Originaly published on August 7, 2002
On August 6, 2002 the United States Securities and Exchange Commission (the "SEC") announced expedited rulemaking regarding the filing of ownership reports on Form 4 by Section 16 insiders (directors, executive officers and greater than 10% beneficial owners) under the Securities Exchange Act of 1934. The SEC intends to amend the Section 16(a) rules, including Rule 16a-3(f), to implement Section 403 of the Sarbanes-Oxley Act of 2002 (the "Act"), which shortened the due date for Section 16 insiders to file Section 16(a) transaction reports to two business days after executing the transaction. Section 403 of the Act requires accelerated filing of certain transactions occurring on or after August 29, 2002. Such reports currently must be filed on a monthly basis within 10 days after the close of each calendar month in which a transaction occurred.
The SEC's release suggests that the current Section 16(a) rules will continue in effect but will be modified in at least three ways. First, Rule 16a-3(f), as amended to implement the Act, would subject many, but not all, reportable insider transactions to two-business day reporting on Form 4. Second, the scope of transactions reportable within two business days may be expanded to include new transactions and possibly eliminate delayed reporting on Form 5 altogether. As a result, accelerated reporting would apply to transactions with the issuer exempted by Rule 16b-3, including transactions in issuer equity securities and derivative securities (including, without limitation, option and stock grants, exercises, and cancellations and regrants of stock options, including repricings). Third, while the Act authorizes the SEC to alter by rule the two-business day filing deadline where that deadline is not feasible, the SEC intends to alter the reporting deadline only for certain narrowly specified types of transactions where both objective criteria prevent the insider from controlling (and in many cases from knowing) the timing of transaction execution and the two-business day period is not feasible (e.g., single market orders executed over more than one day but less than a specified number of days, pre-arranged transactions outside of the knowledge of an insider and discretionary transactions involving an employee benefit plan).
It should be noted that the SEC has provided only general guidance to date indicating that companies should prepare for two-business day reporting of Section 16(a) reports to begin on August 29. Based on the advice thus far, it is clear that non-exempt transactions would be subject to two-business day reporting except in those narrow circumstances where the insider does not have knowledge of the timing of the transaction. In addition, other exceptions to the two-day filing requirement should be forthcoming in the next few weeks.
The SEC will continue to consider other proposals set forth in its April 12, 2002 rulemaking (Release No. 34-45742) to require accelerated disclosure of Rule 10b5-1(c) plans and of company loans and loan guarantees to directors and executive officers that are not prohibited by Section 402 of the Act. Also, while the SEC prepares over the next year for electronic filing of Forms 4 and website posting of such reports by both the SEC and issuers, the SEC will accept electronically-filed Section 16(a) reports that omit the standard box format and gridlines so long as the required information is presented in the proper order.
Comments on this rulemaking must be submitted to the SEC by August 15, 2002. The SEC intends to adopt revised Section 16(a) rules by August 29, 2002, the effective date of Section 403 of the Act. We will provide additional guidance once the final rules are adopted. The SEC's release is available at http://www.sec.gov/rules/other/34-46313.htm. Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing questions which they may have as to the amended Section 16(a) process. Please contact the corporate securities lawyer with whom you work if you have any questions.
Copyright © 2002 Gibson, Dunn & Crutcher LLP
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