.
  • Monitor incentive and company-sponsored plan transactions to determine independently whether an Insider may have a reporting obligation based on transactions that occurred under a company plan.

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