On August 27, 2002, the SEC adopted final rules implementing the accelerated filing deadlines mandated by the Sarbanes-Oxley Act of 2002 for reports of stock transactions by insiders. See SEC Release No. 34-46421 (August 27, 2002). These rules represent dramatic changes to Section 16 reporting requirements and, as expected, provide no relief from the compliance burdens of the earlier SEC proposal regarding Section 16 reporting. The new rules became effective on August 29, 2002.

Also, on August 27, 2002, the SEC announced the adoption of final rules that (1) accelerate the filing deadlines for annual reports on Form 10-K and quarterly reports on Form 10-Q under the Exchange Act and (2) implement the Section 302 certification requirements of the Sarbanes-Oxley Act. The SEC released its Section 302 certification rules this afternoon but has not yet released its rules governing the new periodic report filing deadlines. We will provide additional updates on these rules.

This memorandum summarizes the new Section 16 reporting requirements adopted by the SEC to implement to the Sarbanes-Oxley Act amendments to Section 16(a) of the Exchange Act.

Two Business Day Filing Requirement for All Form 4s

As previously reported, the Sarbanes-Oxley Act amended Section 16(a) by accelerating the filing deadline for Section 16 insider transaction reports to two business days after the transaction occurs. The SEC’s release conforms the filing rules for Form 4 reports to the accelerated deadline.

Subject to certain limited exceptions, the SEC’s amended rules require that all insider transactions occurring on or after August 29, 2002, and which are reportable under Section 16(a), must be reported on a Form 4 before the end of the second business day (i.e., 5:30 p.m., Eastern Time) following the day on which the transaction is executed. Transactions executed before August 29, 2002, may be reported as previously required on either a Form 4 no later than September 10, 2002, or on a deferred basis on Form 5.

The SEC’s release does not amend the Form 5 filing deadline for the limited number of insider transactions that continue to be eligible for deferred reporting under the new rules. Therefore, the Form 5 filing deadline will continue to be 45 days after the end of the issuer’s fiscal year.

Exemptions from the Two-Day Reporting Requirement

The Sarbanes-Oxley Act expressly authorized the SEC, by rule, to exempt insider transactions from the two-day reporting deadline if the SEC determines that compliance with the deadline is not feasible. The SEC exercised this rulemaking authority by granting a limited time extension for two narrow classes of transactions:

  • Transactions under Rule 10b5-1 trading plans are exempted, provided the insider does not determine the date on which transactions are executed. For example, a trading plan transaction that is triggered by price movements in the market would fall within this exemption. However, trading plan transactions that occur on dates fixed or otherwise determined by the issuer would not be exempted.
  • “Discretionary Transactions” under employee benefit plans are also exempted, provided the insider does not select the date on which the transactions are effected. Under Rule 16b-3, “Discretionary Transactions” generally include insider-directed transfers into or out of company stock funds under employee benefit plans.

For purposes of Section 16(a) reporting, such transactions will be deemed to have been executed on the earlier of: (1) the date the executing broker, dealer or plan administrator, as the case may be, notifies the insider that the transaction has been executed or (2) the third business day following the actual trade date (not the settlement date). The Form 4 reporting deadline, in turn, is the end of the second business day following the deemed execution date.

In its release, the SEC states that brokers, dealers and plan administrators “may use any means of communication, including oral, paper or electronic means, to notify the reporting person that the transaction has been executed.” However, recognizing that conventional written notice is not likely to be timely, the SEC recommends that insiders make specific arrangements for prompt electronic or telephonic notice of transactions.

The SEC considered, but rejected, a third exemption that would have covered transactions pursuant to a single market order that is executed over more than one day. The SEC concluded that it is feasible for insiders to report these transactions in compliance with the two-day filing requirement as they are executed.

Form 4 Reporting for Insider Transactions with the Issuer

The SEC also amended Rule 16a-3 to make reportable on Form 4 various transactions between an issuer and its insiders that previously were eligible for deferred reporting on Form 5. Specifically, the following insider transactions must now be reported on Form 4 subject to the two-day filing deadline (except to the extent a transaction qualifies for one of the exemptions discussed above):

  • grants, awards and other acquisitions from the issuer under Rule 16b-3(d), such as stock option grants and restricted stock grants;
  • dispositions to the issuer under Rule 16b-3(e), such as shares surrendered to the issuer in satisfaction of tax withholding obligations, in payment of the option exercise price or in connection with option repricings; and
  • Discretionary Transactions under Rule 16b-3(f).

Acquisitions pursuant to qualified employee benefit plans, excess benefit plans, stock purchase plans and the reinvestment of dividends or interest pursuant to broad-based dividend or interest reinvestment plans will remain exempt from Section 16(a) reporting. In contrast, transactions pursuant to non-qualified deferred compensation plans and other dividend or interest reinvestment plan transactions, such as acquisitions pursuant to voluntary contributions of additional funds, must be reported on Form 4 within the two-day filing deadline (except to the extent the transaction qualifies for the Rule 10b5-1 exemption discussed above).

Transactions Which Remain Eligible for Form 5

Effective as of August 29, 2002, only a very few insider transactions will remain eligible for deferred reporting on Form 5. These transactions include:

  • acquisitions or dispositions by gift or inheritance; and
  • “small” acquisitions under Rule 16a-6 (i.e., acquisitions which, when aggregated with other acquisitions of the same security during the preceding six months, do not exceed $10,000 in market value, provided the insider does not make any disposition within six months thereafter which is subject to Section 16(b)).

Although Rule 16a-6 continues in effect, the SEC adopted conforming amendments to the rule to require an insider to report all such small acquisitions on Form 4 no later than the end of the second business day after the date on which the deferred reporting conditions cease to be satisfied. In addition, Rule 16a-6 will not be available to defer reporting of an insider’s small acquisitions directly from the issuer or an employee benefit plan sponsored by the issuer.

Insiders will continue to be required to use Form 5 for year-end disclosure of late transaction reports.

Conforming Amendments to Forms 4 and 5

In connection with the various rule amendments, the SEC also adopted conforming amendments to Forms 4 and 5. The SEC stated that it plans to publish new forms “as soon as possible.” In the meantime, insiders are directed to continue using the old forms subject to certain modifications described in the SEC’s release.

Electronic Filing and Website Posting

The Sarbanes-Oxley Act requires all insider trading reports to be filed electronically on EDGAR and simultaneously made available on company websites no later than July 30, 2003. In its release, the SEC reiterated its intention to begin rulemaking on this subject in order to assure adoption within the one-year deadline.

Meanwhile, the SEC again encouraged insiders voluntarily to file their Section 16(a) reports via EDGAR, and for companies voluntarily to post the Section 16(a) reports of their insiders on their websites. To facilitate voluntary filings, the SEC will accept electronically filed reports that do not contain all of the boxes and lines which appears on the SEC’s forms, so long as the captions of the items and all required information is presented in the proper order.

Compliance Measures

Our August 16, 2002, memorandum entitled “Sarbanes-Oxley’s New Accelerated Insider Reporting Rules: What You Need To Know Now” identified a number of specific compliance measures that U.S. public companies should implement now to avoid Section 16 reporting violations for their insiders. (For an electronic copy of this Memorandum, visit our website at www.dorseylaw.com, click on the link to “Firm News” and scroll down to “Corporate Advice Memos”).

As expected, the final Section 16 reporting rules are substantially consistent with the SEC’s earlier proposals and do not ease in any respect the anticipated compliance hardships. We recommend that you contact the Dorsey & Whitney attorney with whom you work if you have any questions or require any assistance in adapting your company’s compliance policies to the new rules.

August 29, 2002