Two-Day Reporting Is Required by August 29, 2002 For Changes in Beneficial Ownership

Two-Day Reporting Is Required by August 29, 2002 For Changes in Beneficial Ownership

On July 30, President Bush signed into law the Sarbanes-Oxley Act of 2002, which will have a major impact on insiders of public companies.  Of immediate concern to many corporate insiders – and an item that may have been lost among all the news reports concerning the Act – is that the deadline for insiders to report changes in beneficial ownership of a company’s equity securities – typically reported on a Form 4 – will be shortened to two business days. The proposed amendments to Section 16(a) are scheduled to go into effect on Thursday, August 29, 2002.

The SEC intends to amend Rule 16a-3(f) to require two-business-day reporting of all reportable transactions between a company and its officers or directors that are exempted from short-swing liability under Section 16(b) and are therefore currently exempt from Form 4 filings.  As a result, transactions in stock options and other derivative securities issued by a company to officers and directors — including grants, repricings, exercises and others – would be reportable within two business days.

The Practical Impact
Many insiders will find it difficult, if not impossible, to meet the new deadline without proper planning and assistance from their companies.  Gone are the days of trading by companies’ insiders without concern for public notification. Until July 30, 2003, when insiders will be required to file their forms electronically, the new deadline will, in effect, be a one-day deadline for paper filings, since one day will have to be set aside for delivery of the report by overnight courier to be received in time by the SEC.

Why Change the Rules?
The new reporting deadline represents a major shift from the existing system. Currently, the earliest date an insider is required to report a transaction is ten days after the close of the month in which a transaction occurred. Several exemptions to this requirement are available until August 29, making it easy for transactions to go unreported for months at a time.

The accelerated reporting deadline is designed to give investors access to information before it becomes stale and meaningless.  While the SEC is expected to pass certain exemptions to the new two-day requirement – e.g., transactions involving a pre-existing arrangement where the insider does not have knowledge of the timing of the transaction – insiders should not expect exemptions based on the size of a transaction or the type of insider.  This is all part of an ongoing effort by the SEC to increase transparency in securities transactions by insiders and make information about such transactions more readily available to the public.

What Should You Do Now?
Companies and insiders must begin preparing immediately for the new deadline and beyond.  Here are some suggested measures you can take:

  • File Electronically.  Obtain EDGAR filing numbers for each insider to provide an extra day to complete and file a Form 4; hard copies of reports filed electronically need not be sent to the SEC (though stock exchanges may require them).
  • Preclear Insider Transactions.  Require preclearance with a designated company official of all proposed insider transactions involving company equity securities to allow advanced warning of reportable transactions and provide extra time to prepare the necessary reports. 
  • Designate Individuals to Draft Reports.  Designate individuals (or, if appropriate, outside counsel) to prepare draft reports promptly based on the information received regarding reportable transactions, and require quick review by the insider.
  • Powers of Attorney.  To avoid delay in filing a report, obtain limited powers of attorney from all insiders to enable designated company officials to sign reports for insiders.
  • Designate Brokers.  Designate brokers who are experienced in handling market transactions for insiders; this will allow procedures to be established for communicating transaction information to the company promptly after execution of a trade as well as assist in timely reporting.

Quickly undertaking a combination of these measures should improve the level of insider compliance and help prevent potential problems for the insider and the company.  Additional steps may also be taken, particularly in companies that have large numbers of insiders to track.

If you have questions regarding the new requirements or what steps to take in order to comply with the new rules, please do not hesitate to contact us.

The Corporate Governance Practice Group of Ruskin Moscou Faltischek, P.C. includes highly experienced general corporate, securities, white-collar crime, employment, litigation and alternative dispute resolution attorneys who are fully conversant with this complex landscape and will assist in your timely compliance with these new and difficult legal requirements.

You may contact any of us at 516-663-6600.