Revised Form 4 and the Two-Day Filing DeadlineCorporate Securities
|Accelerated Filing under Section 16|
On August 27 and August 29, 2002, the SEC issued final rule and Form 4 amendments with respect to the accelerated filing deadline applicable to Section 16 filings, as required by the Sarbanes-Oxley Act of 2002. Effective August 29, 2002, most Form 4 transactions must be reported to the SEC before the end of the second business day following the day on which the transaction was executed. (For example, a transaction executed on Tuesday must be reported on Form 4 filed before 5:30 p.m., Washington D.C. time, on Thursday.) The new rules affect transactions subject to Section 16(a) for which the date of execution (trade date) is on or after August 29, 2002. The amendments do not affect transactions that occurred before August 29, 2002.
Who must file.
Section 16(a) of the Securities Exchange Act of 1934 requires every person who is a director, officer or 10% owner of an issuer with a class of securities registered under Section 12 of the Exchange Act to file a Form 4 with the SEC whenever there has been a change in ownership of the equity securities of that issuer.
The Sarbanes-Oxley Act shortened the time period for filing Form 4. Effective August 29, 2002, Form 4 transactions must be reported to the SEC before the end of the second business day following the day on which the transaction was executed or deemed to have been executed. Most changes in beneficial ownership must be reported on Form 4 within two business days after the trade date, which is before the "T+3" settlement date. As a result, Form 4 is no longer a monthly form. The revised Form 4 is posted on the SEC`s web site.
Transactions between officers or directors and the issuer.
Reportable transactions between officers or directors and the issuer that are exempt from the short-swing profit recovery provisions of Section 16 and were previously eligible for deferred reporting on Form 5 must be reported on Form 4 within two business days. As a result, grants, awards and other acquisitions from the issuer, dispositions to the issuer and discretionary transactions pursuant to employee benefit plans exempted by Rule 16b-3 are now reportable on Form 4 within two business days. Other transactions previously reportable on Form 5, such as gifts and certain acquisitions of less than $10,000 in market value, will remain reportable on Form 5. Transactions previously exempt from Section 16(a) reporting, including routine acquisitions under 401(k) plans, will remain exempt from reporting except when required to be included in total holdings of a reported security.
The SEC has provided a short extension to the filing deadline for two limited exceptions when the two-business day reporting period is not feasible. Neither exception is available if the reporting person has selected (and therefore knows) the date of transaction execution.
These specific exceptions are:
- Transactions that satisfy the affirmative defense conditions of Rule 10b5-1(c), which are transactions under a pre-existing trading arrangement that meets the safe harbor requirements under the insider trading rules (such as a Rule 10b5-1 selling plan). According to the SEC release, this exception may include reportable transactions under employee benefit plans and dividend or interest reinvestment plans if these transactions satisfy the requirements of Rule 10b5-1. In the release, the SEC reasoned that price movement in the market, rather than instructions from the reporting person, may determine the date of execution for these transactions.
- "Discretionary transactions," which are transactions under an employee benefit plan (such as an intra-plan transfer into or out of a company`s stock fund or a cash-out from a company`s stock fund), whether or not exempted under Rule 16b-3. In the release, the SEC reasoned that the plan`s administrative procedures, rather than the reporting person`s instructions, may determine the timing of transactions under an employee benefit plan.
The release does not provide the expected reporting relief for a single market order that is executed over a number of days. As a result, these transactions must be reported separately as they are executed, without the benefit of any extension of the filing deadline.
Deemed execution date.
For the two specific exceptions, the date on which the broker, dealer or plan administrator notifies the reporting person that a transaction has been executed is generally deemed the execution date. If the notification date is later than the third business day following the trade date, the date of execution is deemed to be on the third business day following the trade date of the transaction. The Form 4 is due on the second business day after this deemed execution date.
Arrangements to provide notice.
As stated in the SEC release, the reporting person is expected to make specific arrangements with the broker, dealer or plan administrator to provide actual notice of a transaction execution as quickly as possible. The SEC expects that brokers and dealers will provide the necessary notice to the reporting person either electronically or by telephone in addition to providing a written confirmation by mail.
