On September 27, 2023, the Securities and Exchange Commission (the “SEC”) announced charges against six officers, directors, and major shareholders of public companies (“insiders”) for failing to timely report and file disclosures related to (i) their holdings in public company stock and (ii) transactions they undertook involving public company stock. Five public companies were also charged in connection with timely reporting failures by their insiders. Without admitting or denying the charges, the six insiders and five public companies agreed to cease and desist from violating the charged provisions and agreed to pay civil penalties ranging from $66,000 to $200,000.
Recent history of SEC enforcement actions
The charges came as a result of SEC enforcement actions focused on Form 4 and Schedule 13D and 13G reports, which are required to be filed by company insiders regarding their holdings of company stock. Using data analytics, the SEC identified the charged insiders as having repeatedly filed these reports late, with some filings delayed by weeks, months or even years. The SEC conducted a similar sweep in 2014, when 28 insiders and six public companies were charged for timely reporting failures, followed up by charges against eight insiders in 2015 and two insiders in 2020 (see here and here).
Form 4, Schedule 13D and Schedule 13G reports
Under Section 16(a) of the Exchange Act, officers, directors and certain beneficial owners of more than 10% of a registered class of a company’s stock must report their transactions in that company’s stock within two business days of the relevant transaction. A failure to file timely Form 4’s must be reported in a public company’s proxy statement or in its Annual Report on Form 10-K.
In addition to Form 4 reports, beneficial owners of more than 5% of a registered class of a company’s stock are required to file Schedule 13D or 13G reports to report their holdings and intentions with respect to the company. Section 16 and Schedule 13D and 13G reports provide increased transparency to investors and assist with the operation of securities markets. The reports are required regardless of whether or not the trades were profitable.
SEC amendments to Schedule 13D and 13G report filing timelines
On October 10, 2023, the SEC adopted amendments to the rules governing beneficial ownership reporting on Schedules 13D and 13G. These amendments will become effective 90 days after publication in the Federal Register, though compliance with the revised Schedule 13G filing deadlines will only be required beginning September 30, 2024. Under the amendments, an initial Schedule 13D will now be due five business days after acquiring beneficial ownership of more than 5% of a registered class of a company’s stock or losing eligibility to file on Schedule 13G (previously ten calendar days), and an amended Schedule 13D report will now be due two business days after the triggering event (previously “promptly” after).
An initial Schedule 13G will now be due 45 calendar days after the calendar quarter-end in which beneficial ownership exceeds 5% for Qualified Institutional Investors (“QIIs”) and exempt investors (previously 45 calendar days after the calendar year-end in which beneficial ownership exceeds 5%), five business days after the month-end where beneficial ownership exceeds 10% for QIIs and exempt investors (previously ten calendar days), and five business days after acquiring beneficial ownership of more than 5% for passive investors (previously 10 calendar days). An amended Schedule 13G will now be due 45 calendar days after the calendar quarter-end in which a material change occurs for QIIs and exempt investors (previously 45 calendar days after the calendar year-end in which any change occurs), five business days after the month-end where beneficial ownership exceeds 10% or a 5% increase/decrease in beneficial ownership occurs for QIIs and exempt investors (previously ten calendar days after the month-end where beneficial ownership exceeds 10% or, as of month-end, a 5% increase/decrease in beneficial ownership occurred), and two business days after exceeding 10% beneficial ownership of a 5% increase/decrease in beneficial ownership occurs (previously “promptly” after).
Ensuring reporting compliance
These recent enforcement actions underscore the SEC’s commitment to enforcing the timely filing of Section 16 and Schedule 13D and 13G reports. Insiders and public companies should familiarize themselves with the disclosure requirements and obligations that are applicable to them, and ensure proper internal compliance procedures are in place to manage the timely filing of insider disclosures.
Please feel free to reach out to the authors if you have questions about these developments or to share your thoughts on this topic.