Get that Form 4 Filed!

The SEC recently announced civil charges against 28 officers, directors or shareholders and six publicly-traded companies for failure to publicly report information about stock holding and transactions, as required under Sections 13 and 16 of the Securities Exchange Act of 1934. The forms required by these provisions (Schedules 13D and 13G and Forms 3, 4 and 5) are triggered by the accumulation of threshold percentages of publicly-traded stock (5% or 10%, depending on the form), or just being an insider (officer or director). These filers are thereafter required to report most transactions in the stock.

In the past, the SEC would generally bring these enforcement actions only in cases where the failure to file was part of a larger scheme, for example, a shareholder accumulating a large position in a company and not wanting to disclose it publicly. In these new cases, however, the SEC identified the filing failures via quantitative analysis and made clear that even an inadvertent violation is still a violation.

Form 4 | Andrew Abramowitz | NYCAlthough the filing obligations are imposed on the shareholder or insider, not the company, the SEC has always used the proxy rules (which are imposed on the company) to cause the company to ensure that its insiders are making the filings. These rules require that annual proxy statements contain specific disclosure of the insiders’ filing delinquencies over the past year. The six companies charged by the SEC failed to include those disclosures in their proxies. The policy behind this requirement is that companies will be so embarrassed by disclosure of delinquencies that they will ensure that the insiders comply. In the real world, however, among the small percentage of investors who actually read proxy statements, an even smaller proportion focus on this delinquency disclosure, buried near the end, or would even know what it meant if forced to read it. This enforcement action by the SEC can be read as an acknowledgement that the company embarrassment factor isn’t doing the trick.

The message to insiders is to pay attention to the obligations and get it done. For companies, even though they’re essentially not at risk if they make the proper disclosure in the proxy, as a practical matter the system works best when they put into place internal protocols to assist their insiders in making prompt filings.