Early filing of Form 3.
Under some circumstances, a reporting person may be required to file a Form 4 before the Form 3 (Initial Statement of Beneficial Ownership of Securities) is due. In this situation, the SEC encourages the reporting person to file the Form 3 along with the Form 4 at the time the Form 4 is due.
A company will continue to be obligated to disclose any late filings in its proxy statement. The company`s disclosure obligation has not been modified by the new rules.
Web site posting.
The SEC encourages companies to post Section 16(a) reports on their web sites before the July 30, 2003, statutory implementation date.
Fax and conformed signatures.
The form may continue to be filed with either fax or conformed signatures (signed with "/s/ Name"), as long as the filer retains the original signature for at least five years.
In order to comply with the accelerated filing requirement, the SEC encourages all officers and directors and companies filing on their behalf to file Form 4s electronically by EDGAR. Electronic filing of all Section 16(a) reports will be required no later than July 30, 2003 under the Sarbanes-Oxley Act and is expected to be required earlier by the SEC.
We recommend that companies apply now on Form ID to obtain EDGAR CIK and CCC codes for all of their Section 16 reporting persons. Form ID is available on the SEC web site. Form ID may be submitted to the SEC by fax at 202.504.2474 or 703.914.4240. Alternatively, A&K is available to assist clients in obtaining these numbers.
EDGAR filing codes.
Companies should be aware of the following problems associated with individual EDGAR filing codes.
- Use of company EDGAR filing codes for an individual filing. Insiders cannot use the company`s EDGAR filing codes for an individual Section 16 report. If an individual uses the company`s EDGAR filing codes, even if the filing is initially accepted by the EDGAR system, the individual filing will not be properly recorded and filed.
- Multiple EDGAR filing codes. Insiders sometimes do not realize that they already have EDGAR filing codes because a different issuer has filed Section 16(a) reports electronically for them in the past.
- If reports are filed under more than one EDGAR filing code, filings may not be properly recorded and filed.
- To avoid EDGAR filing problems, the company should make sure each Section 16 reporting person has no other EDGAR filing codes. To determine whether a CIK code has previously been assigned, the company may search the SEC`s searchable database.
- Individuals who have problems submitting filings because they have incorrectly received multiple EDGAR filing codes should call the SEC`s EDGAR filer support help line at 202.942.8900.
- The SEC release states that, when applying for EDGAR codes, the company should indicate whether the individual is a reporting person for any other issuer.
Additional SEC guidance.
The rules issued on August 27, 2002, are final rules required under Section 403 of the Sarbanes-Oxley Act.
- The SEC has requested comment on the new rules on or before September 30, 2002 and is expected to issue further guidance on the new rules and other Section 16 topics.
- The SEC has requested comment regarding whether any changes are required in the treatment of stock options under Section 16(a) and Section 16(b). In particular, the SEC has asked whether a six-month holding period should be required as a mandatory condition to exempt option grants under Rule 16b-3(d).
Links to SEC Releases. The SEC releases are posted at:
- www.sec.gov/rules/other/34-46313.htm dated August 6, 2002, and
- www.sec.gov/rules/final/34-46421.htm dated August 27, 2002.
A copy of the revised Form 4 is posted at:
Fax and E-mail Filing Assistance. Fax and e-mail filings. To assist our clients in meeting this accelerated deadline, the Corporate and Securities section of Andrews & Kurth L.L.P. is available to assist clients with fax and e-mail filings. Please contact your attorney at Andrews & Kurth for more information on this filing process.
Filing deadline. The filing deadline for Form 4 is 5:30 p.m., Washington, D.C. time (4:30 p.m. central time) on the second business day following the transaction date. Generally, D.C. traffic permitting, the Firm is able to make a timely filing if the form is received no later than one hour before the filing deadline (4:30 D.C. time, 3:30 central). Earlier arrangements are advised.
This E-Alert is intended to be only a general discussion and summary of the matters discussed, based on laws and regulations and practices currently in effect. For more information on the topics in this E-Alert, please contact your attorney at Andrews & Kurth L.L.P.