United States: SEC Enforcement Actions Emphasize Importance Of Stock Ownership Reporting Obligations For Public Companies And Insiders

On September 10, 2014, the Securities and Exchange Commission (SEC) announced charges against 28 officers, directors and major stockholders of public companies for violating Section 16(a) and/or Section 13(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act). These rules require prompt reporting about holdings and transactions in the stock of publicly traded companies. Six public companies were also sanctioned for contributing to filing failures by insiders or failing to report their insiders' filing deficiencies. A total of 33 out of these 34 individuals and companies agreed to settle charges and pay financial penalties totaling $2.6 million.1  
 
SEC's "Broken Windows" Strategy and "Quantitative Analytics" Tools Prompt New Look at Issuers' and Insiders' Filing Obligations
 
These sweeping actions are another step in the SEC's initiative to "fix broken windows," as described by SEC Chair Mary Jo White in her public remarks on October 9, 2013. White explained the SEC's efforts to ensure that its enforcement program is pursuing all types of violations of the federal securities laws, big and small, thus "casting its nets wider, and into smaller spaces, paying attention to violators and violations regardless of size."2 She noted that the SEC is streamlining its investigations, particularly those involving strict liability where there is no need to prove intent, such as in the case of Exchange Act Section 16(a) and Section 13(d) reporting violations. This is a noteworthy change in that these types of reporting violations, by themselves, traditionally have not been a source of significant SEC enforcement interest in the absence of other alleged violations or bad facts. 
 
In announcing these charges, Andrew Ceresney, Director of the SEC's Division of Enforcement, noted that the SEC brought these actions together to send a clear message about the importance of abiding by the reporting requirements of the federal securities laws. Ceresney issued a stern warning: "Officers, directors, major shareholders and issuers should all take note: inadvertence is no defense to filing violations and we will rigorously police these sorts of violations through streamlined actions."3   
 
It is important for public companies to understand the SEC enforcement staff's use of quantitative data sources and ranking algorithms to identify individuals and companies with notably high rates of filing deficiencies. In particular, Ceresney pointed to using "quantitative analytics," which allow the staff to make allegations on a broad scale with limited resources.4 This is consistent with White's previous statements that the SEC would harness the power of enhanced technologies as a "force multiplier" in the SEC's effort to let market participants know that it is "looking and pursing charges in all directions."5  
 
What the Rules Require When Officers, Directors and Major Stockholders Trade
 
Section 16(a) and the rules promulgated thereunder require each officer, director and greater-than-10% stockholder (collectively, insiders) of a public company to file Forms 4 with the SEC within two business days after the date of certain transactions resulting in a change in beneficial ownership of the company's equity securities. Forms 5 must be filed with the SEC within 45 days after the end of each fiscal year for certain types of stock transactions that the SEC has designated as eligible for a Form 5 filing, rather than a Form 4 filing. In addition, insiders must also report on a Form 5 all transactions that occurred during the fiscal year that should have been, but were not, reported earlier on a Form 4.
 
In general, Section 13(d) and the rules promulgated thereunder require that any person or entity (or group of persons or entities acting together) who makes an acquisition of common stock which results in such person or group owning more than 5% of the outstanding shares of common stock of the company must report the ownership of company securities by filing either a Schedule 13D or Schedule 13G with the SEC.  
 
One principal function of Sections 16(a) and 13(d) is to enable information to rapidly enter the public market about insider transactions and significant changes in stock ownership. Violations of Sections 16(a) and 13(d) do not require a showing of intentional conduct, and a failure to timely file a report, even if inadvertent, constitutes a violation.6 
 
SEC Holds Insiders Responsible for Failing to File, Even Where Companies Took Responsibility for Preparing Reports
 
The SEC's orders with respect to individuals and investment firms generally alleged violations of Section 16(a) of the Exchange Act for failing to timely file reports of transactions on Forms 4 and annual statements of beneficial ownership on Form 5, and of Exchange Act Section 13(d) for failing to file timely reports of beneficial ownership of more than 5% of a company's stock. The penalties for these violations ranged from $25,000 to $120,000. The SEC's enforcement division will litigate the charges against one individual.7 
 
The SEC was not persuaded by the defense raised by many insiders that their delinquent filings resulted from failure on the part of the public company issuer that took on responsibility for the preparation or filing of these reports. The SEC consistently stated in its findings that "the failure by an issuer to inform an insider that he or she is subject to Section 16, and the failure of company personnel to make timely filings on an insider's behalf after being timely informed of such transactions by the insider, does not excuse an insider's violations of reporting requirements. An insider retains legal responsibility for filing requirements, insuring the obligation to assure that the filing is timely and accurately made."8 In some cases, the SEC specifically noted that respondents took inadequate and ineffective steps to monitor whether timely and accurate filings were made on their behalf.
 
SEC Also Takes Public Companies to Task for Failing to Timely Report
 
Despite confirming that the responsibility for timely filings ultimately remains with the insider, the SEC also levied fines against six publicly traded companies for (1) being the cause of filing failures by insiders and/or (2) failing to report their insiders' filing deficiencies. In particular, the SEC alleged that these companies voluntarily accepted certain responsibilities for insiders' Section 16 filings and then acted negligently in the performance of those tasks, holding such companies liable as a cause of Section 16(a) violations. The SEC noted in almost all of these cases that the issuer had voluntarily agreed with officers and directors to prepare and file reports, but repeatedly failed to perform the agreed-upon tasks on a timely basis and employed procedures that were insufficient and negligent.
 
