TheCorporateCounsel.net

As John noted here and Alan noted over on the Section16.net blog, last week the SEC announced yet another enforcement sweep in the area of beneficial ownership and Section 16 reporting. As part of the sweep, the SEC announced settled charges against 23 entities and individuals for failure to timely report about their securities holdings and transactions in public company securities. The SEC brought similar “sweep” cases in this area in the past, including in 2014, 2015 and 2023. As in the past, the SEC has made clear that it uses the agency’s data analytics capabilities to identify the reporting violations that Enforcement then pursues.

Notable among these numerous cases is that, in two of the cases, the company had undertaken to make Section 16 filings for its insiders, but the filings were repeatedly late, and the company also failed to make required disclosures regarding delinquent Section 16 filings. As we all know, the individual insiders (e.g., officers, directors and greater than 10% shareholders) have the obligation to file their required Section 16 reports; however, in most situations that I have seen over the years, companies voluntarily take on the obligation to file the Section 16 reports for officers and directors (and sometimes significant shareholders). This voluntary undertaking happens out of “market” practice and a genuine desire on the part of the company to make things more convenient for the insiders, but as these recent SEC sweep cases demonstrate, a company can face some legal consequences for late filings and missed disclosures when things go awry.

In two of the cases involving a large number of late Section 16 filings, the SEC charged the companies who voluntarily accepted the responsibility to file the insider’s Section 16 reports with causing the Section 16(a) violations. As one Order Instituting Cease-and-Desist Proceedings notes:

14. Although the Commission encourages the practice of many issuers to assist insiders in complying with Section 16(a) filing requirements, issuers who voluntarily accept certain responsibilities and then act negligently in the performance of those tasks may be liable as a cause of Section 16(a) violations by insiders.

15. Since at least 2018, Respondent has voluntarily agreed with its officers and directors, as well as two other greater than 10% beneficial owners, to perform certain tasks in connection with the filing of Section 16(a) reports on their behalf, including the preparation and filing of all such reports for which Respondent had timely notification of the required information concerning the transactions. However, on multiple occasions, Respondent acted negligently in its performance of such tasks and was a cause of Legacy insiders failing to file Section 16(a) reports on a timely basis. The procedures and practices employed by Respondent were insufficient to the extent that those practices resulted in the recurrent failure to meet the two-business day filing deadline.

16. For example, between July 2019 and July 2022, Respondent’s insiders filed more than 200 untimely Forms 4 to report transactions related to, among other things, open-market stock sales and award grants of stock and options to officers and directors. Although Respondent had agreed to perform all tasks in connection with preparing and filing such reports, the reports were not timely filed due to Respondent’s negligent procedures and practices.

17. As a result of the conduct described above, Respondent was a cause of certain violations of Section 16(a) of the Exchange Act and Rule 16a-3 thereunder by Respondent’s insiders.

The company was also charged in this case with failing to disclose the late filings pursuant to Item 405 of Regulation S-K, noting:

11. Respondent failed to make the required Item 405 disclosure for its 2019, 2020, and 2021 fiscal years by improperly omitting it from its Forms 10-K filed with respect to such fiscal years. Respondent’s Forms 10-K filed with respect to such fiscal years purported to provide all Part III information required, such as information regarding its executive officers, directors, corporate governance and other required matters, but failed to include any Item 405 disclosure and did not state that it was incorporating by reference any information from other filings. An issuer may only omit the disclosure if there are no Section 16(a) delinquencies to report, and numerous Legacy insiders had multiple delinquent filings during each of its 2019, 2020, and 2021 fiscal years. Respondent also did not file an amendment to such Forms 10-K not later than 120 days after the end of the fiscal year covered by the Form 10-K to provide such information or file a definitive proxy statement no later than the end of the 120-day period that included such information.

These latest sweep cases emphasize the need to implement robust procedures and controls whenever a company voluntarily takes on the obligation to file SEC reports on behalf of insiders. While there is no one-size-fits-all approach that can apply to every situation, companies should consider:

1. Dedicating sufficient resources to the company’s Section 16 filing responsibilities, including providing sufficient staffing, training and resources such as Section16.net;

2. Establishing clear lines of responsibility for the preparation, review, approval and filing of the Section 16 reports in a timely manner;

3. Establishing a robust tracking system for monitoring transactions by and holdings of insiders that facilitates the prompt reporting of transactions;

4. Educating insiders and company personnel on the consequences of late or missed Section 16 filings and emphasizing the importance of timely communication with the company whenever transactions in company securities are contemplated;

5. Emphasizing to insiders the importance of promptly responding to requests to approve Section 16 reports that the company has prepared so those filings can be made within a two business day timeframe;

6. Leveraging the preclearance process applicable to insiders in the company’s insider trading policy as an “early warning system” for upcoming Section 16 filings;

7. Implementing appropriate follow-up procedures so that someone outside of the process of preparing the report is checking to see if the Section 16 report is on track to be timely submitted to the SEC;

8. Utilizing appropriate questions in D&O Questionnaires to solicit information about potential filing delinquencies so those delinquencies can be addressed and reported in accordance with the company’s disclosure obligation under Item 405 of Regulation S-K;

9. Establishing procedures for amending reports or filing late reports in a timely manner when it is determined that an error has occurred; and

10. Periodically reviewing the Section 16 filing process to determine if improvements can be made to the process and procedures.

Are there other procedures that you have put in place to facilitate the timely filing of Section 16 reports? Send them my way, I would love to hear from you!

– Dave Lynn