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November 14, 2024

Beneficial Ownership Reporting: Lessons From Recent Enforcement Actions

A recent White & Case memo reviews the SEC’s enforcement sweep targeting delinquent beneficial ownership reports and provides insight for public companies and their insiders on the lessons to be learned from those enforcement actions. Here’s an excerpt with a couple of pieces of specific advice :

For public companies and investors, confirm that the legal and/or compliance team responsible for filings understands the Section 13 and Section 16 reporting requirements. Section 13 and 16 reporting can be complex, and it is important that those responsible at public companies or investors are well educated on the nuances of these requirements, to avoid missing necessary filings. For example, in one case, the investments at issue were managed by a business unit of the investor that did not typically invest in public equities, and the unit’s internal processes did not timely identify the need to make the required filings.

Steps should be taken to ensure that all relevant personnel are educated regarding their obligations under, as applies depending on the public company or investor’s profile, Section 13(d), 13(g), 13(f), 13(h), and/or 16(a) filing obligations. This could include brokers, financial advisors and estate planning advisors who may assist the insiders in their transactions involving company securities, as these professionals may be unfamiliar with these requirements. In addition, make sure that anyone involved in these filings is aware of the new Schedule 13D and 13G filing deadlines.

For public companies specifically, ensure your Item 405 disclosures comply with the requirements. The SEC has turned its focus to correct Item 405 disclosures. As a reminder, Item 405 disclosure in Form 10-Ks or annual meeting proxy statements of any late filings or known failures to file must (i) identify by name each insider who failed to file on a timely basis any Forms 3, 4, or 5 during the most recent fiscal year or prior fiscal years and (ii) set forth the number of late reports, the number of late reported transactions, and any known failure to file. As highlighted in the recent enforcement actions, the disclosure must identify all of the late-reported transactions, not just the number of late reported filings.

Other lessons in the memo include the need to confirm and continue to track insiders’ beneficial ownership holdings through D&O questionnaires and by monitoring equity award grant and vesting dates, and to ensure robust internal controls around potential filing triggers.

John Jenkins