United States: SEC Charges Insiders For Violations Of Section 16(a) And Section 13

It is unusual for the SEC to bring so many actions at once, and follows on the heels of the SEC stating that it is actively policing compliance with these provisions of the Exchange Act. All of which sends a clear signal to insiders that they need to file Form 4, Schedule 13D and Schedule 13G in a timely fashion, or risk enforcement action. For public companies that voluntarily assist insiders in complying with these filing requirements, the SEC orders make it clear that failure to comply with this voluntary responsibility carries with it serious consequences.

The SEC enforcement staff used quantitative data sources and ranking algorithms to identify individuals and companies with especially high rates of filing deficiencies. The resulting charges targeted companies ranging from micro-cap public companies to major brand name public companies and investment firms.

The SEC announced settlements with all but one of the individuals and entities charged. The settlements included penalties ranging from $25,000 to $150,000 per person and totaling to $2.6 million.

The charges were brought pursuant to violations of Sections 16(a), 13(d), and 13(g) of the Securities and Exchange Act of 1934. The SEC's Section 16(a) actions focused on the failure to file Form 4. Under Section 16(a), officers, directors, and beneficial owners of more than 10 percent of a company's stock are required to report their transactions by filing a Form 4 with the SEC within 2 business days. Sections 13(d) and (g) require beneficial owners of more than 5 percent to report their holdings by filing a Schedule 13D within 10 days of becoming a beneficial owner (or alternatively, when eligible, file a Schedule 13G within 45 days following the end of the year). In addition to the reporting requirements for directors, officers, and shareholders, the SEC rules also require a publicly-traded company to disclose in their proxy statement and Form 10-K any insiders who failed to file their reports on time. These rules apply irrespective of profits or an individual's reasons for acquiring holdings or engaging in transactions and the failure to timely file the required reports, even if inadvertent, constitute a violation of the SEC rules.

The purpose of these disclosures is to prevent corporate insiders from profiting from their access to confidential information. Further, these ownership reports give investors the opportunity to evaluate whether the holdings and transactions of company insiders could be indicative of the company's future prospects.

It is unusual for the SEC to bring so many actions at once, but it is consistent with the Commission's recent strategy to pursue all types of federal securities violations. Andrew J. Ceresney, Director of the SEC's Division of Enforcement announced that the SEC is "bringing these actions together to send a clear message about the importance of these filing provisions." He further added that "inadvertence is no defense to filing violations, and [the SEC] will vigorously police these sorts of violations through streamlined actions."

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