The SEC also charged these companies with a failure to comply with Form 10-K and/or proxy statement disclosure requirements regarding late or missing Section 16 filings, which are set forth in Item 405 of Regulation S-K. As a means of increasing compliance by insiders with their reporting obligations under Section 16(a), the SEC's rules require all public companies to disclose in their proxy statements and annual reports on Form 10 K the names of all insiders who failed to file timely reports during the previous fiscal year, and the number of late or unfiled reports by each such insider. False or misleading Item 405 disclosure can constitute a violation of Section 13(a) of the Exchange Act and Rule 13a-1, which require issuers to include specified information in their annual reports in conformity with SEC requirements. As with Section 16(a) and 13(d), violations of Section 13(a) do not require a showing of intentional conduct. The penalties for these violations ranged from $75,000 to $150,000.9 
 
Lessons Learned
 
Issuers and insiders are advised to heed the warnings of White and Ceresney and be proactive in establishing and following procedures for compliance with Sections 16(a), 13(a) and 13(d) and the Form 10-K and proxy statement disclosure requirements in Item 405:
 

  • Insiders bear ultimate responsibility for the timeliness of their filings and must ensure timely and accurate processing and reporting of transactions, even when relying on the assistance of issuers or brokers with respect to such reporting.
     
  • Issuers that assume responsibility for preparing, processing and/or filing reports for insiders must ensure that they have sufficient policies and procedures in place to timely and accurately complete such filings.
     
  • Issuers must ensure that they have in place policies and practices to facilitate accurate, timely and complete disclosure of late Section 16(a) reports in their annual reports and proxy statements.
     
  • While insiders and issuers always have been advised to make their required filings on time, the SEC now appears more focused on these types of reporting violations than in the past, regardless of whether or not they are linked with other alleged violations.
     
  • More broadly, these actions reflect the SEC's ability to leverage technology to target an area of concern, and market participants and practitioners should expect to see other examples. Prior to these actions, the SEC had touted such acronyms as MIDAS (Market Information Data Analytics System), ABAP (Advanced Bluesheet Analysis Program), CAT (Consolidated Audit Trail), API (Aberrational Performance Inquiry), AQM (Accounting Quality Model) and NEAT (National Exam Analytics Tool) as tools to help the SEC and its staff comb through a variety of information to detect a range of potential illegal activities from insider trading to accounting and disclosure fraud.10 These efforts reflect the SEC's strong commitment to significant investment in sophisticated technology to enforce the federal securities laws.

1 "SEC Announces Charges Against Corporate Insiders for Violating Laws Requiring Prompt Reporting of Transactions and Holdings," SEC Press Release No. 2014-190 (September 10, 2014), available at www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678. In a separate release on the same day, the SEC also announced that it had charged ACT Biotech and its former CEO with violating, among other things, the anti-fraud provisions of the securities laws for misleading statements in annual reports and proxy statements about compliance with the reporting provisions of Section 16(a). The CEO agreed to pay a $175,000 penalty and ACT Biotech agreed to pay a $375,000 penalty and retain an independent consultant to conduct a review of its Section 16(a) reporting and compliance procedures. "SEC Announces Fraud Charges Against Biotech Company and Former Executive Who Failed to Report Insider Stock Sales," SEC Press Release No. 2014-191 (September 10, 2014), available at www.sec.gov/News/PressRelease/Detail/PressRelease/1370542903208.

2 See Mary Jo White, Remarks at Securities Enforcement Forum 2013, Washington D.C., Oct. 9, 2013, available at www.sec.gov/News/Speech/Detail/Speech/1370539872100.

3 "SEC Announces Charges Against Corporate Insiders for Violating Laws Requiring Prompt Reporting of Transactions and Holdings," SEC Press Release No. 2014-190 (September 10, 2014), available at www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678.

4 Richard Hill, "33 Insiders, Companies Settle Late Reporting Allegations in SEC Sweep," Bloomberg BNA Daily Report for Executives, (September 10, 2014).

5 See Mary Jo White, Remarks at Securities Enforcement Forum 2013, Washington D.C., Oct. 9, 2013, available at www.sec.gov/News/Speech/Detail/Speech/1370539872100. White also identified incentivizing whistleblowers, leveraging the SEC exam program, collaborating with criminal and other regulatory authorities, and focusing on gatekeepers as other force multipliers.

6 "SEC Announces Charges Against Corporate Insiders for Violating Laws Requiring Prompt Reporting of Transactions and Holdings," SEC Press Release No. 2014-190 (September 10, 2014), available at www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678. Also see SEC v. Forsyth, Release No. 73059 (September 10, 2014), fn. 4.

7 "SEC Announces Charges Against Corporate Insiders for Violating Laws Requiring Prompt Reporting of Transactions and Holdings," SEC Press Release No. 2014-190 (September 10, 2014), available at www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678.

8 See SEC v. Arling, Release No. 73058 (September 10, 2014), fn. 5, available at www.sec.gov/litigation/admin/2014/34-73058.pdf.

9 "SEC Announces Charges Against Corporate Insiders for Violating Laws Requiring Prompt Reporting of Transactions and Holdings," SEC Press Release No. 2014-190 (September 10, 2014), available at www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678.

10 See Mary Jo White, Remarks at Securities Enforcement Forum 2013, Washington D.C., Oct. 9, 2013, available at www.sec.gov/News/Speech/Detail/Speech/1370539872100, and Elisse Walter, Chairman, SEC, "Harnessing Tomorrow's Technology for Today's Investors and Markets," (Feb. 19, 2013), available at www.sec.gov/News/Speech/Detail/Speech/1365171492300.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Douglas J. Davison
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions